N National Treasury Management Agency a t io Annual Report and Accounts for the year ended n a l T 31 December 2012 r e a s u r y M a n a g e m e n t A g e n c y A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e National Treasury Management Agency r 2 0 Treasury Building 1 2 Grand Canal Street Dublin 2 Ireland Tel: +353 1 664 0800 www.ntma.ie Annual Report and Accounts for the year ended 31 December 2012 | 1 National Treasury Management Agency Annual Report and Accounts for the year ended 31 December 2011 30 June 2013 Mr Michael Noonan TD Minister for Finance Government Buildings Upper Merrion Street Dublin 2 Dear Minister I have the honour to submit to you the Report and Accounts of the National Treasury Management Agency for the year ended 31 December 2012. Yours sincerely John C Corrigan Chief Executive 2 | National Treasury Management Agency About the NTMA The National Treasury Management Agency (NTMA) is a State National Pensions Reserve Fund (NPRF): The NTMA is body which operates with a commercial remit to provide asset Manager of the National Pensions Reserve Fund which was and liability management services to Government. It has evolved established with the objective of meeting as much as possible from a single function agency managing the National Debt to a of the costs of social welfare and public service pensions from manager of a complex portfolio of public assets and liabilities. 2025 onwards. The Fund’s investments comprise a globally Businesses managed by the NTMA include borrowing for the diversified portfolio of equities, bonds and alternative assets Exchequer and management of the National Debt, the State and the public policy investments in Irish banks made at Claims Agency, the New Economy and Recovery Authority, the the direction of the Minister for Finance. In June 2013 the National Pensions Reserve Fund and the National Development Government announced its intention to reorient the NPRF to Finance Agency. The NTMA assigns staff to the National Asset the Ireland Strategic Investment Fund with a mandate focused Management Agency and also provides it with business and on commercial investment in Ireland. support services and systems. National Development Finance Agency (NDFA): The Funding and Debt Management: The NTMA is responsible National Development Finance Agency is the statutory for borrowing on behalf of the Government and managing the financial advisor to State authorities in respect of all public National Debt in order to ensure liquidity for the Exchequer investment projects with a capital value over €20 million. The and to minimise the interest burden over the medium-term. NDFA also has full responsibility for the procurement and The Funding and Debt Management Directorate also performs delivery of Public Private Partnership (PPP) projects in sectors a number of other functions including executing NAMA and other than transport and the local authorities. It performs its NPRF treasury transactions, providing a Central Treasury functions through the NTMA. Service for State bodies and local authorities and managing National Asset Management Agency (NAMA): the assets of the Dormant Accounts Fund. The NTMA is also The National Asset Management Agency was established the Scheme Operator of the Credit Institutions (Eligible in 2009 as one of a number of initiatives taken by the Liabilities Guarantee) Scheme 2009. Government to address the serious crisis in Irish banking State Claims Agency (SCA): Acting as the State Claims which had developed as a result of excessive lending to the Agency, the NTMA manages personal injury, property damage property sector. It has acquired certain loan assets (land and and clinical negligence claims brought against certain State development and associated loans) with a nominal value of authorities, including Government ministers and health €74.2 billion for a consideration of €31.8 billion paid in the enterprises. It also has a risk management role, advising and form of Government-guaranteed securities issued directly assisting State authorities in minimising their claim exposures. to the institutions. Its mandate is to manage acquired assets In 2012 the Government decided to establish a Legal Costs to obtain the best achievable financial return for the State. Unit within the SCA to deal with third-party costs arising from The NTMA assigns staff to NAMA and provides NAMA with certain Tribunals of Inquiry. business and support services and systems. New Economy and Recovery Authority (NewERA): The NTMA reports directly to the Minister for Finance in the In September 2011 the Government announced the performance of its