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Archive for May, 2010

It’s now over two months since NAMA started to acquire the first loans of the First Tranche. At the time, there was much debate as to the derivation of the numbers – why was the consideration paid, substantially lower than the long-term economic value (LEV)? How precisely did the recovery and default discounts work? Were they in respect of the first tranche only or the total predicted loans of €81bn? What went largely unnoticed was the fact that on average the LEV was 11% more than the current market value (CMV). This post examines the effect of this on NAMA’s future financial prospects.

The valuation date, by reference to which the CMVs were assessed in the First Tranche, was 30th November, 2009. Why 30th November 2009? The banks were required to submit their First Tranche data before Christmas 2009 and the valuers had to value to a specific date so 30th November, 2009 was as good as any, particularly against a background of statements from the Minister for Finance that we were close to the bottom in September 2009. Many commentators have pointed out that the market has continued to fall since then and that NAMA may be disadvantaging the taxpayer by perhaps €5bn by sticking with this date. It is unclear from the NAMA Act if the Minister for Finance can designate a new date for future tranches but he would certainly be protecting the taxpayer’s investment in NAMA if he were to do just that.

So, the First Tranche has a CMV of say 100 and a LEV of 111. Since 30th November, 2009 the residential market has fallen by reference to the Permanent TSB/ESRI index by 3.6% in December 2009 and 4.8% in Quarter 1 of 2010 (a cumulative compound fall of 8.2%) so the CMV of the First Tranche is now worth 91.8. Are further falls in prospect for residential property? Who can say but the betting would be yes. But let’s say that March 2010 was the bottom. To break even NAMA would need see the 91.8 increase in value to 110 over the next 9-10 years, ie an increase of 2% per annum compound over 9.5 years (91.8 * (1.02)^9.5). To sell at 5 years NAMA would need see an increase annually of 3.75%. Achievable? Maybe but if residential property were to drop further then both that drop and the time it takes to reach the bottom could severely impact NAMA eg if property were to drop another 18% in the next two years as suggested by Moody’s then at the start of 2013 the CMV would be 75.2 and in the remaining 7.5 years of NAMA’s lifespan, property would need to rise by 5.25% each year compound to get back to the LEV. Again perhaps achievable. Factor in the cost of NAMA’s debt which is running at about 1%+ and you will  be looking at 6-7% per annum compound growth to break even. Perhaps achievable but a long way off the 1% per annum flat rate of growth over 10 years that NAMA set out as a basis to break even last October 2009.

The above analysis relates to residential. There is a mixed picture on commercial. However in the coming weeks when NAMA unveils its Business Plan, much attention will focus on how the market has changed since last November 30th and also the recovery needed so that NAMA can break even.

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An Taisce, the private member-funded organisation designated with providing input to planning and development decisions, and whose motto is “Preserving our built and natural heritage for future generations” has chipped in to the debate over the future of so-called Ghost Estates (built or part-built housing estates from the boom which remain completely or substantially unoccupied).

Using the Ghost Estates as allotments for growing vegetables and house-swapping (where a partly-occupied Ghost Estate is de-peopled by swapping them with housing in more occupied areas) are two ideas floated in An Taisce’s latest (May) newsletter which will be available here – the proposals have been referred to an An Taisce advisory committee on NAMA which might explain why the newsletter is not presently available online.

However, An Taisce has also called for greater openness and transparency at NAMA in respect of property holdings and Ghost Estate proposals and that call will attract widespread support. Without a Business Plan, published Codes of Practice, exclusion from the Freedom of Information Act and very limited updates on operations, NAMA is at risk of cutting short whatever honeymoon period the brave efforts of its personnel may have secured.

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It used to be two –  one to change the lightbulb and another to sue him for malpractice. But if the Law Society have their way it will be three, though in the context of obtaining a loan from a bank to fund a property deal – one for the buyer and one for the seller (the existing set-up) and a new additional one for the bank. The Law Society will be meeting on 25 June 2010 to debate a change in the way property deals are managed with input from lawyers and to examine a proposal to insist on the bank using a lawyer who would oversee aspects of loan transactions.

This comes after banks have launched a barrage of actions against solicitors for alleged failings during the property boom. The London Times reports that in recent weeks, INBS and AIB have launched “at least five actions” (in the case of INBS) and “a similar number” (in the case of AIB) against solicitors for alleged negligence.  BoI and ACC are reportedly also jumping on the litigation bandwagon.

Why? Because solicitors are accused of failing to execute undertakings. “During the boom, solicitors often breached undertakings given to banks over how to use funds released by banks to complete deals, and in some cases diverted the monies elsewhere instead of paying off existing mortgages on the property or paying stamp duties.”

And what is the Law Society’s response to this history? Introduce a third set of legal eyes into the transaction on behalf of the banks. The Irish Banking Federation says this will push up loan costs. And examining the circumstances, you would have to ask why the two existing lawyers can’t just do their jobs properly. And that isn’t a joke.

