(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Oct 24 (Reuters Breakingviews) - Barclays (BARC.L) former bankers like helping struggling institutions. Three years ago a group of them enabled their ex-employer to tidy its balance sheet when they acquired $12.3 billion of nasty structured credit gunk through their controversial Protium fund. Now the same team is offering assistance to Irish taxpayers, taking a 17 percent stake in the National Asset Management Agency, Ireland's bad bank. Protium extracted a pound of flesh from Barclays, and it's not clear why Walbrook Capital, as the latest venture is known, wouldn't do the same.
In both cases, the bankers did a small deal that solved a big problem. Three years ago Barclays wanted to avoid mark to market gyrations on its toxic assets, and did so by effectively swapping structured-credit securities for something more stable – a 10-year $12.6 billion loan to Protium, which in turn took ownership of the troublesome portfolio. Today, Ireland needs to replace the recently nationalised Irish Life insurer as one of the three private holders of 51 percent of NAMA’s holding company – otherwise Eurostat rules would require the bad bank to be added to the country's national debt.
The bankers got fantastic terms from Barclays: Protium stood to benefit from gains on the securities, but the UK bank's loan was to take the bulk of any losses. By contrast, the NAMA deal looks like it genuinely transfers risk to Walbrook. If NAMA cannot sell its huge heap of property loans above the 31.8 billion euros it paid for them by 2020, Walbrook, along with other shareholders, could take the hit. Protium's "heads-I-win-tails-you-lose" structure isn't repeated.
At first glance, the deal looks pretty pedestrian. Walbrook inherited unfavourable terms that went with Irish Life's stake: a dividend capped at Ireland’s prevailing 10-year bond yield, and upside (if there is any capital appreciation by 2020) capped at a 10 percent premium to the value of its stake. So if Walbrook partners pay 17 million euros for the stake and fund it entirely with equity, the total value of nine years of dividends plus a 1.7 million euro capital gain would only yield an internal rate of return of 6 percent, according to Reuters Breakingviews’ calculations.
Even in this low return world, it's hard to see why Walbrook would be tempted. But now assume Ireland sells the stake at a 10 percent discount - not impossible, given that the state now owns Irish Life and it needed a buyer. And Walbrook funds half of its purchase with debt costing 5 percent annually. The return leaps to 14 percent. It’s still risky. But it might explain why Protium’s alumni have taken the plunge.
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- Walbrook Capital announced on Oct. 22 that it had acquired a 17 percent stake in the holding company of the National Asset Management Agency, Ireland’s bad bank.
- The stake, in the National Asset Management Agency Investment Limited (NAMAIL), was previously held by Irish Life. Three private investors together hold 51 percent of NAMAIL, which enables Ireland to leave NAMA off its government debt.
- Walbrook paid less than the 17 million euros spent by Irish Life for its original stake in NAMAIL, the Irish Times reported on Oct. 23. Walbrook declined to comment on the terms of the deal.
- Irish Life said in its 2010 annual report that although NAMAIL investors had a majority stake in NAMA, NAMA’s permission was required if NAMAIL investors wanted to sell their stakes. NAMA could also veto any action by NAMAIL.
- Walbrook’s partners include Michael Keeley, who previously worked for Barclays and Protium, an entity set up in 2009 to acquire $12.3 billion of Barclays’ toxic assets. Barclays reacquired the assets in April 2011, and paid Protium $83 million in management fees.
- Nama statement: here
- Irish Times: here
- Reuters: UK investors take stake in Irish bad-bank investment vehicle [ID:nL5E8LM8RV] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and David Evans)
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