NTMA Annual Report 2012 and Midyear 2013 Update
18 July 2013
- Bond market access re-established and funding plans for 2013 on target
- NPRF has committed €1 billion to areas of strategic importance to Irish economy
- Bord Gais Energy transaction underway: NewERA advising Government
- NDFA facilitated closure of 2 PPP deals and sourced €341m for non-PPP projects in past year
- State Claims Agency saves €43.5 million in management of clinical claims
18 July 2013 - The National Treasury Management Agency (NTMA) today published its Annual Report 2012 (3.7 MB, PDF format) and provided an update on activities across its range of business functions.
Speaking today, NTMA Chief Executive John Corrigan said that the €7.5 billion raised by the NTMA from two syndicated bond sales in the first quarter of 2013 - both of which attracted strong international interest and were heavily oversubscribed - confirmed Ireland's ability to access long-term market funding on sustainable terms.
"At the beginning of last year the NTMA's main objective was to address the substantial bond redemption of almost €12 billion in early 2014. We have since eliminated that "funding cliff" and furthermore achieved a significant landmark in March 2013 with the first new 10-year issuance in over three years, representing a strong vote of confidence in Ireland by the international debt markets."
The funding achieved to date in 2013 together with the funds available under the EU/IMF programme means that, as agreed with the Troika, Ireland will have more than 12 months advance funding in place at the end of this year. Decisions on potential bond auctions will be taken later in the year in the light of prevailing market conditions, Mr Corrigan said.
"Increased international investor confidence in Ireland has been reflected in the steep falls in Irish Government bond yields from their peak in the middle of 2011. Ireland's continued success in meeting fiscal targets is a key domestic factor in this while, externally, a number of supportive developments at a European level have also had a very significant impact. Ireland does remain vulnerable, however, to international developments as evidenced by the increased volatility in global bond markets over recent months, driven primarily by concerns around the future path of quantitative easing policies."
Mr Corrigan also noted that the IBRC promissory note transaction and the recently agreed extension of maturities on the EU portion of its EU/IMF programme loans provided a strong underpinning to Ireland's return to the markets by reducing the amount that will have to be borrowed over the next decade by €40 billion.
Mr Corrigan welcomed the Government's recently announced proposed legislative changes - based on proposals put forward by the NTMA - to establish an overarching NTMA Board that will oversee all of the Agency's functions and said the new structure would greatly assist the NTMA in delivering on its objectives in an integrated and coherent manner.
The proposed legislation will also establish NewERA on a statutory basis and reorient the National Pensions Reserve Fund (NPRF) into the Ireland Strategic Investment Fund (ISIF) focused on investment in Ireland on commercial terms to support economic activity and employment. The ISIF will build on initiatives already taken by the NPRF which has now committed circa €1 billion to areas of strategic importance to the Irish economy.
Key points from the 2012 Annual Report and midyear 2013 update are summarised below:
Funding and Debt Management
The NTMA maintained its intensive investor relations programme through 2012 and into 2013, helping pave the way for a €2.5 billion bond issuance in January 2013 and a €5 billion sale in March which marked Ireland's first new 10-year issuance since January 2010. There was strong demand for both issues, with bids for the 10-year bond amounting to some €13 billion.
In 2012 the NTMA's engagements with the debt markets included bond switches in January and July (€4.6bn total); the issuance of conventional bonds in July (€4.2bn); and the sale of the first Irish amortising bonds in August (€1.0bn).
Auctions of short-term Treasury Bills resumed in July 2012 and continued through the remainder of the year and into 2013. The annualised yield1 recorded at these auctions has fallen from 1.8 per cent in July 2012 to an average of 0.20 per cent over the six auctions held in the first half of this year, the lowest level since the introduction of the NTMA's Treasury Bill programme in March 2009.
Irish Government bond yields (which move inversely to prices) have recorded significant declines over the past 24 months with 10-year yields falling from over 14 per cent in July 2011 to 3.84 per cent currently.
