Nama’s riskiest bond climbs to new high on help-to-buy plan

The National Asset Management Agency’s riskiest bonds are trading at a record high at almost 99 cent on the euro, helped in the past week by the Government’s help-to-buy plan for first-time buyers, which is set to help its residential development plans significantly.

When Nama acquired €74 billion of toxic commercial property loans from the State’s banks at a 58 per cent discount in 2010, about 95 per cent of the payment was in senior government-backed bonds. The remainder was in subordinated bonds which Nama would make good on only if it did not make a loss.

Outlook

While the agency did not pay the discretionary annual 5.264 per cent annual coupon on the junior bonds in its first few years, amid fears it would not return a profit, it began to make the payment in 2014 as its outlook improved

It became possible to track the market's view of Nama's prospects in late 2014, when the liquidators of Irish Bank Resolution Corp, formerly Anglo Irish Bank, sold the lender's €841 million of junior Nama bonds in the market. AIB and Bank of Ireland continue to hold their bonds, though they, too, have been increasing the value of them on their own books in recent years.

Nama, which at one stage estimated it would generate enough money to repay only its senior debt, has subsequently upgraded its forecast a number of times. Its latest, made in early June, assumes it will make a lifetime surplus of €2.3 billion. The agency’s mandate was expanded last year to facilitate the delivery of thousands of homes in Dublin and surrounding counties as the Government grapples with a housing crisis.

"We infer from recent Nama commentary that they were probably set to upgrade profits again in the summer but conservatively held fire because of Brexit," said Stephen Lyons, a bond analyst with securities firm Davy. "But given that residential development is now also a significant part of its mandate, the help-to-buy scheme in the budget should provide an immediate boost to the worth of its land and viability of its projects."

Securities

Nama’s junior securities fall in value every March when the annual coupon is paid. In this respect, it is different to most bonds, which trade with accrued interest attached.

Still, the underlying performance of the Nama junior bonds has improved this year, with the notes trading at about 96 cent immediately before the last coupon payment. They are currently priced at almost 99c, giving them a yield, or market interest rate, of about 6.7 per cent.

“While high-yielding bonds have seen a lot of volatility in recent times, the Nama bonds have been pretty stable, except for the annual drop in the price when the coupon is paid,” said Mr Lyons.

“The risks attached to the bondholders getting their money back is very low now and it should ordinarily trade at a lower yield, but the fact that there are very few documents behind the bond – the bond prospectus is just one page – means that investors’ required risk premium is higher.”

Nama’s has its first opportunity to redeem the bonds in 2020. There has been some speculation in the market that it may offer to buy them back before then, as it is has already repaid 88 per cent of its €30.2 billion of senior debt.