NAMA’s valuation methodology for sub-€20m loans after the abandonment of loan-by-loan due diligence and valuation. The %s used are illustrative.
A couple of weeks ago on here I bemoaned journalism standards in Irish media and it is a topic with which I introduce an analysis of an aspect of the NAMA (Amendment) Bill published yesterday evening. Now I suppose you can forgive Caroline Madden at the Irish Times for getting some of the facts wrong in a piece created for the online version of that paper a couple of hours after the NAMA Bill was published. She (still) writes that “originally Nama was to acquire all land and development loans valued above €16 million from Bank of Ireland and AIB, but this was increased in September to €20 million” though she thankfully changed the line “it was estimated at the time of EU/IMF agreement that the additional loans to be transferred to Nama would amount to about €16 billion” – at least it now says €16 billion and not €16 million. For the record, here are the thresholds that have applied to NAMA:
So the “original threshold” for BoI and AIB was €5m and that was raised to €20m at the Big Bang announcement by Minister for Finance, Brian Lenihan on 30th September, 2010 and then reduced following the arrival of the IMF in November, 2010. But that is a detail, though I still believe that professional journalists should be more careful with the accuracy of their reporting and indeed editors should ensure that reporters are sufficiently briefed on a subject’s context before writing any old shyte on that subject. But there is a more serious criticism of established journalists and their reporting of the new NAMA Bill.
There seems to be a focus on the Bill enabling NAMA to take over loan exposures of €0-20m at AIB and BoI. Emmet Oliver’s piece in the Independent today would be typical of that penned by the Premier League of finance reporters. But as stated on here numerous times, there never was a threshold for any NAMA loan enshrined in legislation. The NAMA Act defines in some detail eligible loans and there is a NAMA regulation that further expands on the topic. There were two ministerial directions in October 2010 aimed at accelerating the transfer of loans. But never has there been a mention of thresholds, be they €5m, €20m or anything else. NAMA simply decided for its own operational reasons to impose thresholds on AIB, Anglo and BoI (by the way, with respect to Anglo the claim was that there was practically no sub-€5m land and development exposure there – before Christmas there were suggestions that NAMA might revisit their assessment of Anglo’s sub-€5m loans).
The principal reason for this NAMA Bill is to enable NAMA acquire these smaller exposures without valuing them on an individual basis, either before or after acquisition. This will plainly accelerate the acquisition of these loans. According to press reporting NAMA will use the experience gained in the past year of undertaking due diligence and valuing larger-value loans to produce haircuts that will populate the matrix shown at the top of this entry.
So why doesn’t this new method of operation by NAMA make sense, let alone justify the claim on here that it is lunacy?
(1) THEN - NAMA was set up to provide certainty to the value of a certain class of lending in Irish banks which was underpinned by a type of property which had collapsed in value. NAMA was supposed to value each loan on an individual basis and in so doing the banks would exchange a generally toxic class of loan on its balance sheet with nice crisp NAMA bonds which could be exchanged for cash at the ECB (in simple terms). NAMA found appalling loan documentation and NAMA’s initial estimate of the average discount (haircut) to be applied to the loans being acquired increased from 30% in September 2009 to 58% today. The EU gave approval to the NAMA project on the basis of it undertaking individual loan due diligence and valuation (either before, for the larger-scale loans or after for the smaller-value loans)
NOW – NAMA is to acquire €13-17bn of sub-€20m loan exposures on a “portfolio basis” and apply a general haircut based on the agency’s valuation experience of large-value loans. Banks will be paid for the loans with consideration that comprises NAMA bonds (90.1%) and NAMA subordinated debt (9.9%). Although details of the new NAMA subordinated debt have not been released, the existing subordinated debt is issued on condition that it will not be honoured unless NAMA breaks-even over its lifetime. So banks replace uncertain loan values with approximated values and will apparently risk 9.9% of the consideration not being paid in 10 years time. So much for certainty, either for the valuations or for the consideration.
(2) THEN – NAMA was to protect the financial interests of taxpayers (or citizens as Vincent Browne would correctly claim) by ensuring NAMA only paid what the loans were worth plus a small state-aid premium in the shape of the long term economic value premium. NAMA would claw back any overpayment and at the end of NAMA’s life a levy could be applied to banks if a loss was made.
NOW – NAMA is acquiring loans on a portfolio basis without individual valuation. NAMA is applying haircuts to the smaller-value loans based on the experience of valuing the larger-value loans. There are those who have claimed that smaller-value loans would have fallen more in value than larger-value loans. I tend to agree with that view because (a) I am personally aware of many €1-3m transactions where a field was bought outside an urban area (especially provincial towns) for the purpose of building 5-15 properties and today I pass many of these fields which have practically returned to agricultural use with a value some 98% off the value at peak with development potential (b) there was a mad dash at the peak of the boom to lend money for property development and many “amateurs” decided to participate and I expect these “amateurs” will have made poorer purchasing decisions than the larger-scale “professionals” (c) I expect loan documentation for smaller value loans to be of a poorer standard than the higher value loans if banks were giving priority to higher-value transactions. So I believe there is a good case for arguing that haircuts to be applied to smaller-value loans should be higher than those that applied to higher-value loans. I might be wrong of course but it will now be NAMA that takes the downside risk (if NAMA undervalues, then it seems that NAMA must pay an additional sum to the banks at a subsequent stage).
