Why ‘Bad Banks’ Give the Best Deals

Ka-ching! Forget about the coming Boxing Day sales. Two investors just joined forces and got a €700 million discount!

Now that’s the kind of deal you want in asset markets. It’s even better when everyone else is spooked and fretting about the state of the world.

You can get on with the business of building an asset portfolio while they keep their money on the sidelines.

It’s not too late to grab a bargain yourself…though time is slipping away.

The best deals come out of a major bust

If you didn’t catch the news, Bloomberg reports that Ireland’s National Asset Management Agency (NAMA) just sold a group of Dublin shopping mall loans for €1.85 billion.

The par or face value of these loans was €2.6 billion.

See what I mean about that discount?

NAMA is Ireland’s ‘bad bank’. It was set up in the wake of the global financial crisis that smashed Irish real estate.

Basically, the government stuffs all the non-performing loans into a sack. Then they try and hide it under the bed until they can get themselves out of the mess they’ve created.

The loans appear to be largely secured against shopping malls. Why would investors want such a thing with the world looking so gloomy?

Bloomberg reports, ‘Irish consumers have been buttressing the nation’s economic recovery in the past 18 months, with retail sales surging at levels seen during the nation’s Celtic Tiger era.’

Perhaps things aren’t as bad as they can seem at times.

And it’s not just in Ireland where deals like this are going down…

Greedy buyers meet willing sellers

Actually Ireland is chicken feed compared to the UK. The British government is dangling £12 billion worth of loans in front of the market.

The amount is so huge that interested investors are forging alliances to go in together

The loans were the assets of defunct bank Northern Rock. They too are currently sitting in a ‘bad bank’, the UK Asset Resolution (UKAR).

The Financial Times reported on September 20:

UKAR took on the securitised mortgages after Northern Rock was broken up following its high-profile collapse in 2007.

‘They include Northern Rock’s 125 per cent loan-to-value “Together” deals, which became a symbol of the pre-crisis debt binge as they offered to tack an unsecured loan of up to £30,000 on to a mortgage.’

The comeback in British real estate values has taken most of these loans from ‘non-performing’ to ‘performing’. According to the FT, of a total of 118,323 loans, only 7,949 are in arrears.

Can you see why the powers doing everything they can to reflate asset markets?

If that means driving interest rates down, printing money, bailing out bankers and screwing the taxpayer, then that’s what happens. Anything to make sure that pesky land price stops falling and starts going back up again.

A first in 575 years of history

What’s even better for the buyers is the Irish and UK government basically want to get rid of these loans. They want the problem to go away.

There are less and less of these loans up for sale, because there’s so much demand. The volume of portfolio transactions was €64 billion in 2013. It was €91 billion last year.

The forecast is for the total to hit €150 billion this year.

What’s appealing about these loans now for the interested buyers is they carry a 4.79% standard variable rate. That’s high by today’s standards in Britain.

It’s hard to get a decent bang for your buck these days with rates so low.

To give you an idea, Reuters reported back in August that elite British boarding school Eton College borrowed 45 million pounds.

They locked in a fixed interest rate of 3.63% for 45 years.

It was the school’s first private debt placement in 575 years of history.

It’s so cheap to borrow in the UK that you basically have to.

Talking about that…

Around in circles the world economy goes

Investors are so starved for yield they’re beginning to like the look of ‘non prime’ residential mortgage backed securities in the United States again.

Or as the Financial Times puts it, ‘Lenders warm to housebuyers who do not meet strict borrowing guidelines introduced after the financial crisis.’

Hey, didn’t we learn our lesson last time? You might recall troubles in the US subprime market brought on the global financial crisis.

Remember all the liar loans, dodgy AAA ratings and NINJA types?

These are heading in the same direction, except now they’re called ‘non prime’.

No kidding.

Can you see why over at Cycles, Trends and Forecasts we study the real estate cycle? It’s all history repeating. You couldn’t make this stuff up.

If you want to know what’s next, start here.


Callum Newman,

Associate Editor, Cycles, Trends and Forecasts

Ed Note: This article was first published in Money Morning.

PS: There will be no article from Bill Bonner today owing to the Footy Friday public holiday in Victoria.

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Callum Newman

Callum Newman

Callum Newman is the editor of Markets and Money and Associate Editor of Cycles, Trends and Forecasts. He also hosts Markets and Money Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to Markets and Money here.

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