Ten years ago today, the market value of Anglo Irish Bank plunged up to 22 per cent as skittish international investors zeroed in on problems building up in Ireland's banks, as they scanned the globe for risks in the immediate aftermath of US investment bank Bear Stearns's near collapse.
The so-called St Patrick’s Day Massacre is etched in the memory of many here as the moment that people began to fret about the tens of billions of commercial property loans in the Irish banking system in a faltering real-estate market. (That’s despite the fact that Irish bank shares had been falling for more than a year at that stage.)
The share price slump in March 2008, as most Irish traders enjoyed the day off, prompted a mini run on Anglo Irish’s deposits in the following days – marking the beginning of the end to the bank of choice for many of the country’s boom-time developers.
It also subsequently emerged in a trial in 2014 that the stock sell-off led to the family of businessman Seán Quinn facing immediate cash demands for up to €300 million from their brokers. That was to shore up their leveraged 25 per cent, clandestine stake in the bank, held through instruments known as contracts for difference (CFDs).
Toxic loans
The now-defunct Anglo Irish ended up transferring €34.1 billion of toxic loans to Nama, the bad bank set up in 2009 to purge lenders of most of their commercial property debt in the wake of the State guaranteeing the financial system.
The bank – which was subsequently renamed Irish Bank Resolution Corporation and put into liquidation five years ago – contributed almost 46 per cent of all the €74 billion of loans transferred by five lenders to Nama, at an overall discount of 57 per cent.
Meanwhile, Nama confounded many of its early critics last year as it repaid the final part of €30.2 billion of senior Government-backed bonds used to cover 95 per cent of the cost of buying bank loans during the crisis. The redemption came three years earlier than originally scheduled and eliminated a contingent liability of the State.
Nama has upgraded its financial forecasts a number of times in recent years amid a recovering economy and property market, and is now projecting a €3 billion lifetime surplus. (Some in the market are more optimistic, with Investec Ireland economist Philip O'Sullivan, for one, estimating that the final figure will be at least €4 billion.)
Nama was sitting on €1.2 billion of cash or cash equivalents at the end of September, according to its most recent set of account.
Paying back
So, isn’t it surely now time for the agency’s chief executive, Brendan McDonagh, to start looking at paying back the remaining debt it issued to pay the final 5 per cent consideration for bank loans?
There’s €1.6 billion of such debt out there. They comprise junior bonds, which carry an annual interest rate of 5.264 per cent. That makes them the most expensive remaining debt shouldered by the State stemming from the rescue of the country’s banks during the crisis.
By contrast, the Government’s own bonds that are due to be repaid in April 2020 are trading in the market with a negative interest rate of about -0.5 per cent, meaning investors are willing to pay the State for the privilege of holding their money. (Of course, this is mainly down to the European Central Bank’s ongoing €2.5 trillion quantitative-easing bond-buying programme, which is widely expected to come to an end by the close of 2018.)
Nama did not pay the discretionary interest rate, or coupon, on the junior bonds in its first few years, as the agency’s board feared that it might not return a lifetime profit. However, it has been making the annual €84 million payment since 2014 – the latest one occurring just a few weeks ago.
Junior debt
The European Commission, which decided in 2010 to approve the setting up of Nama under EU state-aid rules, would need to give McDonagh the nod to start paying back the junior debt early. That shouldn't be much of a problem.
Analysts estimate that Nama would need to keep up to €700 million of cash on its balance sheet at any one time over the coming years, as it finances its commitment to the Government to delivering 20,000 homes by the end of 2020 to help alleviate an ongoing shortfall in housing supply in Ireland.
But the sooner Nama rids itself of the junior debt, the sooner it can start returning excess capital to the exchequer.