(3) THEN – NAMA was to share some risk with the banks by holding back 5% of the purchase price (the subordinated debt) which would only be honoured in 2020 if NAMA broke-even.
NOW – NAMA is apparently paying nearly 10% interest on these subordinated bonds (10-year sovereign bond rate, 9.05% this morning plus a 0.75% premium) so over 10 years at present levels the banks will receive over 100% of the value in compound interest if bond rates remain at present levels. NAMA is proposing now to pay 9.9% of its consideration in subordinated debt (up from 5% at present)
(4) THEN – If NAMA made a net loss over its lifetime, a levy would be applied to the NAMA banks to recoup the loss.
NOW – of the the NAMA banks – AIB, Anglo, BoI, INBS, EBS – only BoI has a prospect of continuing outside State control (and I would have said that with an imminent preference share dividend of €214m due on 20th February, 2011 and a challenging €1.5bn capital raising target by 28th February, 2011 that the chances are high of the State increasing its stake from 36.5% today to over 50%). So if NAMA makes a loss how will the State subsequently apply a levy to the banks. INBS and Anglo should be no more than a distant unpleasant memory in 2020. EBS is being sold today but what buyer will want to take on a substantial contingent liability? AIB is likely to be put up for sale but again what foreign bank will want to buy AIB if it has a large contingent millstone around its neck. And as for Bank of Ireland, well let’s see if it remains outside State-control in the coming weeks. All in all, this levy provision looks nonsensical though it is confirmed in the present Amendment.
(5) THEN – NAMA was to undertake valuations and due diligence on a individual loan-by-loan basis and not depend on the banks’ own valuations
NOW – although bank employees may face 10-year stretches in jail for providing inaccurate information on sub-€20m exposures (the same standard term for murder in the State by the way), we must remember the recent claims by NAMA that the banks seriously misrepresented the value of their eligible loans to NAMA in 2009. Indeed these recent serious claims are presently being investigated by the Financial Regulator, Matthew Elderfield because there may have been misrepresentation to the stock exchange. NAMA claims that it can’t act on the inaccurate information provided by the banks because (conveniently) the information was provided before NAMA formally came into being at the end of December 2009.
(6) THEN – NAMA was to manage the loans itself to ensure the cosy relationships that had built up between banks and developers did not compromise the future work-out of the loans in a way which financially disadvantaged the taxpayer. Of course it was always the case that NAMA was only going to directly manage the larger value loans itself (the top 170 worth some €50bn at par value) and the remainder was to be managed at the original institutions under the aegis of outsourcing specialist, Capita.
NOW – It seems that these smaller-value loans are to be managed entirely by the original banks.
So in a nutshell what this Amendment does is put a highly approximate value on €13-17bn of loans at the banks, allows the banks to continue to manage the loans, forces the banks to accept uncertain consideration, exposes the taxpayer to higher losses and puts a high store of trust in the banks providing accurate information (which they didn’t in 2009). Lunacy.
Although the NAMA Bill was referred to by the Taoiseach and then Fianna Fail party chief, Brian Cowen, last Saturday at his resignation speech, as one of the two vital pieces of legislation needed before the dissolution of the present Dail (the other piece of legislation being the Finance Bill which now looks practically certain to pass by Monday next), the NAMA Bill is not likely to be dealt with this side of a general election. It seems that it will be March 2011 at the earliest before it gets enacted by which time, it is likely to be either Joan Burton or Michael Noonan at the helm at the Department of Finance (though it could theoretically be Pearse Doherty, Brian Lenihan or a Green party deputy). Because Michael Noonan became the FG finance spokesman last summer after the failed heave by former finance heavyweight, Richard Bruton against party leader, Enda Kenny, we don’t know a great deal about Michael Noonan’s stance on NAMA. Joan Burton’s stance is fairly well established and it would seem difficult to reconcile her support for NAMA transparency and value for money with the provisions as presently drafted.
And I leave you with the depressing fact that regardless of the name on the Minister for Finance’s office door come March 2011, it will still be the same civil servants that effect the implementation of policy.
In section 19 of the bill, there is a provision that caps the surcharge at 100 percent of corporation tax due over that period. Given the fairly poor profitability prospects for banks over that period, especially relative to NAMA risk, aren’t they in effect removing the supposed certainty of no losses at the end that NAMA was supposed to offer? Now it depends on whether the non-nationalized part of the banking sector can make money!
what views are there on Senator Mark Daley’s(?) interview with Pat Kenny this morning where he alleges that non-transparent sales of property are being pushed through by NAMA in contravention of article 35(?) of the act?
he avers that this enables ‘vulture friends’ of developers to acquire properties below market value and the loss is being borne by citizens.
