The investor trinity: Draghi, the Church of Ireland and Nama
Has CRH boss Albert Manifold got an ace up his sleeve in bidding battle for Ash Grove?
European Central Bank president Mario Draghi: left investors grappling with low incomes as a result of the €2.3 trillion stimulus programme he launched. Photograph: Armando Babani/EPA
While investors globally grappled with the hell of low incomes under European Central Bank president Mario Draghi’s €2.3 trillion stimulus programme, the Church of Ireland’s investment advisers went searching for the promised land in the most unlikely of places.
The holding company, National Asset Management Agency Investment Limited (Namail), was set up in 2009 with one purpose: to keep Nama off the State’s balance sheet as government finances ran out of control.
Private investors – mainly clients of the banks – were brought in to buy a majority stake in the vehicle for €51 million. They had no say in Nama’s day-to-day operation but were entitled to an annual dividend (capped at Ireland’s 10-year borrowing costs), their money back if the agency paid all of its debt, and a potential 10 per cent bonus at the end of Nama’s lifetime if all went well – which was anyone’s guess at the time.
The accounting gimmick ran into trouble during crisis when the State took over one of the investors, Irish Life. This risked pushing the “bad bank” on to the government’s balance sheet.
A solution was found as Walbrook, founded by three ex-Barclays bankers, snapped up Irish Life’s 17 per cent stake five years ago, albeit at a discounted price of less than €8 million – below 50 cent on the euro.
At the time, Ireland didn’t have a 10-year bond to price the dividend off (as it had been locked out of the market in the early years of its troika bailout), but the nearest benchmark, a nine-year bond was yielding more than 5 per cent.
Based on the discounted price Walbrook paid for the Namail stake, the hedge fund secured an initial 10 per cent-plus dividend yield.
That, of course, was before Draghi stepped into the market 2½ years ago with an unprecedented bond-buying – or quantitative easing (QE) – programme to boost inflation and the economy. This pushed bond yields down to record lows and, in many cases, into negative territory.
In a world where Ireland can borrow for five years at a rate of less than zero per cent, as it did last week when it tapped the market for €4 billion, investment firms and pension funds have ended up in the strangest places to scrape out any sort of income.
Few, though, are more obscure than the Church of Ireland Clergy Pensions Fund and Representative Church Body buying a third of Walbrook’s Namail investment, as revealed by a Government response this week to a parliamentary question from Fianna Fáil TD Seán Fleming.
It’s likely the Church of Ireland paid full whack for the investment (which Nama is now all-but guaranteed to make good on) paying a dividend priced off a bond yield that’s currently less than 0.7 per cent. This leaves the church in an investment limbo. While avoiding negative rates, the return is easily wiped out by resurgent euro zone inflation.
With Draghi set on October 26th to deliver a verdict on the future of QE, the consensus is that it will be prolonged into next year (albeit with a lowered amount of monthly purchases) as inflation remains well below the organisation’s 2 per cent target and policymakers are concerned about a further surge in the euro against the dollar and sterling. This has left more investors than just the Church of Ireland seeking divine inspiration.
Has Manifold an ace in Ash Grove poker game?
The Irish building materials giant, which has had mixed results outside its traditional stomping ground in Europe and the US, was reported this week to be circling South Africa’s largest cement maker, PPC, which has a market value of the equivalent of about €700 million.
Last week, it was said to be in advanced talks to buy Florida cement group Suwannee American Cement for about $750 million (€634 million).
But the big one is Kansas-based Ash Grove Cement, for which Manifold made a $3.5 billion bid in September (weeks after agreeing to sell his America’s distribution business for $2.6 billion) - only to be trumped by a higher indicative bid from Summit Materials, a fast-growing CRH “mini-me”.
Summit is led by five former executives at CRH’s US unit, including Tom Hill, who quit the Irish group in 2008 after being passed over for the top job at group level. It has spent more than $2.5 billion acquiring aggregates and cement companies since its foundation in 2009.
Summit has until next Friday to produce a firm offer, after which CRH has five days to respond.
Davy analysts indicated during the week that Summit’s balance sheet may be left a little stretched if it wins out. But that ignores its ability to raise equity at a time of red-hot deals activity in the US building materials sector.
CRH’s ace card might yet prove to be the fact that it is Ash Grove’s largest customer, accounting for almost 19 per cent of its sales. Hill would ignore that one at his peril.