Two days ago, NAMA published its quarterly report and accounts for the three months ended 30th September 2011. This blogpost examines the accounts in some greater detail.
Before starting on any analysis, it’s worth stepping back and considering what NAMA does. It has acquired €74bn of property-related loans from certain Irish banks; it only paid some €32bn for those loans because the underlying security had collapsed in value following our property crash; NAMA has another nine years in which these loans must be reduced to zero; NAMA paid for the loans with bonds on which NAMA must pay just over 1% interest per annum; on the other hand developers pay NAMA just over 3% on their loans; the loans will drop to zero by (1) NAMA selling the loans (2) developers repaying the loans or (3) NAMA foreclosing on the loans and getting the best price it can for the property it secures. NAMA incurs expenses in managing the loans – it has its own staff but also third party suppliers. And lastly NAMA buys insurance (technically “hedging” and “derivatives”) so as to protect the Agency from the ECB increasing interest rates, or foreign exchange rates between the euro and other currencies changing.
So, treating NAMA as a business, what figures should we look at, in order to assess how the Agency is performing? Profit will be the main performance indicator. Profit represents the difference between a business’s sales and its costs. Its “costs” include not just those expenses paid out during a period, but also the change in the value of assets held by the business. In NAMA’s case, it doesn’t publish a full profit figure every quarter; only at the end of each year does NAMA re-value its assets, which in the main are loans which the Agency is owed by developers. So in 2010, the Agency saw the value of the loans owed to it by developers drop in value by €1.5bn, mostly because the underlying security, which is generally Irish property, dropped in value. This is an important point when considering NAMA’s quarterly accounts; so in the Q3,2011 accounts just published, we have a profit figure of €317m but it excludes the cost of its assets declining in value; that cost, called “an impairment charge” will only be reflected in the Q4,2011 end of year accounts. And now that we have both the commercial and residential property indices for Q4,2011, I would expect an overall impairment charge in 2011 of close to €1bn, particularly after the anaemic increase in commercial property of just 0.2% in the last quarter despite the slashing of stamp duty from 6% to 2%. If NAMA delivers a profit before impairment of €600m which I believe is its latest forecast, then we might expect the Agency to make a net loss of €400m after impairments.
It is also worth pointing out that NAMA should be making a very healthy profit every quarter. The Agency pays interest on its bonds (roughly €32bn) at 1% yet it collects interest on the face value of the loans – roughly €74bn – at 3%. So if all of NAMA’s loans were performing and paying quarterly interest, then the Agency would be taking down 3% of €74bn for 3 months (or roughly €600m) each quarter and would only be paying out 1% of €32bn for 3 months (or roughly €100m). So purely looking at interest, NAMA should be really profitable every quarter if all its loans were performing and paying quarterly interest. That’s not the case, and NAMA now says that only 21% of its loans are performing so the interest receivable each quarter falls to 3% of 21% of €74bn for 3 months or just over €100m. So NAMA should be generating a profit each quarter on interest, even if it is just a few million. NAMA says that it received interest of €255m in Q3 and paid out interest on its bonds of €109m.
NAMA also generates a profit if it gets more for its loans than it acquired them for, from the banks. For the sake of illustration only – the NAMA acquisition costs are not in the public domain – say NAMA acquired the loans in the Maybourne group for €700m. In September 2011, it was reported that these loans had been sold to the Barclay brothers for €800m. So NAMA would have booked a profit of €100m, based on the illustrative acquisition price. NAMA says it made a profit of €132m in Q3, 2011 from the sale of loans.
NAMA can also generate a profit if it forecloses on its loans, and appoints a receiver to assets and those assets are sold for more than the NAMA loan acquisition price. Again to illustrate, it is understood that the Odeon site in Leicester Square in London which was sold last week by a NAMA receiver for a price understood to be around €120m, the site was originally assembled by Limerick’s Steamboat Developments for a reported GBP 58m (€70m). It is not clear what NAMA paid for the loans used to finance the development. But on the face of it, it seems likely that NAMA will have made a profit on the transaction.
