Does this section contain a guarantee by the State to the SPV?
SECTION 7.
Question proposed: "That section 7 stand part of the Bill."
Subsection (1) allows the Minister to guarantee, indemnify and pay the designated body, that is the SPV, any amounts needed to ensure sums due to it by a housing authority or authorities are made over to it.
In the very unlikely event of a local authority defaulting on a payment or payments due to a designated body the Minister will make good the shortfall. He will then pursue the housing authority concerned through powers in the Local Loans Fund Act, as mentioned in section 5. The Local Loans Fund Act, 1961 gives the local loans fund powers to access the general revenues of a housing authority in the event of a default on a local loans fund loan. The general revenues act as the collateral for loans made by the LFS.
The proposed guarantee is necessary as security for the bonds that are to be issued, which is the point to which the Deputy referred earlier. In a commercial securitisation the ultimate security for the bonds would be recoursed by the bond issuer to the householder should the householder default on his or her mortgage repayments, which is the precise point made by the Deputy. However, in the present case, this recourse to the householder is blocked specifically for the policy reasons I stated earlier. This back stop guarantee will give the necessary reassurance to the bond holders that their investment is secure.
I have not quite grasped what the structure of the SPV will involve. Is it a private company with a couple of directors? Will they be appointed by the Minister? Will it be at arm's length?
It will be at arm's length. It is a specific trust that will be set up in this instance by the Union Bank of Switzerland. I recognise it for the purpose of this legislation. The trust's affairs will be managed by the National Treasury Management Agency.
Who appoints the trustees?
The trustees, subject to confirmation, will be the UBS.
It is completely at arm's length. The Minister will not have any ongoing interest in the management of the company.
Under section 4, I can delegate my powers of management to the NTMA.
Question put and agreed to.
Sections 8 to 10, inclusive, agreed to.
SECTION 11.
Question proposed: "That section 11 stand part of the Bill."
The explanatory memorandum states:
Section 11 is a technical amendment to allow the Post Office Savings Bank Fund to purchase any securities issued by the designated body. This is a stand-by provision to allow the POSB Fund to help provide liquidity for the bonds.
I presume the POSB does not have that power at present and the provision will give it the power to purchase bonds in the SPV in the unlikely event that nobody else is willing to take up the bonds, which I am sure will not happen. Is this the purpose of the section?
The bond purchasers will want to be assured that there is a reasonably liquid market.
It is a type of fall back position for bond holders in case the trading market does not develop. They could get rid of their bonds by selling them to the POSB.
It is part of the wider strategy. If one can create a relatively active capital market, by definition it must be reasonably liquid. There must be movement in and out and therefore possibilities for people to purchase must be created. Section 11 allows specifically the Post Office Savings Bank Fund to buy any securities issued by the designated body. It is based on technical advice from the NTMA.
It is a good idea and I congratulate those who devised it. However, I cannot think of any of any State body which could do it.
Every pension fund could do it.
A State body could not do so.
Every State pension fund could do so. The RTE or Telecom Éireann pension fund could buy it.
The POSB did not have that power.
It did not have that explicit power. We were advised that it needed to be explicitly stated in the section.
Will they be obliged to do so?
No. The provision is based on the advice of the NTMA, which is the specialist in this area. Section 138 of the 1993 Act needed amendment to provide for this extra flexibility. The Post Office Savings Bank must exercise its own due care, etc, in deciding to exercise an option to purchase these items.
Under the previous section, the Minister can ask them to take the option. There will be a surplus in the fund at the end of the ten years; the surplus will grow every year. The income coming into the fund will be at 11 or 12 per cent, depending on the stream of mortgages which have securitised. This was the rate at which local authorities loaned the SDA money. On the other side of the profit and loss fund account of the SPV, money will be paid to the bond holders at six monthly intervals but at a lower rate than 11 per cent, given the current state of the bond market. There will be a surplus in the SPV every year and it will continue to grow.
I am not sure that is exactly the case.
Will that be the case?