funding and debt management, State Claims establishment of NewERA, initially on a non-statutory basis, Agency and NewERA functions. The National Pensions Reserve within the NTMA. The core role of NewERA involves the Fund, the National Development Finance Agency and the National oversight of the financial performance, corporate strategy, Asset Management Agency each has its own board. The NTMA capital and investment plans of the five commercial semi-state has an Advisory Committee to assist and advise on such matters companies within its remit - ESB, Bord Gáis Éireann, EirGrid, as are referred to the Committee by the NTMA. Bord na Móna and Coillte - and working with stakeholders The information contained in this annual report is primarily in to develop and structure proposals for investment in energy, respect of those functions where the NTMA reports directly to broadband and water to support economic activity. NewERA’s the Minister for Finance. Separate annual reports are published role also involves, where requested, advising on the disposal by the National Pensions Reserve Fund Commission, the or restructuring of State assets. National Development Finance Agency and the National Asset Management Agency. Further information on the NTMA is available at www.ntma.ie. Annual Report and Accounts for the year ended 31 December 2012 | 3 NTMA Report & Accounts For the year ended 31 December 2012 Contents Chief Executive’s Review 4 Executive and Advisory Committee 6 Funding and Debt Management 8 State Claims Agency 18 New Economy and Recovery Authority 23 National Pensions Reserve Fund 26 National Development Finance Agency 29 National Asset Management Agency 31 Governance 32 Financial Statements 37 4 | National Treasury Management Agency Chief Executive’s Review The NTMA made substantial number of supportive developments at a European level have had progress across the range of its a very significant impact. Ireland does remain vulnerable, however, asset and liability management to international developments and, indeed, volatility increased activities during 2012 and into in global bond markets in May and June 2013, driven primarily by 2013. It re-engaged with the concerns around the future path of quantitative easing policies in international debt markets with the US and Japan. Ireland’s first issuance of new A key goal for the NTMA in 2012 was to reduce the challenging debt since its entry into the EU/ “funding cliff” presented by a bond repayment of almost €12 billion IMF programme in November due in mid January 2014 and which was seen by investors as a major 2010 and Ireland is now well obstacle to Ireland’s smooth exit from the EU/IMF programme. positioned to exit from the programme on schedule at the end of this year. Significant investment commitments were made in The NTMA progressively reduced and eliminated this funding line with the Government’s intention of reorienting the National cliff through a series of bond switches and the issuance of new Pensions Reserve Fund (NPRF) into an Ireland focused strategic bonds. A significant landmark was reached in March 2013 with investment fund and the National Development Finance Agency the first new 10-year issuance since January 2010. The transaction, (NDFA) is playing a key role in the delivery of the Government’s which attracted strong international interest and was heavily Infrastructure Stimulus Programme. NewERA is up and running oversubscribed, confirmed Ireland’s ability to access long-term and providing independent corporate finance advice and financial market funding on sustainable terms. The NTMA’s focus over the analysis to Government on the commercial semi-state sector remainder of the year will be on continuing its market funding while a Legal Costs Unit dealing with third-party costs arising programme so that Ireland has the comfort of having 12-15 months’ from certain Tribunals of Inquiry has been established in the State advance funding in place when the EU/IMF programme reaches Claims Agency (SCA). In addition, in June 2013, the Government its scheduled end. Such funding “visibility” is vital if Ireland is to announced legislative proposals for the establishment of NewERA successfully exit the programme at the end of this year. on a statutory basis, reorienting the NPRF into the Ireland Turning to the NPRF, during 2012 and the early part of 2013 the Strategic Investment Fund (ISIF) and streamlining the NTMA’s Fund took a number of important strides towards refocusing its governance structure. investments on commercial investment in Ireland in keeping with Managing Ireland’s return to the international debt markets is a