There is a fourth activity which may generate profit for NAMA, but it has not happened to date, and that is where NAMA forecloses on a property and takes possession of it – remember that to date, NAMA has just appointed receivers and if the receivers recover more than the value of the loan due by the developer, then the developer will normally be given that excess. If NAMA truly forecloses, then it takes possession of the property and may make a profit on its disposal which doesn’t need be returned to the developer. This hasn’t happened yet.
NAMA Profit.
NAMA reported a profit of €317m for Q3,2011. This comprised interest charged to developers of €255m, profit on the disposal of loans of €132m less interest payable on NAMA bonds €109m, operating costs of €30m. Movements on foreign exchange balances and derivatives comprise most of the difference. Of the €30m operating costs, €7m relate to NAMA directly, €14m was payable to the banks for administering NAMA loans, €3m was legal fees and €7m was for “portfolio management fees” which presumably refers to receivers costs. The NAMA profit excludes impairment charges which in my view are likely to be in the order of €1bn for 2011.
Beyond profit, what is worth examining in the NAMA accounts? Normally cash-flow is critical to many businesses but it is not likely to be an issue for NAMA, as interest receipts should cover interest payments and expenses, particularly in the early years – during Q3,2011, NAMA generated €1.4bn in cash, with €1.8bn received from developers – presumably €255m interest and the rest was repayment of loans – and €0.4bn paid out in interest and costs. Also NAMA has a colossal basket of loans, and, in the early years, it can cherry-pick which to offload, which again will provide a cash flow boost. NAMA’s bonds don’t need to be redeemed until 2020 though NAMA has a self-imposed target of repaying 25% by the end of 2013, and to date, NAMA has redeemed €1.25bn of bonds.
What will be interesting to analyse is how NAMA’s cost base compares with its competitors. And NAMA most certainly has many competitors, both in Ireland and internationally. It is intended to develop this analysis and comparison in coming months.
Absence of transparency.
NAMA will tell you that it is the most transparent Govt or semi-state organisation in Ireland, and to an extent it is correct but that just means most Govt organisations are opaque. I must say that with an accountant’s hat on, the quarterly management accounts and report produced by NAMA are becoming increasingly difficult to interpret.
What you might consider to be basic information such as the amount of interest received from developers, the amount of loan repayments and information on assets sold is either threadbare or absent. NAMA uses a convoluted method for calculating interest which meant that €255m was booked in Q3, yet if only 21% of the €74bn portfolio was performing then that would imply interest of only €100m at 3%.
When Minister Lenihan was leading the NAMA legislation through the Oireachtas, there was a provision that NAMA would publish every quarter “sums recovered from property sales in the relevant quarter” – section 55(6)(g) of the NAMA Act. But NAMA has not to date given any details of “property sales” and instead interprets the section of the Act to mean sales where the Agency has foreclosed, and NAMA doesn’t regard the appointment of receivers or liquidators as “foreclosure”. So although we know NAMA has approved €6.8bn of assets for sale to the end of December 2011, NAMA will presumably provide no detail of such sales, as might have been envisaged when the NAMA Act was being drafted. It would be laughable if it weren’t so serious.
Along similar lines, there is a requirement for NAMA to provide details of advances made during each quarter (pursuant to s54 (2)(c) which s55 requires to be updated quarterly). NAMA interprets this to exclude advances made to developers! So all we get are inter-company advances within the NAMA group which tells us nothing meaningful.
NAMA is also required by s54(3)(e) to provide a quarterly “list of all asset portfolios” held by the Agency which NAMA interprets to be merely a total for debtors, a total for cash, a total for other receivables etc, but again this provides no really meaningful information.
I regret to say that NAMA has now lost me in terms of its derivative and hedging activity. We can see each quarter that NAMA books profits and losses, and one assumes that is because of interest rate or foreign exchange bets that have paid off or resulted in losses. It is unclear from the accounts what exposure NAMA has to these products.
Revenue and costs summary for the 2011
I leave you with the summary of revenue and costs for the three reported quarters of 2011 for the main NAMA company, National Asset Management Limited. You can see that some of the costs are beginning to become quite meaty. Presumably NAMA has hidden the Paddy McKillen court case costs under “Legal Costs”. Presumably “Portfolio Management” includes receivers costs.
