Chief Executive’s Review

2013 was a very significant year for Ireland and the NTMA as we emerged successfully and on schedule from the EU/IMF programme and, in the first half of 2014, have returned to participating normally in the sovereign debt markets. Our successful exit was based on a number of factors – both domestic and international – including the Government’s steadfast delivery on its programme commitments, the February 2013 promissory note transaction, the extension of the maturities on the European portion of our programme loans, and the interventions by the ECB to calm the wider euro crisis.

The success of the ECB in calming the euro crisis since July 2012 has seen an increased investor appetite for riskier assets generally and Irish Government bonds have been a major beneficiary of this trend. Irish bond yields are now at record lows – a sharp contrast with the situation just three years ago when the yield on our two-year bond peaked at over 22 per cent and 10-year yields peaked at over 14 per cent. The NTMA has taken advantage of these benign market conditions and to date has completed over 80 per cent of its €8 billion funding target for 2014. Most importantly we have turned from the opportunistic and syndicated issuance through which we first returned to the markets to a series of scheduled bond auctions – the final step in gaining what would be regarded as normal market access.

More favourable market conditions have also assisted NAMA greatly in its programme of disposal of loans and property assets which it acquired from the banks in 2009 and 2010. NAMA has met its first debt repayment milestone – the repayment of €7.5 billion or 25 per cent of its senior debt by end-2013 and expects to redeem 50 per cent of its senior debt by end-2014. The NAMA bonds are a contingent liability of the State and NAMA’s work in removing that contingent liability in a progressive, but commercially astute, manner has been an important factor in restoring our market credibility. Although our debt dynamics have improved dramatically over the last few years, risks to debt sustainability still represent a significant exposure for the economy. This factor is recognised in the draft National Risk Assessment published by the Government in April 2014 which notes that Ireland’s debt/GDP ratio remains high by historical standards and further consolidation is needed in coming years to put the debt ratio firmly on a downward path.

While I have focused particularly on debt management in my comments in this annual report and in its counterparts over the last few years, debt management is but one of the asset and liability management functions performed by the NTMA. This focus is, of course, a result of the extraordinary situation in which Ireland has found itself through our entry into an EU/IMF programme and our subsequent efforts to exit that programme. Indeed, much of the specialist language of the bond markets has become daily currency in the news over the last few years in a way that none of us working in the area could ever have envisaged. One of the signals of the complete normalisation of our debt management activities is that our bond auctions are no longer deemed newsworthy events and generate no more than a few lines in the business pages. There are encouraging signs in recent months that we are returning to that normality.

A further sign of a return to a normal capital market environment was the successful financial close in April 2014 of the N17/N18 (Gort to Tuam) road PPP project – the first PPP deal to include institutional investor debt funding since the onset of the financial crisis. The NDFA, another part of the NTMA family, was financial adviser on the project. Building renewed investor confidence and interest in Ireland’s PPP programme has been a major strategic objective for the NDFA over the last two years and it has undertaken an active investor engagement programme to that end.

I have already mentioned NAMA – to which the NTMA assigns staff and provides business and support services. However, this is but one of a number of new functions the NTMA has been asked to perform in recent years. The NTMA (Amendment) Bill 2014, currently before the Oireachtas, provides for the putting of these other new functions on a statutory basis. These are our NewERA functions; the conversion of the National Pensions Reserve Fund into the Ireland Strategic Investment Fund (ISIF) with a mandate to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland; and the State Claims Agency’s legal costs accounting function to deal with third-party costs arising from certain Tribunals of Inquiry.

The NTMA has already made considerable progress on these functions.

The NewERA Unit is up and running since September 2011 taking a commercial approach to the oversight of the semi-State companies with an emphasis on return on capital and providing a dedicated source of corporate finance expertise to Government. To this end it has developed a Shareholders’ Expectations Framework intended to aid in establishing clarity and alignment of objectives of the shareholder and the relevant commercial State entity. It has also provided advice and project management services to the Government in relation to the sale of BGE’s energy business with an enterprise value of up to €1.1 billion.

The NTMA has been working to develop a pipeline of potential investments for the ISIF. A number of these have been concluded and as a result, the NPRF now has some €1.3 billion invested or committed to areas of strategic importance to the Irish economy including infrastructure, venture capital and long-term financing for SMEs. A draft ISIF business plan has been brought to an advanced stage in anticipation of the legislation. This draft business plan is based on an Economic Impact Framework developed by the NTMA which seeks to identify areas for investment with a higher potential economic and employment impact as well as categories of investment that would be expected to assist and accelerate normalisation of capital markets in Ireland following the financial crisis. Indeed, one of the potential advantages of the ISIF is that it is in a position to provide equity finance and thus reduce the disproportionate reliance of Irish businesses on bank credit as a source of finance.

The Legal Costs Unit became operational in February 2013 and seeks to resolve bills of costs by way of negotiation and, where necessary, through the taxation of costs system, in an effort to deliver significant savings to the Exchequer. It has secured savings of 47 per cent on the €6.4 million of legal expense claims from the Mahon and Moriarty tribunals it has negotiated and agreed since it became operational.

The NTMA (Amendment) Bill also provides for the establishment – based on proposals put forward by the NTMA – of an overarching NTMA Board to oversee all of the NTMA’s functions, other than NAMA which will continue to have its own separate governance structure, and which will replace the various boards and committees currently in place.

This new governance structure is a very significant development in terms of the role the NTMA will play in post-crisis Ireland. Across the NTMA’s functions – in particular, its ISIF, NewERA and NDFA functions there is an implicit “invest in Ireland” objective.

By replacing separate boards that have distinct and narrowly defined mandates with one overarching board, the new governance structure will allow the NTMA work in a more integrated manner and take a strategic view across our mandates towards the achievement of that objective.

The past few years have presented a major challenge to the NTMA as we have sought to re-establish Ireland’s presence in the sovereign debt markets and, from a standing start, to establish NAMA as a fully operational entity with a €32 billion balance sheet and a staffing complement of over 300 people. We were also asked to establish a banking unit to manage the State’s interest and holdings in the financial institutions and which has been on secondment to the Department of Finance since August 2011. In 2013 this unit was involved in the sale of Irish Life for €1.3 billion, the sale of €1 billion of Bank of Ireland contingent convertible notes, the sale of Bank of Ireland preference shares for €2 billion (including accrued interest), the IBRC Special Liquidation and the promissory note transaction.

I am proud of the role the NTMA has played in meeting the challenges over these last few very demanding years and I would like to thank our staff across all our business units and corporate functions for the energy and commitment they have shown. The challenges facing us in the medium term in delivering on the new mandates which Government has assigned to us are of a different order as we move from crisis to recovery. I believe the NTMA business model, designed to perform commercial and market facing functions while being funded from the Exchequer, has served us well in delivering on the additional functions that have been assigned to us to date and will continue to serve us well as we seek to recruit and retain the specialist skills necessary to the successful performance of these new mandates.

Finally, while I have talked of the advantages to the NTMA of reporting to one overarching board, this is not in any way to seek to diminish the contribution made by the members of the various boards and committees under our current governance structures. I would, therefore, like to take this opportunity to thank the members of the NTMA Advisory Committee, the State Claims Agency Policy Committee, the NPRF Commission, the NDFA Board and the various sub-committees of these bodies for giving so generously of their time and for their hard work, counsel and support.

John Corrigan
Chief Executive