Government’s declared intention of channelling NPRF resources priority for the NTMA. To this end, the NTMA has continued with towards productive investment in the Irish economy. It has the intensive investor relations programme which it commenced announced investment commitments to three SME-focused funds in 2011. This has involved a structured programme of face-to-face that will provide €850 million of equity, credit and restructuring / meetings putting the investment case for Ireland to investors in recovery investment for Irish small and medium-sized enterprises. Europe, the US, the Middle East, Asia and to the domestic market. The NPRF played a significant role in the development of these These presentations are based on three simple principles: tell funds and will be a cornerstone investor in each. By committing investors the facts, do not over-promise, and return regularly with its resources as a cornerstone minority investor, the NPRF’s assets a progress update. It is a slow and deliberate process, but one can be leveraged and act as a catalyst for attracting additional which has helped generate renewed interest among institutional investment from third-party investors into funds targeted at areas investors in Irish Government bonds. of strategic importance and that fill financing gaps in the economy. Increased international investor confidence in Ireland has been The NPRF has also provided funding support to two recent reflected in the steep falls in Government bond yields from significant Public Private Partnership (PPP) projects (the Schools their peak in mid 2011. The various domestic and external factors Bundle 3 and N11/N7 road projects) and the ISIF is expected to driving this are discussed in more detail in the body of this Report. play a significant role in the financing of the Government’s Key among the domestic drivers, however, is the Government’s multi-year €1.4 billion PPP programme which forms part of its continued success in meeting fiscal targets, while, externally, a €2.25 billion Infrastructure Stimulus Programme. Annual Report and Accounts for the year ended 31 December 2012 | 5 The NTMA is also playing a key role in the delivery of the NAMA has made substantial progress in generating cash flows Infrastructure Stimulus Programme through its NDFA function. from its debtors’ loans and underlying assets and in repaying the The NDFA is carrying out a comprehensive engagement bonds it issued as consideration. Some €10.6 billion in debtor programme with potential project funders who have been absent receipts was generated in the period from its inception to end from the Irish market since the financial crisis first took hold December 2012, allowing NAMA to redeem, over the same period, and continues to seek both traditional and alternative funding €4.75 billion of senior bonds and placing it firmly on course to sources for capital investment. As we have had to do as part of meet its end-2013 target of redeeming €7.5 billion of senior bonds. our debt management function, Ireland needs to rebuild the In June 2013 the Government announced legislative proposals trust and confidence of investors in our PPP programme and an to establish NewERA on a statutory basis and reorient the NPRF active investor engagement programme is a key part of that. In into the Ireland Strategic Investment Fund focused on investment addition to putting together financing packages for the Schools in Ireland on commercial terms that will contribute to economic Bundle 3 and N11/N7 road projects – the first PPP contracts signed activity and employment. While the ISIF will build on investment since Ireland’s entry into the EU/IMF programme – the NDFA initiatives taken by the NPRF, legislative change is required as the has played a lead role in sourcing some €340 million in funding NPRF’s statutory investment policy limits the amount of investment for capital projects from the European Investment Bank and the in Ireland due to the concentration risk this would entail. Council of Europe Development Bank. The Government also announced legislative changes – based on 2012 was the first full year of operations for NewERA. It provided proposals put forward by the NTMA - to establish an overarching financial advice and analysis to Government on a broad range NTMA Board to oversee all of the NTMA’s functions, other than of issues, including funding, capital expenditure, corporate plans NAMA which will continue to have its own separate governance and the establishment of Irish Water. It has also been providing structure, and which will replace the various boards and assistance and advice on potential State