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If I were Frank Daly, the NAMA Chairman, opening up the Sunday Independent this morning I would probably be choking on my granola at the headline: “NAMA: the truth it’s a bailout for developers”. Based solely on a couple of sentences from his speech last Thursday at the Association of Compliance Officers in Ireland lunch, where he said that NAMA’s “core objective will be to recover for the taxpayers whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that Nama will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up”, this, according to the Independent, is proof positive that NAMA will abandon the pursuit of developers for the original loan and call off the chase as soon as the sum paid by NAMA has been recovered. And elite developers will continue to fly overhead wolfing down Beef Wellingtons (with truffles), champagne and fine wines as they go, on their way back from the K-Club to the helipad of their trophy house on Ailesbury Road etc etc

I think on balance that the Independent’s interpretation is wrong and that Frank simply used ill-judged language. The draft NAMA Business Plan in October 2009 after all clearly showed the recovery of more than NAMA would pay for the loans. However I don’t think Frank would be justified in feeling too aggrieved at the “damned medja” – if NAMA had produced a robust, defensible and transparent Business Plan then there would be no vagueness about the objectives (core or otherwise).  And whilst NAMA may now need to go into overdrive to clarify Frank’s comments (which will distract from the work at hand), the Department of Finance  might again consider how NAMA’s secrecy and lack of transparency may undermine public confidence on a widespread, and significant, basis.

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NAMA website costs revealed!

On a light note to finish the week and for those of you who think the NAMA website looks like it was put together by a class of senior infants, you might be interested to know that it was revealed in the Oireachtas yesterday that the annual cost of maintaining, operating and monitoring the five NTMA web sites, including NAMA’s,  is €2,457 – so I suppose €500 a year or thereabouts for the NAMA.ie website.

For one of the world’s biggest property funds, it looks a little basic and if NAMA is going to attract investors to marry up with distressed developers or promote itself overseas or sell off property (albeit through third parties) then it might be worth throwing a few bob at it to bring it up to a standard that won’t unsettle its intended audience. NAMA of course will execute much of its business through third parties, but even so…

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A few years ago I remember the elder statesman of BBC foreign-correspondent journalism, Martin Bell, reminiscing about his experiences with Arkan, the Serbian warlord and gangster, who had just been gunned down in a “hit”. Now Martin Bell is a very well regarded journalist, widely travelled, educated and from all accounts a decent person. Arkan was accused of torturing, raping, terrorizing his way through the new states forming from the crumbling Yugoslavia and given he was indicted by the UN for crimes against humanity, there was probably more than a little truth in the accusations. It came as a bit of surprise then to hear Martin Bell talking about Arkan as a “friend” and that “I don’t think that you necessarily have to feel moral approval for people whose company your enjoy”

I am reminded of this incident today when reading NAMA Chairman, Frank Daly’s speech to the Association of Compliance Officers yesterday in which he described the origin of the term “Groupthink” and then applied it to borrowers whose loans are being transferred to NAMA. Whilst you wouldn’t expect NAMA to dehumanize developers, you would expect NAMA not to lower any stated standard in recovering loans which might involve NAMA being tough to the point of ruthlessness in pursuing borrowers. Some of these borrowers are big personalities, as genuinely charming and affable as you could hope to meet. They have in the past enjoyed (and indeed some in the present also enjoy), wealth beyond the previous horizons of the NAMA CEO or Chairman. It is to be hoped that NAMA personnel develop sustainable boundaries in dealing with developers. It wasn’t though Frank Daly’s description of groupthink as applying to “otherwise intelligent, well meaning and moral individuals” which gave rise to concern but the following:

“In essence, NAMA’s core objective will be to recover for the taxpayer whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that NAMA will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up.”

Does this mean that NAMA has ditched the objective of trying to recover the nominal value of the loans and will now only focus on recovering the sum paid for the loans? Given the State’s expected €22.3bn dead-money injection into Anglo (and possibly €20bn of that will be to make up the haircut NAMA applies to Anglo loans), the public would be outraged if NAMA were moving goalposts and effectively writing off a large part of the original loan. Hopefully this interpretation is incorrect, and that NAMA will leave no stone unturned in pursuing the recovery of loans.

UPDATE: 30th May, 2010, The journalists Alan Ruddock and Ronald Quinlan go further in today’s Independent with their unequivocal headline ” NAMA: the truth it’s a bailout for developers”. They don’t, however, have any additional evidence to NAMA Chairman, Frank Daly’s perhaps ill-judged sentence reported above.

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Minister for the Environment John  Gormley is reported in today’s Irish Times to have replied to a question in the Oireachtas to confirm that loans relating to the Irish Glass Bottle (IGB) site have been taken into NAMA. It was widely speculated, eg here though never confirmed by NAMA, that developers Bernard McNamara and Derek Quinlan were amongst the top 10 developers whose loans across up to five institutions would pass to NAMA in tranche 1. Bernard McNamara and Derek Quinlan have previously been reported as being heavily involved in the IGB site and Tranche 1 was completed at the end of April 2010.

Yet John Gormley has apparently said that the Business Plan will be produced by the end of July, ie possibly three months plus after the loan was supposedly acquired by NAMA. Why has NAMA apparently abandoned its 30-day rule, that developers produce Business Plans within 30 days of NAMA taking over the loans? Is it because of the government-owned Dublin Docklands Development Agency’s involvement in the project?

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