Hi Vinny, there will be an entry on here within the next hour which details said interview that made serious allegations in respect of NAMA’s dealings with certain assets.
if this is the answer…
“So in a nutshell what this Amendment does is put a highly approximate value on €13-17bn of loans at the banks, allows the banks to continue to manage the loans, forces the banks to accept uncertain consideration, exposes the taxpayer to higher losses and puts a high store of trust in the banks providing accurate information (which they didn’t in 2009). Lunacy.”
what was the Question that needed this Bill to solve it?
does it address CBoI/FinReg/NAMA/Politican’s ‘lack of patience’ with the banks or is the Q. coming from further afield?
Who would put money into BoI now?
(You are on top of your brief NWL, most excellent post)
And so we come to it at last. NAMA, the bailout fund for the Property Ascendancy of this county, now smiles upon all members of that class great and small. From the mightiest developer to the smallest buy to let-er, and every buyer, seller, lawyer, accountant, consultant, civil servant and estate agent in between; all will get their bailout, no strings attached, no matter how small the loan. The masses will pay for everything.
It’s an Ascendancy, make no mistake; NAMA is its church and the USC its tithe. Whether or not you worshiped at the alter of property prices is irrelevant, everybody pays to keep the established religion alive.
(At least the old Protestant Ascendancy made some effort to run the country. But this gombeen Property Ascendancy gives us nothing but wreck and ruin.)
We must realise that NAMA has nothing to do with finance, stability, returning a profit or any other of its stated objectives. It’s a socio-cultural institution, built to maintain the interests of the ruling regime at public expense. Without understanding this, nothing NAMA does makes sense; with it, everything does.
OSM
As good an explanation of NAMA as I have seen to date.
There was a good reason for making NAMA the most secretive organization in the State. The Pat Kenny show this morning is just the tip of the iceberg.
[...] lauding the mechanics of free market capitalism. They wanted socialism and they got socialism: New NAMA Bill represents lunacy apex in policy response to the financial crisis [namawinelake.wordpress.com] FF senator accuses NAMA of selling loans back to the original [...]
Re (4) above, I agree the levy provision looks a bit odd but it is hardly lunacy or nonsensical.
Firstly, it is intended to satisfy the demand from people like you that the banks pay for any NAMA losses.
Secondly any such losses can only be determined after the 10 year life of NAMA.
Thirdly, the period over which any such levy or surcharge would be paid could only start at the end of the 10 year period…. I agree this would be unenforceable for Anglo and INBS which are likely to have disappeared by then but, given that we currently own 100% of these entities (and by then are also likely to own 100% of AIB) any levy on such entities would long since have become meaningless as being a case of the left hand paying the right hand. I cannot think of any way of avoiding this problem apart from increasing the haircut on the initial asset transfers and God knows NAMA has been doing its best in this regard IMHO.
Fourthly, for continuing entities such as EBS and BOI which are not wholly state-owned, the levy would be enforceable and while I agree that it would involve a contingent liability which could prejudice a sale of the bank, you can’t have it both ways…… you either want a levy to cover NAMA losses, which implies a contingent liability, or you don’t want a contingent liability which implies no levy to recover NAMA losses. Anyway the levy is limited to 100% of the bank’s corporation tax liability during the period over which the levy would apply and so would at worst represent an effective 25% tax rate rather than a 12.5% tax rate on the bank’s profits during that future period AND would of course be nil if there were losses during that period.
If you still think the levy is nonsensical how do you think it should have worked?
Michael
Hi Michael,
When NAMA was conceived, the concept of a levy made sense because the assumption was that NAMA banks would eventually recover to the extent that at the end of NAMA’s expected lifespan in 2020, the banks would have been able to fund a levy. This was one of the bases upon which Eurostat gave a preliminary view that NAMA’s bonds wouldn’t be classified as part of the general government debt.
We seem to be agreed about the future for INBS and Anglo. EBS is presently for sale and given that building society’s extreme reliance on state funding, it is highly unlikely that ILP or Cardinal will accept a contingent liability without pricing that liability into any price paid.
AIB is plainly heading for official state-ownership. And it would seem to me that AIB’s future lies in the hands of these foreign banks referred to by Paddy Honohan.
BoI’s future is, in my view, debatable. It faces a challenging few weeks ahead with a preference share dividend payment and capital target. Paddy Honohan said earlier this week that bank loan losses will be a “little more” than previously expected. An exercise to examine off balance sheet exposures is also underway and this will be verified by the IMF in two months. My view is that BoI will go the way of AIB and will eventually seek a foreign white knight. But that is by no means assured.
Against that background, the re-affirmation of the levy in the NAMA (Amendment) Bill is lunacy.
You ask about the alternative. At this point there is no real alternative. The levy only had relevance when the banks were expected to recover to the extent they could fund any levy from 2020. The losses at the banks have been so extreme that NAMA cannot seek a levy safety net from that source. If NAMA makes a loss, then in my view, that will be the end of the matter. And legislating at this stage for the levy is like promising the man condemned to be hanged that after he’s dead he will be shot. Lunacy.
I’ve just been looking at insolvency reports for two linked development companies in the North. They have BoI borrowings.
The write-downs are shocking.
There is a circa £6m loan relating to a site in Fermanagh. The write-down is more than 80%.
Then there is a sub £1m loan for a site in Roscommon. I make the write-down there 93%.