Emmet Oliver at the Independent is claiming today that Standard and Poor’s (S&P) is predicting NAMA will only recover €16bn from an estimated €40bn of loans (€40bn being the consideration that NAMA is expected to pay for some €81bn of loans). With respect to their position, S&P claim it is “based on information it had seen. It didn’t elaborate any further”.It is elsewhere claimed that S&P said “In our view, the loans that NAMA is acquiring have limited liquidity and cannot readily be sold in the near term. NAMA applied a haircut of 52% to the nominal value of the first €27 billion in assets it acquired from the banks. We view these loans as having value, and as recoveries occur in the medium term we expect them to be available to pay down general government debt. However, based on the information available to us, we would not expect recoveries to amount to much more than €16 billion (10% of GDP) over the time frame that our ratings address. As and when recoveries on NAMA’s assets materialize, we may revise our forward-looking estimates of Ireland’s gross and net general government debt”. I have not seen the full S&P report which is available for $500 from S&P. So the unanswered questions,
(1) what was the “time frame that our [S&P’s] ratings address”? What is the view of S&P over NAMA’s planned time frame of 7-10 years?
(2) what information has S&P seen that had led it to making its judgment that on the face of it means that NAMA will make a loss of €24bn+ which is higher than even the most pessimistic economists have estimated. UPDATE: a few journalists are suggesting that S&P are viewing NAMA over a five year period eg here and here. If you examine page 10 of the June 2010 NAMA Business Plan it shows that NAMA is planning for 40% of NAMA debt to be paid down by 2015 – has S&P simply taken 40% of €40bn (the approximate consideration that NAMA will pay for loans) to arrive at its €16bn? If so, what’s the big secret?
(3) John Corrigan yesterday claimed that 25% of NAMA’s assets are secured on property in London, with the implication that London is a global city with an established property market and indeed London has seen recovering commercial and residential values since NAMA starting moving loans from the financial institutions. This “25%” was an amazing claim given that the draft NAMA business plan said that 27% was based in all of Britain and Northern Ireland (and we understand that the gross value of loans in respect of Northern Ireland alone is €5bn). The NAMA CEO stated at the Oireachtas hearing in April 2010 that 20% of NAMA loans would be based in the UK and more recently in June 2010 the Minister for Finance Brian Lenihan said that “one third” of NAMA loans were based in the UK. Given the imminent sale of AIB’s UK operation with €3.2bn of UK loans, the decision not to transfer Paddy McKillen’s loans pending the outcome of his application for a judicial review (and one of Paddy’s assets is his share in the Maybourne hotel group – Claridges, the Berkeley and the Connaught hotels in London on which refinancing is “imminent”) and the apparent agreement between NAMA and Anglo that €2-4bn of loans in the US and UK will not transfer due to “reclassification”, that “25%” claimed by John Corrigan for London alone looks very high and frankly, wrong. Would he repeat the claim in a more formal setting than a telephone interview with RTE?
(4) NAMA is valuing loans individually and it is hoped is paying close to their current market values (there are issues around using a Valuation Date of 30th November, 2010, the enforcement deduction of only 5%, Long Term Economic Value and the continuing decline in property prices in Ireland though there has been a recovery in commercial prices in the UK). It is difficult though to see how NAMA could make a loss of a headline €24bn. However there is concern that there is little market for NAMA property (it is claimed that Reuters said that “buyers are as rare as leprechauns”). Further, €14bn of derivatives that NAMA is taking over have an exposure that is unknown outside NAMA. NAMA might have done the nation a favour by publishing a credible business plan which would have created confidence in its actions and clarified its exposure on derivatives (which between 29-31st March 2010 cost NAMA €1.3m according to NAMA’s first Quarterly Accounts).
(5) Elsewhere in the Independent article it is claimed that S&P is predicting an overall haircut applied to NAMA loans on purchase by NAMA of 46% up from 45% previously. This compares with the 30% in NAMA’s draft Business Plan, 49.7% average in Tranche 1, 55.7% average in Tranche 2 (an overall average over Tranche 1 and 2 of 52.3%). However 5% of NAMA’s consideration for loans is in the form of subordinated debt that will not be honoured should NAMA not make a profit so using that information and S&P’s claim that NAMA will make a loss effectively turns the S&P haircut to 51% on an equivalent basis with the other %s. So S&P are saying that future tranches will have lower haircuts than the first two (51% versus 52.3%). Why would they think that?
It is a frustrating aspect of judgments by ratings agencies that they do not always justify their ratings and judgments or respond to specific questions and we may not get answers from S&P to the above. I wouldn’t hold my breath for answers from NAMA either.