asset disposals and is committees currently in place. The NTMA has taken on a range project-managing the disposal of Bord Gáis Éireann’s energy of additional responsibilities over the years since its original business. Looking beyond these immediate projects, however, establishment as a single function debt management agency and the longer-term value for the State arises from having its own this is an opportune moment to streamline the various boards and dedicated corporate finance expertise with an emphasis on return committees that currently oversee its various functions. I believe on capital and on dividend policy. the new governance structure will greatly assist in the delivery of During 2012 the State Claims Agency maintained its focus on the NTMA’s objectives in an integrated and coherent manner. minimising the State’s exposure to claims, whether through its I would like to thank the members of the NTMA Advisory ongoing risk management advice to clinicians, schools and State Committee for their assistance and advice during the year. In authorities, through its careful and proactive management of particular, I wish to acknowledge the invaluable contribution of almost 6,000 claims, or indeed via its innovative new procurement David Byrne, the Committee Chairperson, and Hugh Cooney, who initiative that aims to secure significant reductions in legal costs. served as a Committee member and Chairperson of the Audit In 2012 the Government decided to establish a Legal Costs Unit Committee, both of whose appointments expired at end 2012, and within the SCA to deal with third-party costs arising from certain to express my thanks for their service to the Committee. Tribunals of Inquiry – initially the Mahon and Moriarty Tribunals. The Legal Costs Unit is now up and running and is already making Finally, I wish to thank management and staff for their continued significant savings for the State. professionalism and commitment without which the NTMA could not deliver on its challenging mandate. The National Asset Management Agency (NAMA) draws on the NTMA for its staff and for a range of corporate support services. By end June 2012 NAMA had assessed all debtor business plans John Corrigan and its focus moved to maximising its return on the acquired Chief Executive loans and on the property assets securing them. In that respect, 6 | National Treasury Management Agency Executive and Advisory Committee Senior Management Team John Corrigan Ciarán Breen Eileen Fitzpatrick Chief Executive Director, State Claims Director, NewERA Agency Brendan McDonagh Brendan Murphy Brian Murphy Director, NTMA and Director, Finance, Director, NTMA Chief Executive, Technology and Risk and Chief National Asset Executive, National Management Agency Development Finance Agency Eugene Andrew O’Flanagan Oliver Whelan O’Callaghan Head of Legal, Control Director, Funding and Director, National and Compliance Debt Management Pensions Reserve Fund Our Mission and Values The NTMA has formulated a mission statement to encapsulate the central purpose of the organisation across its business areas and a set of core values to guide staff behaviour and decision-making. Mission Statement To manage public assets and liabilities commercially and prudently. Core Values We act commercially while fulfilling our public service responsibilities. We act with honesty and integrity. We are results focused and are each accountable for the work we do. We are adaptable and proactive. We value our people and treat each other with dignity and respect. Annual Report and Accounts for the year ended 31 December 2012 | 7 Advisory Committee (as of 28 June 2013) Brendan McDonagh Tytti Noras Brendan McDonagh is Chairman and Tytti Noras is Legal Counsellor, Financial Chief Executive Officer of the Bank of Markets Department, Ministry of Finance, N.T. Butterfield & Son Limited, Hamilton, Finland and a Member of the Board of Bermuda. He is a former CEO of HSBC North Directors of the European Investment Fund. America Holdings Inc with responsibility for the Group’s banking and consumer finance operations in the US and Canada. He was also Group Managing Director for HSBC Holdings Inc and a member of the HSBC Group Management Board. John Moran Donald C Roth John Moran is Secretary General of the Donald C Roth is Managing Partner of EMP Department of Finance. Previously he Global LLC and former Vice President and served as Second Secretary General at the Treasurer of the World Bank. Department of Finance where he was Head of Banking and responsible for all banking policy matters, management of the State’s shareholding in banks and reform and reorganisation of the Irish banking sector. Formerly, he was Head of Wholesale Bank Supervision in the Central Bank of Ireland and worked with Zurich Capital Markets, McCann FitzGerald, GE Capital Aviation Services, GPA Group and Sullivan & Cromwell. 