Canadian suitor adds new twist to Nama's plans

ANALYSIS:The approach to AIB by a Canadian bank implies credibility for the asset agency on world markets, writes ARTHUR BEESLEY

THE APPROACH to Allied Irish Banks (AIB) from Canadian Imperial Bank of Commerce (CIBC) and a likely liquidation of companies in Liam Carroll’s Zoe group bring crucial new dimensions to the Government’s preparations for the National Asset Management Agency (Nama).

These developments may well play into the Government’s hands by helping to drive down the price at which Nama acquires impaired assets from banks and building societies.

Little is known about the parameters of the investment proposal from the Canadians, but their conditional approach points to an appetite among international financial institutions to participate in a recapitalisation of the Irish banking system post-Nama.

Even if nothing comes of this particular approach, it implies that the Nama scheme has a certain credibility in world markets. This has implications not only for AIB, but for other Nama participants. Mallabraca’s courtship of Bank of Ireland late last year came to nothing but the consortium may yet return. Mallabraca is a consortium of Irish and foreign investors.

At the very least, CIBC’s arrival suggests that the possibility of raising new private capital will be in prospect for AIB. This may bring down or eliminate any requirement for further cash injections into AIB from the Government after the bank incurs losses on Nama-bound loans.

The Government is borrowing extensively to run the State day-by-day and does not have spare billions for bank recapitalisations. The State may now be able to avoid a nationalisation of AIB – something it is very keen to do.

Having allocated €3.5 billion of very scarce money for interest-bearing preference shares in AIB, the Government has indicated in clear terms that any further capital would have to go in as pure equity. To a greater or lesser extent, that would result in nationalisation. The emergence of a suitor for AIB shows State ownership is not necessarily inevitable.

The argument was made yesterday that a CIBC deal with AIB would provide the Canadians with an opportunity to make a killing at the expense of Irish taxpayers, who will foot the bill for Nama.

However, the Government’s existing recapitalisation of AIB provides an opening for the State to share in the benefit from any uplift in its shares.

Warrants attached to the Government’s preference shares in AIB come with an option to buy up to 25 per cent of its ordinary share capital at strike prices that are already significantly below the current price.

In addition, the CIBC approach may ease some of the constraints on the Government as it develops Nama’s pricing mechanism. In light of its strongly held anti-nationalisation policy, the Government was under considerable self-imposed pressure to minimise the extent of the “haircut” discount that will be taken from the book value of bank assets that Nama will acquire. Notwithstanding the inevitable political flak it has endured since opting for Nama, this has been an overriding concern for the Government.

Without private investment, a smaller discount equals less nationalisation. On the other side, however, it means significantly greater risk for taxpayers, who will foot the bill for the entire exercise.

The Government would be free to take a bigger discount if CIBC or any other private institution formalised an investment proposal, lessening taxpayer risk. No matter that AIB has said the “third party” is interested in taking a minority stake. That may be an opening position, changing as Nama evolves.

The new suitor’s arrival, meanwhile, would incentivise existing shareholders to participate in a capital-raising exercise as non-participation would dilute their interest. Assuming a suitor is well-capitalised and well-resourced, a bigger discount may well be in its interest as that would increase its potential stake.

This is where Carroll comes in. ACCBank’s manoeuvres this week suggest the Dutch-owned lender is determined to get its €136 million from Zoe. While there is much uncertainty over what happens next, any sale in the short-term of development or commercial property assets would set a market price for them.

That has potential implications for Nama’s pricing model, which will be bound by statute to deploy a professional estimate of current market values as the starting point of its valuation exercise.

This does not remove the really big potential flaw in Nama’s architecture: the payment of a premium over market price to reflect the agency’s best estimate of the long-term value of assets. Nevertheless, a market price grounded in reality is a clearly superior starting point to one estimated by a professional assessor.

The problem with Irish property is that the market is at a standstill. The same, more or less, is true of the market for Irish bank shares. CIBC’s arrival means there may yet be a market again. Although huge problems remain to be overcome, it’s progress.