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Oliver Gilvarry
Dublin, 18th September 2009
National Asset Management Agency - All roads lead to NAMA
Background to NAMA
 Funding difficulties for Irish banks
 Restricting the flow of credit into Irish economy
 Banks are unwilling to lend in order to preserve capital
 “Liquidity more difficult and costly to attract” Minster for Finance
 Banking system needs to be capable of providing credit to viable businesses and
households as recovery kicks in
 Main priority for NAMA is to restore liquidity into the Irish Banking system and in
turn provide a flow of credit into the economy
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Structure of NAMA
 NAMA involves removing development loans from eligible banks along with a certain
amount of performing investment loans
 The mix of loans allows for NAMA to receive an income flow which can be used to
pay coupons on the NAMA bonds and costs of the agency
 Minister for Finance had stated the nominal value of the loans transferred into NAMA
will be €77bn
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Structure of NAMA
 For Irish banks, NAMA bonds can be used to raise cash from ECB on Repo
 Irish banks sell NAMA bonds to the ECB with promise to buy them back at a
future date at an agreed price
 Provides cash for the Irish banking system
To pay for loans, NAMA
hands over Government
Bonds
NAMA
BANK
Payments received by
NAMA from performing
loans are used to pay
coupons on bonds issued to
pay for loans from
participating banks.
Bank sells loans to
NAMA
NAMA
BORROWER
Borrower continues to make
repayments as agreed with bank
previously. Payments are now
made to NAMA instead, but
terms and conditions of the loan
remain the same
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Profile of Loans Transferred
Loan breakdow n per bank
AIB €24 billion
Bank of Ireland €16 billion
Anglo Irish Bank €28 billion
EBS €1 billion
Loan amounts transferred as
% of Loan Book:
AIB
16%
BOI
14%
Anglo
42%
Irish Nationwide
76%
EBS
6%
INBS €8 billion
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Profile of Loans Transferred
Sectoral breakdow n
Geographical breakdown
Customers: 2,000
Number of loans: 21,500
Average LTV: 77%
Land 36%
Ireland 66%
Northern Ireland 6%
Development 28%
UK 21%
USA 3%
Associated 36%
Europe 4%
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NAMA Haircut
 Relates to the discount the Government will pay for the bank loans from the banks
 NAMA will not pay the face value of the loans, but a lower value
 The difference is the haircut
 Size of the haircut is key to the banks
 The larger the discount paid for the loan, the larger the losses the banks will suffer
 The greater the losses taken by the banks, the increased requirement for new capital
to be injected into the banks
 Must also factor in coupons on NAMA bonds
 Low coupons will lower the pre-provision profits of the banks
 Reducing the ability of the banks to absorb losses from the residual loan book
through profit generation
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What is the Haircut?
 Minister for Finance released details of overall haircut on 16th September
 Total Loans transferred is €77bn


€68bn of loans
€9bn of interest roll-up
 Haircut applied was 30% with banks receiving NAMA bonds of €54bn

Current market Value of loans is estimated at €47bn
 Five percent of payment will be in subordinated NAMA bonds
 Payment on these bonds will be dependent on performance of NAMA
 Individual haircuts for each bank were not released at the same time
 AIB have guided their Haircut will be less than 30% average
 BOI have guided their haircut will be substantially below 30%
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What is the Haircut?
 Valuation of loans will be on a case by case basis
 Valuation will be based on current price and “Long-Term Economic Value”
 Adjustment over the current value will be done by:
 Difference between current yields & yields over
relevant periods
 Correlation between
– Land prices & demographic variables
– Land prices & interest rates
– Land prices & GDP
 Therefore, valuations will be subjective
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Other Details from the
Minister’s Speech
 Guarantee on Bank liabilities to be extended
 New scheme called Eligible Liabilities Guarantee (ELG)
 Enables banks to issue debt beyond Sept 2010
 Liabilities cannot have maturity greater than 5 years
 Scheme will operate up to Sept 2010
 Customer deposits to be covered under scheme
 Banks will have option to issue debt and take deposits without guarantee
 Dated subordinated debt will not be covered under ELG
 Current scheme remains in place until Sept 2010
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Other Details from the
Minister’s Speech
 Institutions participating in the scheme will have to restructure its operations
 The shape of the new system has not been outlined, but will be a focus over the
coming weeks
 Promotion of Lending
 Comments the structure of NAMA will improve liquidity
 Removal of problem loans will allow focus on new lending
 No set target for lending as part of NAMA, but will be examined
 Economic & Social benefits of NAMA
 Facilitate Department of Education & Environment to improve areas by offering
land banks in the control of NAMA
 Use certain properties for social and affordable housing
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Overall view of NAMA
 Passes significant risk onto the Irish taxpayer
 Any losses made by NAMA could be paid for by the Taxpayer
 The Agency will remove the problem loans from banks balance sheets quickly
 It will be a catalyst for the recapitalisation of some banks if required
 NAMA will also be a catalyst for consolidation within the Irish banking sector
 Allows a way for Ireland to solve the banking and property crisis without losing
“Economic Sovereignty”
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Impact on BOI & AIB
 Estimate capital shortfall in AIB of over €2.5bn
 Potential capital raising through sale of US or Polish operations
 Rights issue
 Strategic investment
 BOI
 We believe BOI may not need to raise equity
 Any equity raise will focus on repayment of preference shares
 In Irish Banking sector our preference remains Irish Life & Permanent, followed by
BOI
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Alternatives to NAMA
 Number of alternatives have been put forward domestically and internationally
 Insurance Scheme
 Full Nationalisation
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Insurance Scheme
 An insurance scheme is where the Government insures certain assets on a bank’s
balance sheet
 The assets remain on the bank’s balance sheet and continue to be managed by the