8 | National Treasury Management Agency Funding and Debt Management Ireland re-engaged with the international debt market in 2012 • The improvement in Ireland’s debt profile, particularly for the first time since its entry into the EU/IMF Programme reinforced by the EU agreement on 12 April 2013 to further of Financial Support (the EU/IMF programme) in November extend the maturities of the European portion of Ireland’s 2010. The NTMA took advantage of a number of long-term debt EU/IMF programme loans by an average of seven years. issuance opportunities in 2012 combined with more regular access The decline in bond yields through 2012 was most marked in to the short-term market, particularly through the resumption of shorter maturities. the Treasury Bill programme. Irish Government Bond Yields Yield at End Yield at End Change Market Review Maturity 2011 (%) 2012 (%) Year to End 2012 Irish Government bonds have enjoyed a sustained rally since July 2013 7.45 0.77 -6.68 2011 when 10-year yields peaked at over 14 per cent and 2-year 2014 7.58 1.52 -6.06 yields peaked at over 22 per cent. The agreements reached in July 2015 - 1.58 new issue and September 2011 to reduce the cost of the European portion 2016 7.67 2.50 -5.17 of Ireland’s borrowings under the EU/IMF programme created a 2017 - 3.31 new issue positive momentum for the market in Irish Government bonds. 2018 8.18 3.63 -4.55 This strong performance has been broadly based and has resulted in 2019 8.26 4.21 -4.05 a dramatic improvement in the yields in Irish Government bonds. 2020 8.25 4.43 -3.82 The factors behind the rally include: 2025 8.10 5.13 -2.97 • Ireland’s consistent delivery on its EU/IMF programme Source: NTMA commitments and adherence to all quantitative fiscal targets; Renewed secondary market buying interest through January • The progressive elimination of the large refinancing requirement and February 2012 brought yields in all maturities below arising from the bond maturity in mid-January 2014; 7 per cent and led to three months of stable yields despite an increasingly uncertain backdrop elsewhere in the eurozone. In • The EU leaders’ supportive reference to Ireland in their mid May 2012, however, yields increased above 7 per cent amid statement of 29 June 2012 on the necessity to break the link increased concerns regarding the situation in Greece along between sovereign and banking debt; the statement by the with developments in the Spanish banking sector and concerns President of the European Central Bank (ECB) on 26 July 2012 regarding the Irish referendum on the EU Fiscal Compact Treaty. that “the ECB is ready to do whatever it takes to preserve the euro”; and the ECB’s announcement on 2 August 2012 of the Yields fell again in July 2012 following the statement from the Outright Monetary Transactions (OMT) policy initiative which Euro Area Summit on the importance of breaking the link between indicated a commitment to buy, if necessary, sovereign bonds sovereign and bank debt. In addition, the ECB’s announcement in the secondary market with a focus on bonds with a maturity in August 2012 of a commitment to buy sovereign bonds in the of one to three years; secondary market with a maturity of between one and three years (Outright Monetary Transactions) led to a sharp rally at the short • The promissory note arrangement, whereby Irish Government end of eurozone yield curves. A feature of the Irish Government Bonds were issued to the Central Bank of Ireland, and the bond market in the second half of the year was its relative stability promissory notes previously held by Irish Bank Resolution in light of volatility in other eurozone Government bond markets. Corporation (IBRC) were cancelled. This will have positive implications for the State’s funding requirements and for the The positive momentum generated in 2012 carried through into General Government Balance and the General Government 2013 and significant yield declines were observed in early 2013, Debt in the medium to long term; particularly following the issuance of a new 10-year benchmark bond in March. However, in May and June 2013 volatility increased • Regaining access to international debt markets and the in international bond markets, including Ireland, driven primarily first issuance of long-term debt since entering the EU/IMF by concerns around the future path of quantitative easing policies programme in late 2010; and in the US and Japan. Annual Report and Accounts for the year ended 31 December 2012 | 9 10 Year Government Bond Yields 1 January 2011 to 31 May 2013 Following the NTMA’s continued re-engagement with the market % Ireland is well positioned to exit the EU/IMF programme at year-end. Ireland’s consistent delivery on its EU/IMF programme 17 commitments has been central to the fall in bond yields and the 15 significant improvement in investor sentiment towards Ireland. 