NTMA Results and Business Review 2011

13 January 2012

  • Intensive investor relations programme to prepare for phased return to long-term debt markets
  • Debt service costs in 2011 were €5.4 billion
  • Burden-sharing with subordinated bank bondholders delivers €15.5 billion since 2009
  • NPRF Discretionary Portfolio achieves 1.6 per cent return in difficult year for equity markets, annualised return since inception is 3.3 per cent per annum
  • NewERA established as a Shareholder Executive within the NTMA

"In our dealings with investors we have noted that Ireland is gaining credit for the progress it is making. Investors recognise that Ireland has a flexible open economy and is fully engaged in taking action to deal with its problems on the basis of the measures set out in the EU/IMF programme." - John Corrigan, NTMA Chief Executive

13 January 2012 - The National Treasury Management Agency (NTMA) today reported results for 2011 and provided a review of activities across the range of its business functions.

Speaking today, NTMA Chief Executive John Corrigan said that during 2011 Ireland had used the breathing space afforded by the EU/IMF funding programme to make significant progress in addressing its fiscal and banking issues and this was reflected in improved investor sentiment towards Ireland. "Since May we have met over 300 institutional investors in North America, Europe and Asia," said Mr Corrigan. "In our dealings with investors we have noted that Ireland is gaining credit for the progress it is making. Investors recognise that Ireland has a flexible open economy and is fully engaged in taking action to deal with its problems on the basis of the measures set out in the EU/IMF programme. However, a resolution of the wider eurozone sovereign debt and banking crisis is critical to restoring investor confidence and positioning the NTMA for a return to the markets."

"During 2012 we will build on the intensive investor relations programme we carried out during 2011 - commencing this month by meeting investors in Europe and North America and in Asia during February - as we position the NTMA for a phased return to the markets,'' said Mr Corrigan. "Our aim is to gradually extend our continuing but limited presence in the short-term debt market before seeking to raise long-term debt, but the eventual timing and approach still depend on a number of factors, both national and international."

"The NTMA remained at the forefront of the State's response to the financial crisis during 2011 through its ongoing investor relations programme, provision of advice to the Minister for Finance on borrowing and debt-related issues, its work on burden-sharing with subordinated bank bondholders, and the work carried out by the National Pensions Reserve Fund," said Mr Corrigan. "The recent assignment of responsibility for NewERA will be an important feature of the NTMA's work in 2012."

Funding and Debt Management

During 2011 Ireland drew down €34.5 billion under the EU/IMF programme at an average interest rate of 3.7 per cent (following hedging operations by the NTMA to guard against currency and interest rate risk) and an average maturity of 7.5 years. This borrowing was applied to fund an Exchequer deficit of €24.9 billion (of which €6.5 billion was for bank recapitalisation payments) and to refinance €9.1 billion of maturing debt. The NTMA maintained Exchequer cash balances of €13.1 billion at the Central Bank at year end.

At 31 December 2011 Ireland's National Debt stood at €119.1 billion. Debt service costs in 2011 were €5.4 billion.

The wider General Government Debt (GGD)1, the standard measure used for comparative purposes across the European Union, was estimated by the Department of Finance at 107 per cent of GDP at end 2011. The GGD/GDP ratio is projected to peak at 119 per cent in 2013 and to start to decline thereafter.

Having started 2011 at 9.0 per cent Irish ten-year bond yields spiked at 14.1 per cent following Moody's' downgrading of Ireland to sub-investment grade in July. Yields fell rapidly in the third quarter reflecting the successful recapitalisation of the banking sector, the rate cut and term extension on Ireland's EU/IMF borrowing and increased investor confidence that Ireland was dealing successfully with its fiscal and economic issues, before rising somewhat to 8.3 per cent at year end in what were very turbulent markets for eurozone sovereign debt generally. Yields have fallen since year end and currently stand at 7.5 per cent.

Banking System Functions

From its establishment in March 2010, the NTMA Banking Unit engaged with the banks to drive an agenda of burden sharing with subordinated bondholders and asset disposals. The Unit was also closely engaged in the development of the deleveraging and restructuring plans for the banks. In addition, it managed i) the State's capital injections into the banks, ii) the transfer of the deposit books and senior NAMA notes of Anglo Irish Bank and INBS; and iii) the mergers of Anglo Irish Bank with INBS and AIB with EBS.

Since 2009 burden sharing measures have delivered €15.5 billion which would otherwise have had to be provided by the taxpayer, including €5.6 billion in burden sharing since 31 March 2011 following the Central Bank's PCAR/PLAR review.

The bank recapitalisation and burden sharing programme was substantially completed by end-July. The delegation of banking system functions to the NTMA ended in August 2011 with the secondment of the Banking Unit to the Department of Finance. Mr Corrigan said he was pleased that the staff recruited by the NTMA form the cornerstone of the Banking Division's new Shareholding Management Unit in the Department and that their valuable commercial and specialist skills continue to be utilised by the State.

National Pensions Reserve Fund2

The NPRF's Discretionary Portfolio earned a preliminary return of +1.6 per cent in 2011 (compared with -3.5 per cent for the average Irish managed pension fund) despite a very volatile year generally and declines in most global equity markets. The positive performance of the Discretionary Portfolio in 2011 was largely due to the Fund in midyear adopting a significant tactical underweight position in equities and purchasing two-year equity index put options which have shielded much of the Fund's quoted equities holdings from adverse price movements.