Ireland's progress in restoring its creditworthiness has also resulted in credit rating improvements. Fitch Ratings' revision of Ireland's outlook from "negative" to "stable" in November 2012 was the first positive action since the start of the financial crisis. Since then Standard & Poor's has revised its outlook upwards on two occasions, most recently on 12 July when the ratings agency changed its outlook on Ireland from "stable" to "positive" citing improved prospects for debt reduction2.
The weighted-average maturity of Ireland's long-term marketable and official debt increased from 6.4 years at end December 2011 to 12.6 years at end June 2013. This increase is largely due to the issuance of long-term bonds to replace the IBRC promissory note. It also reflects the issuance of Irish amortising bonds, the issuance of the new 10-year benchmark bond and the extensions of the maturities on the EU portion of Ireland's EU/IMF programme loans.
Ireland's General Government Debt is projected to peak as a percentage of Gross Domestic Product at 123 per cent this year and decline thereafter.
National Pensions Reserve Fund (NPRF)
The NPRF Commission Annual Report, also published today, details the approximately €1 billion now invested or committed to areas of strategic importance to the Irish economy in areas including infrastructure, venture capital and long-term financing for SMEs.
This includes NPRF commitments of €375 million to three new long-term funds, announced in early 2013, that will provide a total €850 million of equity, credit and restructuring/recovery investment for Irish small and medium-sized businesses and mid-sized corporates. The NPRF played a significant role in the development of the funds, all of which have established a local presence, and will be a cornerstone investor in each alongside additional investment from third-party investors. The third and largest of the funds - a €450 million credit fund managed by BlueBay Asset Management LLP - was launched earlier this month and has already issued several indicative term sheets to potential borrowers.
In light of the proposed refocusing of the NPRF towards investment in Ireland, the NPRF has taken steps to provide the Fund with some downside protection against equity market declines while retaining some participation if markets perform well - this strategy has been implemented through the purchase of equity index options and equity sales.
The Fund's Discretionary Portfolio earned a return of 7.8 per cent in 2012. The Directed Portfolio, comprising public policy investments in Irish banks made at the direction of the Minister for Finance, recorded a return of 10.5 per cent in 2012.
The Discretionary Portfolio earned a return of 2.7 per cent in the first six months of 2013. From the Fund's inception in 2001 to end June 2013, the Discretionary Portfolio has delivered an annualised performance of 3.8 per cent per annum. At end June the Discretionary Portfolio was valued at €6.4 billion and the Directed Portfolio at €8.8 billion.
NewERA
The core role of NewERA involves the oversight, from a shareholder perspective, of the financial performance, corporate strategy and capital and investment plans of the five commercial semi-state companies within its remit3 and working with stakeholders to develop and structure proposals for investment in the key sectors of energy, broadband and water to support economic activity.
NewERA's role also involves, where requested, advising on the disposal or restructuring of State assets.
NewERA is currently advising the Government on the sale of BGE's energy business which was formally launched on 3 May 2013. The transaction is expected to be concluded before the end of 2013. NewERA is also working closely with ESB and the relevant Government Departments in relation to the sale of some of ESB's non-strategic power generation capacity.
Following the June 2013 Government decision in relation to Coillte, the restructuring of the company will be overseen by NewERA and the relevant stakeholder departments. NewERA is also undertaking further financial analysis to establish the viability of a Bord na Móna/Coillte merger.
NewERA is also actively participating in the establishment of Irish Water which includes advising on the governance and funding structures.
NewERA is playing a central role in advising on the establishment of the Energy Efficiency Fund, in which Government has committed to invest €35 million.
Last year NewERA provided detailed financial analysis and recommendations (where appropriate) to relevant Ministers on a total of 45 requests for advice concerning the commercial semi-state companies, including circa €2.5 billion in financing-related requests and in excess of €1 billion in capital expenditure requests for projects.