13 Nonetheless, Ireland’s continued access to the international bond 11 markets also remains critically dependent on external factors, 9 particularly developments at a wider eurozone level. 7 Long-term Funding 5 3 In 2012 the NTMA’s engagements with the debt markets included 1 bond switches (€4.6 billion); the issuance of conventional bonds 0 (€4.2 billion); and the issuance of a new debt instrument, Irish Jan 2F0e11b 2M01a1r 2A0p1r1 2M01a1 y 2Ju01n1 2J0u1l1 20A1u1 g 2S0e1p1 2O01c1t 2N01o1v 2D0e11c 2Ja01n1 2F0e12b 2M01ar2 2A0p1r2 2M01a2y 2Ju01n 2 2J0u1l 2 20A1u2g 2S0e1p2 2O01ct2 2N01ov2 2D0e1c2 2J0a1n2 2F0e1b3 2M01a3r 2A0p1r3 2M01a3y 2013 Amortising Bonds, tailored to meet the needs of the domestic Ireland (10-yr maturity) Germany Italy Portugal Spain pensions industry (€1.0 billion). Source: Bloomberg The NTMA’s own market borrowings, combined with drawdowns of some €21 billion under the EU/IMF programme during 2012, Funding Activity were applied to fund an Exchequer deficit of €14.9 billion and to refinance €5.6 billion of maturing debt. Funding Strategy Since entering the EU/IMF programme the NTMA’s working plan The NTMA maintained Exchequer cash and other short-term has been to return to the markets on a phased basis, both through cash management balances of €19.3 billion at year-end. Against short-term issuance and by taking advantage of opportunities to a background where Ireland seeks to achieve sustainable access issue long-term debt, as and when they arise. During 2012 and the to the debt markets while running a sizeable though declining first half of 2013 a number of successful long-term debt market budget deficit, the need to hold significant cash balances as operations were conducted, along with a regular schedule of Ireland emerges from the EU/IMF programme is paramount. In short-term Treasury Bill auctions which recommenced in July 2012. line with this, it is envisaged that the State will have sufficient cash on hand at the end of the EU/IMF programme to cover A priority for the NTMA in 2012 was to reduce the challenging 12-15 months of Exchequer financing needs. “funding cliff” presented by a bond repayment of €11.9 billion due in January 2014. The substantial redemption, soon after the end of the Bond Switches 2012 EU/IMF programme, was seen by investors as a major obstacle to a Bond switches provide investors with an opportunity to sell their smooth exit from the programme. The combined effects of the long- holdings of one Irish Government bond in exchange for another. term market operations carried out in 2012 and early 2013 have been In 2012 the NTMA conducted two bond switches with the aim Claims Estimated Liability to eliminate the January 2014 “funding cliff.” This has been viewed of improving the structure of Ireland’s debt and in particular to positively by the debt markets and has contributed significantly to reduce the funding requirement associated with the refinancing of rebuilding investor confidence in Irish Government bonds. the 2013 and 2014 bond maturities. In January investors switched €3.53 billion of the 2014 bond into a new 2015 bond while in July The NTMA’s intensive investor relations programme of 2012 has holders of the 2013 and 2014 bonds switched €1.04 billion into a been continued into 2013. This has helped generate renewed new 2017 bond and the existing 5% October 2020 bond. interest among institutional investors in Irish Government bonds and has reinforced existing investor conviction. The NTMA New Issuance 2012 conducted a series of presentations and meetings in the US, UK, Along with the second bond switch in July, the NTMA also offered mainland Europe, Asia and Ireland between February and October investors the opportunity to invest additional money in the new 2012. Additional ad-hoc meetings were also conducted throughout 5.5% October 2017 and the existing 5% October 2020 bonds. This was this period. Ireland’s first long-term debt issuance since September 2010. Investors committed €4.19 billion to these bonds at a yield of 5.9 per cent for the 2017 bond and a yield of 6.1 per cent for the 2020 bond. The weighted- average yield on the combined transaction was 5.95 per cent.