Since the Fund's inception in April 2001, the Discretionary Portfolio has delivered an annualised return of +3.3 per cent per annum compared with +1.1 per cent per annum for the average Irish managed pension fund.

The Directed Portfolio consists of public policy investments in Allied Irish Banks and Bank of Ireland that were undertaken on foot of directions from the Minister for Finance. Since 2009 the Fund has invested €20.7 billion in preference shares and ordinary shares in the two banks, including €10 billion in July 2011, comprising Bank of Ireland €4.7 billion (where the Fund's shareholding is 15.1 per cent) and Allied Irish Banks €16.0 billion (where the Fund's shareholding is 99.8 per cent).

At 31 December 2011 the total value of the National Pensions Reserve Fund was €14.5 billion, comprising the Discretionary Portfolio of €5.4 billion and the Directed Portfolio currently held at €9.1 billion pending completion of an independent valuation review of the Fund's investments in Allied Irish Banks. The Fund has received a total of €1.8 billion in cash from Bank of Ireland preference share dividends, the repurchase of warrants by the Bank and the sale of ordinary shares to a consortium of private investors.

In September 2011 the Government announced the establishment of a Strategic Investment Fund which will take the form of a portfolio of funds investing in areas of importance to the Irish economy including infrastructure, financing for SMEs and venture capital. The NPRF will be a cornerstone commercial investor in these funds with the expectation of increasing total fund size by attracting other commercial co-investors. In November the NPRF announced a commitment of €250 million to a new Irish infrastructure investment fund which is seeking up to €1 billion from institutional investors in Ireland and overseas and which will invest in infrastructure assets in Ireland, including assets designated for disposal by the Government and commercial State enterprises and also new infrastructure projects.

Other Developments

In September 2011 the Government announced the establishment, initially on a non-statutory basis, of the New Economy and Recovery Authority (NewERA) within the NTMA.

NewERA will centralise the management of Government holdings in the commercial semi-state sector3 from a shareholder perspective. This role, based on the Shareholder Executive model already established in a number of developed economies, will involve oversight of activities such as capital expenditure plans, corporate strategy, acquisitions and disposals. NewERA is already working closely with the relevant Government departments and companies in this regard. The Shareholder Executive approach is designed to provide the Government with a portfolio view of investment returns from the sector and with a means of assessing the likely impact of commercial developments in the sector on long-term Government investment plans.

NewERA is also charged with assisting the development and implementation of Government plans for investment in energy, water and next-generation telecommunications and has commenced work with the relevant Government departments in these areas.

NewERA will, where requested by Government, carry out advisory and oversight roles in relation to the possible restructuring or disposal of commercial semi-state company assets as required under the EU/IMF programme.

By the end of 2011 the State Claims Agency (SCA) had 5,249 claims under management. The total estimated liability against all active claims was approximately €960 million, of which €830 million related to clinical claims and €130 million related to employer liability, public liability and property damage claims. From January 2011 the management of a number of additional classes of claims, including bullying/harassment claims, was delegated to the SCA bringing the number of authorities under the Agency's remit to 52.

During 2011 the SCA achieved significant savings on claims and related legal costs associated with the management of the Clinical Indemnity Scheme (CIS). An independent actuarial assessment projected that €106 million would be required to satisfy CIS claims and related costs in 2011. The outturn for the year was €81 million, representing a saving by the SCA of €25 million.

The National Development Finance Agency (NDFA) completed its second bundle of schools, providing accommodation for approximately 4,700 students at six schools in counties Cork, Limerick, Kildare, Wicklow and Meath during the second half of 2011. The NDFA has also selected a preferred tenderer for a third bundle of new and replacement schools providing accommodation for approximately 5,600 students at eight schools. Financial and contract close is scheduled for the first half of 2012 with construction commencing immediately thereafter. These projects are part funded by the European Investment Bank.

The NDFA acts as financial adviser in respect of all large projects undertaken by State authorities. It is currently advising the NRA on the N11/Newlands Cross PPP Project and is also advising the HSE on the new National Paediatric Hospital.

The NTMA provides the National Asset Management Agency (NAMA) with staff and business and support services including HR, IT, market risk, communications and the execution and processing of treasury and hedging transactions. Since March 2010 NAMA has acquired some 11,800 loans from over 800 debtors with a combined nominal value of some €74.2 billion. Because of NAMA's size the NTMA has seen a major expansion in staff numbers since end 2009 rising from 169 then to 433 at end 2011.

NAMA has approved sales of assets totalling €6.6 billion. A large proportion of the sales proceeds will be used to pay down NAMA's borrowings and the Agency has used its strong cash flow to redeem €1.25 billion of bonds in issue and repay €299 million in advances made by the Minister for Finance. At the end of 2011 NAMA had total cash and liquid asset balances of €3.8 billion and is on track to meet its target of repaying 25 per cent of its outstanding debts by the end of 2013.

1 General Government Debt is a gross measure and does not allow for the offsetting of Exchequer cash balances. As well as the National Debt it includes the promissory notes issued to certain financial institutions, local government debt and debt of non-commercial State bodies. GGD ratios are as published by the Department of Finance in Budget 2012.

2 Information in respect of the NPRF is, in the case of direct quoted investments, based on valuation as of close of business on 31 December 2011 and, in the case of indirect investment vehicles, based on the most recently available valuations.

3 Initially the companies within NewERA's remit are ESB, EirGrid, Bord Gáis, Bord na Móna and Coillte.

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