IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

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Notes to the financial statements continued25. Promissory notesThe GroupThe Bank2011 2010 2011 2010€m €m €m €mPromissory notes 29,934 25,704 29,934 25,704The Minister for Finance has provided the Bank with a promissory note to the value of €25.3bn comprising four tranches. Eachtranche pays a market based fixed rate of interest which is set on the date of issue and is appropriate to the maturity date ofthe tranche. The promissory note pays 10% of the initial principal amount of each tranche annually. The Bank received the firstinstalment payment of €2.53bn on 31 March 2011. This pay down resulted in the promissory note having a revised principalamount of €23.6bn from 31 March 2011.In addition, the Minister for Finance had provided a promissory note to INBS to the value of €5.3bn comprising two tranches.The terms of these tranches were the same as tranches one and four of the Bank's promissory note. Following receipt by INBSof the first instalment payment on 31 March 2011, the revised principal amount was €4.9bn. On 1 July 2011 the principal andaccrued interest as of that date transferred to the Bank under the INBS Transfer Order.In December 2010, at the request of the Minister for Finance, a change was made to the legal terms of the promissory notesallowing for an ‘interest holiday’ in 2011 and 2012, with a higher notional interest rate thereafter. This interest holiday doesnot impact the accounting for the promissory notes as the cash flows and effective interest rate of the notes were unchanged.Hence the Bank will continue to accrue interest income on the notes in 2011 and 2012.The fixed cash flows of the instruments create an interest rate risk for the Group. As at 31 December 2011, the Bank hadhedged a total of €4.3bn of the nominal amount using interest rate swaps. A further €5.7bn of economic hedges exist in theform of the Group’s capital and fixed rate debt issuance.The promissory notes are currently pledged as collateral for funding under a Special Master Repurchase Agreement with theCentral Bank of Ireland.The notes, which are classified as loans and receivables, are initially recognised at fair value and subsequently carried atamortised cost. IFRS defines loans and receivables as ‘financial assets with fixed or determinable payments that are not quotedin an active market’.78
Irish Bank Resolution Corporation LimitedAnnual Report & Accounts 201126. Government debt securities atThe GroupThe Bankamortised cost 2011 2010 2011 2010€m €m €m €mNAMA Government Guaranteed Floating Rate Notes947 10,623 947 10,62395% of the overall consideration received for assets that transferred to NAMA was in the form of Government GuaranteedFloating Rate Notes ('senior bonds'). The senior bonds are classified as loans and receivables, and are initially recognised at fairvalue.At 31 December 2010 the Bank held senior bonds with a total nominal value of €12,275m. These bonds accrued interest at 6month Euribor, receivable semi annually on 1 March and 1 September, and had a maturity date of March 2011 but wereextendible annually at maturity at the option of NAMA.In early February 2011, following valuation adjustments on loans transferred to NAMA in 2010, the Bank transferred €91mnominal of senior bonds back to NAMA. On 24 February 2011, pursuant to the AIB Transfer Order and CISA, the Bank'sremaining holding of senior bonds of €12,184m was transferred to AIB (note 13). The carrying value of these notes on the dateof transfer was €10,568m.Subsequently, following completion of due diligence by NAMA on certain loans which transferred in bulk during November andDecember 2010 the Bank has received new senior and subordinated bonds which increase the original consideration paid byNAMA for these assets. The new government guaranteed senior bonds accrue interest at 6 month Euribor, receivable semiannually on 1 March and 1 September. The maturity date of these new senior bonds is 1 March 2012 however NAMA may,with the agreement of the Bank, settle the senior bonds by issuing new senior bonds with the same terms and conditions and amaturity date of up to 364 days. There are certain key differences between the terms and conditions of the senior bonds thatwere held at 31 December 2010 and those held at 31 December 2011. A new amended Offering Circular of 22 June 2011 doesnot include an issuer extension option and the holder now has the right to reject physical settlement of the senior bonds onmaturity. As a result of the removal of the issuer extension option the Bank has valued the senior bonds, on receipt, as a shortterm instrument with a maturity date of 1 March 2012.At 31 December 2011 the Bank’s nominal holding of senior bonds totalled €950m. This figure includes €33m nominal of seniorbonds received by the Bank under the INBS Transfer Order on 1 July 2011. In October 2011 the Central Bank of Ireland advisedthe Bank not to increase its usage of sale and repurchase facilities provided under open market operations with the ECB. As aresult, at 31 December 2011 there were no senior bonds used in sale and repurchase agreements under open marketoperations with central banks (2010: €12,275m). At 31 December 2011 senior bonds with a nominal value of €750m had beenpledged under a Special Master Repurchase Agreement (‘SMRA’) with the Central Bank of Ireland.In February 2012 NAMA informed the Bank of its intention to physically settle the current senior bonds on 1 March 2012 byissuing new senior bonds with a maturity of 1 March 2013. The Bank’s commercial preference was to receive cash in exchangefor its holdings of senior bonds on 1 March 2012. However, bearing in mind the preferences expressed by both NAMA and theDepartment of Finance and overall public interest considerations, the Bank agreed to accept physical settlement.79
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ContentsIrish Bank Resolution Corpo
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Chairman’s statementIrish Bank Re
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Group Chief Executive’s reviewIri
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Business review continuedIrish Bank
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Board of DirectorsIrish Bank Resolu
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Corporate Responsibility continuedI
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Principal risks and uncertainties c
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Principal risks and uncertainties c
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Report of the DirectorsIrish Bank R
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Corporate governance statementIrish
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