National Development Finance Agency (NDFA)
The NDFA is playing a key role in the delivery of the Government's €2.25 billion Infrastructure Stimulus Programme, a substantial portion of which is to be delivered via Public Private Partnerships (PPPs). The NDFA is responsible for procuring the Programme's education, justice and health PPP projects with an estimated total capital value of c. €650 million.
Schools Bundles 4 and 5 (12 schools in total providing accommodation for 8,650 pupils) were the first of these projects to be brought to the market by the NDFA with the publication of a tender notice in early June 2013. These are due to be followed by tender notices for the DIT Grangegorman campus project and the launch of the Primary Care PPP programme in September. The courthouses/divisional Garda headquarters projects will follow later in the year.
Over the past 12 months the NDFA has met with market potential participants including lenders, equity investors, contractors and professional service providers to build awareness and support for the delivery of the Programme and continues to seek both traditional and alternative funding sources for capital investment.
In addition to facilitating the financing packages for the Schools Bundle 3 (November 2012) and N11/N7 road projects (April 2013)4 - the first PPP contracts signed since Ireland's entry into the EU/IMF programme - the NDFA has played a lead role in sourcing €341 million in funding for capital projects over the past 12 months from the European Investment Bank and the Council of Europe Development Bank.
State Claims Agency (SCA)
As a result of the delegation of management of claims against new authorities and additional classes of claims, the number of claims under the SCA's active management at end 2012 increased by 8 per cent from a year earlier to 5,755. The estimated liability against all active claims at end 2012 was €1.1 billion, of which €970 million (86 per cent) related to clinical claims and the remainder, €157 million (14 per cent), related to personal injury and third-party property damage claims.
The SCA achieved savings of €43.5 million in the management of clinical claims in 2012. The net cost of satisfying clinical claims and related costs during the year was €84 million compared with an independent actuarial assessment that €127.5 million would be required.
The SCA's newly-established Legal Costs Unit, tasked with dealing with third-party costs arising from certain Tribunals of Enquiry, has secured significant savings on the first batch of tribunal-related legal expense claims resolved by the Unit since it became operational in February 2013.
National Asset Management Agency (NAMA)
The NTMA provides the National Asset Management Agency (NAMA) with staff and business and support services including HR, IT, market risk, transaction processing and treasury services. NAMA reimburses the NTMA the costs of staff assigned to NAMA and the costs of business and support services. Of the 559 staff employed by the NTMA at end June 2013, 264 were assigned to NAMA.
NAMA has made substantial progress, most notably in generating cash flows from its debtors' loans and underlying assets and in repaying its debt. Some €10.6 billion in debtor receipts was generated in the period from NAMA's inception to end 2012 (this had increased to €12.7 billion by end June 2013). €4.75 billion in senior bonds was redeemed up to end 2012 and with an additional €1.5 billion redemption in June 2013, the cumulative senior bond redemption to date has been €6.25 billion. NAMA remains well on course to meet its end-2013 target of redeeming €7.5 billion of its senior bonds.
NAMA, which has published its Annual Report separately, generated a profit (after impairment, tax and dividends) of €228 million in 2012.
1 Market convention is to quote the yield on an annualised basis i.e. the effective rate of interest that would apply if the investment term was one year. As these Bills had a three-month maturity, the actual interest cost on them is proportionately less than the annualised rate.
2 Ireland retains investment grade status with Fitch and Standard & Poor's, which have both set a rating of BBB+, three notches above sub-investment grade. It has a sub-investment grade rating of Ba1 from Moody's since July 2011.
3 ESB, Bord Gáis Éireann (BGE), EirGrid, Bord na Móna and Coillte.
4 The NDFA was also the procuring authority for Schools Bundle 3 (eight schools providing accommodation for c. 5,700 students) and provided financial advice to the procuring authority for the N11/N7 project.