bank who lent the money in the first place
 No need to create a new agency to manage the loans
 Government imposes a “First Loss” piece (similar to excess on an insurance policy)
 Losses the bank suffers on the insured loans above a certain amount are covered
by the Government
 A fee or “Insurance Premium” is charged by the Government
 More equity friendly than Asset Purchase Agency
 Shareholders will continue to benefit if assets covered under scheme increase in
value
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Insurance Scheme
 Allows banks to use pre-provision profits to absorb the losses over time
 May not result in banks lending into the economy
 No direct liquidity benefit
 Banks will try and retain capital
 Management focus will be on minimising the use of the “First Loss”
 Similar to risk sharing proposal being examined by the Minister
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Full Nationalisation
 Irish banks are fully nationalised for a short period of time
 Tax-payer can get all of the upside on the flotation of the banks in the future
 Makes it easier to restructure the banks and clean up their balance sheets
 Government don’t have to pay to take loans off the banks
 Government takes over all responsibility for funding of the balance sheet
 Not only have to provide capital to the bank, must continue to fund the bank
 Can result in outflow of deposits from banking system
 Even with a Government guarantee, Irish banks suffered outflows of deposits in
Jan after the nationalisation of Anglo Irish Bank
 Similar result once the revelations over the deposits between Anglo and Irish Life
& Permanent became public
17
The extra cost of issuing Irish debt
Vs German Debt
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Irish Banking system
 Number of domestic banks to fall to three
 AIB & BOI to remain with IN, EBS & banking arm of Irish Life & Permanent merged
to create a Super Mutual
 High interest rates paid on deposit by Irish banks to reverse
 Liquidity to improve in the banks
 Uncertain if significant credit will be released into the economy, but will be better
than current situation
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Summary
 We see NAMA as the best solution compared to other alternatives
 Provides liquidity to the Irish system via the ECB
 Removes the bad loans from the banks’ balance sheets, with the aim to make it
easier to attract liquidity and capital
 It allows the country to stabilise the banks in a way Ireland can afford
 With ordinary equity required after transfer of loans into NAMA
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Summary
 NAMA is the best option for the Irish Economy
 No sustainable recovery unless the banking system is repaired
 Will have a cost to the taxpayer
 Can’t be examined just on whether it will make a profit or loss
 The benefits of stabilising the Irish banks and reducing the length of the current
recession must also be taken into account
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Economic Outlook
 Key part of NAMA is to ensure Ireland is in a position to benefit from economic
recovery in the global economy
 Next number of slides outline our economic outlook for next number of months
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Economic Outlook
GDP
Ireland
Euro Zone
UK
US
 Economic growth will return to the
major economies in 2010, but at levels
below long-term potential.
 Unemployment in the US and UK will
only peak in the first half of the year,
with Europe following later in the year
due to employment subsidies and more
inflexible labour laws within the EuroZone.
2009(e)
-8.00%
-4.00%
-4.00%
-2.00%
2010(e)
-2.60%
0.40%
1.00%
2.00%
Unemployment in Major Economies
16.00%
14.00%
12.00%
Ireland
10.00%
UK
8.00%
US
6.00%
Euro-Zone
4.00%
2.00%
0.00%
2006
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2007
2008
2009(E)
2010(E)
Economic Outlook
 Due to weak growth and higher unemployment rates, precautionary
savings by consumers will continue. Savings ratios in the UK and US
will continue to rise as consumers re-structure their own balance
sheets after the excesses of the last number of years.
 Interest rates will remain accommodative, but rates will start to rise
in the US followed by the UK. Europe will be slower to move on
increasing its base rate, but the reduction of a number of Repos will
reduce liquidity within the Euro-Zone and bring one month EURIBOR
closer to base rate.
Central Bank Interest Rates
Euro Zone
UK
US
Current
1.00%
0.50%
0.00%
2009(e)
1.00%
0.50%
0.00%
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2010(e)
1.00%
1.25%
1.00%
Economic Outlook
 Higher interest rates and better growth
outlooks will see the Dollar and Sterling
appreciate against the Euro over the course
of the next year.
 UK and US bond yields will move higher
next year, but the greatest move is
expected in gilts as the removal of QE and
large government deficits drive yields
higher.
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Exchange Rates
EUR/GBP
EUR/USD
GBP/USD
Current
0.86
1.42
1.65
10 Year Bond Yields
Euro Zone
UK
US
Current
3.29%
3.61%
3.49%
2009(e)
0.85
1.40
1.64
2009(e)
3.20%
3.15%
3.30%
2010(e)
0.80
1.30
1.62
2010(e)
3.00%
4.00%
3.75%
Economic Outlook
 Property to remain under pressure in Ireland
 Recovery in Commercial Property in the UK
 US Commercial Real Estate to remain subdued due to lack of financing
Office markets with the highest vacancy rates, 2009
Q2, %
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Two-year office development pipelines, 2009 Q1, % of
stock
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20
8
6
15
4
10
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Contact Details
Oliver Gilvarry
Will Sparks
Head of Research
Stockbroker
Dolmen Securities
75 St. Stephen’s Green,
Dublin 2
Tel:
01 633 3609
Fax:
01 633 3856
Website: www.dsl.ie
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Appendix
28
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Dolmen Securities Limited Board
Ronan Reid: Chairman
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Directors: Paul McGowan, Michael Jacob, Garrett Kelleher, Martin Scully
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____________________________
Clients:
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 Companies
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Introduction to Dolmen Divisions
Stockbroking
Wealth Management
Corporate Finance
Dolmen Wealth Management
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32
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33
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34
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