AIB’s capital position could be boosted by roughly €160m following Nama’s decision to pay interest on its subordinated bonds.
Moreover, the Nama move will increase AIB’s full-year revenue by roughly €25m and Bank of Ireland by €15m, according to Merrion Stockbroker analyst, Ciaran Callaghan.
When Nama was set up in 2009 it issued roughly €30bn in senior bonds and €1.593bn in subordinated bonds for €74bn of development loans.
There was a discretionary coupon on the subordinated bonds that would only be paid out in the event that Nama met certain targets. The news agency Bloomberg has reported that Nama will now make interest payments on the subordinated debt based on the improved outlook for the property market.
“The activation of coupon payments on the subordinated notes represents a major development in the history of the Irish property agency, illustrating its improved financial position and the confidence management has in its outlook,” said Mr Callaghan.
AIB is holding €479m and Bank of Ireland is holding €279m of subordinated bonds with the balance held by the now liquidated IBRC. The junior debt carries a 5.264% coupon.
The decision to make interest payments on these bonds paves the way for a revaluation of the debt on the banks’ balance sheets.
“We believe this move by Nama gives the banks scope to increase the carrying value of the bonds, with AIB and Bank of Ireland holding them at 10c and 44c (of par) respectively at June 2013. While the subordinated bonds are exposed to the same risk, the current valuation variance between the institutions reflects managements’ different estimates of Nama’s future cash flows and ability to generate a profit,” said Mr Callaghan.
Nama has so far redeemed €7.5bn of senior bonds and is on schedule to redeem another €7.5bn by the end of 2016.
The Irish property market has experienced a huge pick up over the past 18 months based on robust demand for high end office buildings and a shortage of residential units in some urban areas, particularly south Dublin.
In an interview with the Irish Examiner published on February 3rd, Nama CEO Brendan McDonagh said the agency would look to accelerate its asset sales this year to take advantage of the improved market conditions. Bloomberg quoted a source claiming that Nama’s 2013 profit will beat the €228m posted in 2012.
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