It is a technical question and with the permission of the Chairman perhaps Mr. Conor O'Mahony from the Department of Finance could answer it.
We created this precedent on the Finance Bill. We broke every procedure but now it is a new procedure.
Mr. Conor O'Mahony (Depatment of Finance)
The difference between the interest being paid out on the bonds and the interest coming into the fund, plus the redemptions, will form a block of money which will, over the ten year period of the bonds, grow and be there to meet the redemption of the bonds at the end of the ten year period. As the flow of mortgage payments will extend over a longer period, perhaps 15 or 20 years, the normal capital repayments would not be sufficient at ten years to meet the full redemption of the bond. The surplus interest on that will be used in that case to meet the redemption at the end of the ten year period. When the bonds have been redeemed, the residual flow of income from year 11 to the end of the mortgages would again flow back into the Exchequer.
As the fund grows on the income side for the ten years, it should grow at a particular rate. For example, £200 million at 11 per cent is £22 million income, plus redemptions of perhaps £3 million a year, giving a total each year of £25 million. If the bonds are at 7 per cent, the figure is £14 million. The surplus, therefore, is approximately £11 million each year. If the sum of £11 million grows for ten years, it would eventually amount to £110 million. This sum will exist throughout the ten years.
If it is left in this position, there will be a £90 million shortfall for the redemption of the bonds at par at that stage. I presume that money must be raised at the end of ten years to ensure the bonds can be redeemed. Is this correct?
The Deputy is equating two matters and I am not sure they are necessarily the same thing. We are raising a total capital sum of £200 million. We are veering sufficient income from the flow for the local loans fund to raise that amount of money. The Deputy contrasted the current rate of interest of 7 per cent with the traditional rate of 12 per cent for SDA loans. However, this gap does not necessarily exist. We are not taking half the total amount of capital moneys and putting it out on loan. We are not getting them in at 12 per cent and putting them out at 7 per cent and thereby getting the profit in between.
The fund will have authorised share capital. On day one when the bonds are issued, there will be debentures on one side of the balance sheet of £200 million. In the ten year period income will come into the account and at the end, it must be redeemed. In a normal commercial transaction, the balance must come from somewhere.
If there is any surplus at the end, the SPV is wound up and the surplus is returned to the Government.
It is probable that the people here will not be present in ten years time. However, at that point, the bond holder must be repaid at par. He must be repaid £100 million, which he is putting up now. The surplus which will arise in the fund will not be sufficient if it is all left there.
If it is not left there, does temptation exist for the Minister for Finance, through the NTMA, to put that sum into the Exchequer each year? I do not wish to labour the point and, perhaps, the Minister could refer to it later.
I am thinking of the balance sheet of the funds.
We do not have an immediate answer and I would like to reflect on the matter.
I am not against it but I would like to know how it will work out in the end.
I will write to the Deputy on the matter.
Question put and agreed to.
Sections 12 to 17, inclusive, agreed to.
SECTION 18.
Question proposed: "That section 18 stand part of the Bill."
These bonds will be gilt edged and I am sure will be over-subscribed. Will UBS underwrite the scheme through the markets here? Will Irish punters have a chance to invest in this issue in their own country?
That is the intention. I will get that information for the Deputy for Report Stage. As UBS is an international bank it will make this issue in Dublin, London and Frankfurt. Part of the reason for using it in this way is to try to stimulate a domestic market. I am anxious to ensure that all the potential Irish investors, fund managers in particular, would be notified. An understandable criticism made by Irish fund managers is that there is a limited number of investment vehicles for the kind of funds for which they have responsibility, that is gilt edged secure funds. This is another secure fund in which they can comfortably invest and meet their fiduciary obligations.
Question put and agreed to.
Title agreed to.
I would like to thank the officials of the Department of Finance who were so helpful in briefing me on the Bill.
Report of Select Committee.
I propose the following draft report:
The Select Committee has considered the Bill. The Bill is reported to the Dáil without amendment. Is that agreed?
Report agreed to.
Ordered to Report to the Dáil accordingly.
The Select Committee adjourned at 3.45 p.m.