If you put an auditors hat on, would you be inclined to say that Nama is Failing to maintain proper books of account?
Nama’s instinct to take every opportunity, and to contrive ones that do not even appear to exist, to say as little as possible is so transparently obvious that it ironically speaks volumes about the ‘institution’.
That is probably not what they were trying to achieve, but sometimes people reveal themselves by simply going too far.
Just on the points you were making in previous posts about the accidental secrecy Nama have managed to achieve surrounding the most basic details of properties for sale, I would just make the point that a group of first year business students would struggle to make such basic errors.
There is a sense in Ireland that things get done behind closed doors and you have to be invited to play. The way Nama is carrying on does nothing to diminish that.
It’s only an error if you didn’t mean to do it!
:-(
@NWL, I think that the Paddy McKillen example might be a tad optimistic on today of all days (Thursday)! From your tweet, it looks like Mr McKillen will be costing the taxpayer (through NAMA) a large amount of money!
NAMA’s accounts are a fiction. The longer NAMA holds on to its unsalable assets and does not allow the market to find its own level the worse its loss will be. At this point, it is evident that it will not recover €20 billion euro.
Most of the US funds that have visited NAMA have turned their back on Ireland because of the reception that they received from NAMA when they met the agency. The Yanks don’t waste time. Unlike Mrs Doyle in Father Ted, they take rejection or indifference to be as expressed. There’s no “Ahh, go on, g’wan”… The truth is these funds have gone on – they have moved on from Ireland to the banks that are deleveraging all over Europe.
By “seeing off” the only purchasers with sufficient money, it’s just going to get harder for NAMA – and it is self inflicted through a combination of hubris and ignorance.
Pride doesn’t come before a fall, arrogance does. And NAMA suffered its second major fall courtesy of Paddy McKillen in the courts in London Yesterday. This was the result of ignorance of the law and the arrogant belief that NAMA is above it. There needs to be a change of culture and heads should roll.
@NWL,
Additional recoveries where personal guarantees exist is another source of income for NAMA. Perhaps you’re including that within one of your other headings. It’s not clear where this is in their accounts. It would be interesting to see how much this is yielding.
When do you reckon NAMA will need more capital and who will provide it? IIRC NAMA is privately owned (51%) to keep it off the national debt. Can the gov give them money for nothing?
Re the Odean site
From the Irish Times: “Estimated by some quarters to be a £100 million deal, it is likely to have proven highly lucrative for Real Estate Resolutions, a property company run by former Ballymore Properties executive Tim Farrow, but owned by Irish investor Frank Woods, London property figures have said previously.” http://www.irishtimes.com/newspaper/finance/2012/0131/1224311000785.html
AFAIK Ballymore is a big NAMA exposure and Peter Bacon was a director of Ballymore (?). This is not to suggest anything underhand. But it’s a little bit concerning. In such cases NAMA should make full disclosure of transaction details and demonstrate an open bidding process has taken place.
The level of the 2011 impairment charge that NAMA has to apply will make for interesting reading.
NAMA is reporting operating profits for the year to 30th Sept 2011 €526m.
I wonder what result Q4 2011 will derive? And will 21% of performing loans figure change in Q4 2011? Hardly I would guess.
If the impairment charge for 2011 is €1 billion, then 2011 is likely to provide a lower loss than the loss reported by NAMA for 2010.
What should be of real concern is that the 2010 and 2011 results pertain to the better quality assets/loans which NAMA has managed to dispose of.
God only knows what financial results will be derived from the poorer quality assets/loans, assuming NAMA can dispose of them?
@gd, the 21% of performing loans has to drop by the end of 2011. If all NAMA is selling is performing loans, then the proportion of performing to non-performing loans must change. The minimum drop should be 2% down to 19%. The numerical quantum of performing loans should be extractable from the accounts. The problem is that NAMA is now fudging the actual interst paid, thereby artificially increasing it’s “performing” loans.
@wstt best case absolute high water mark 20 billion.
At least 10 billion write down.
According to today’s Irish Times (22nd March 2012):
“THE NATIONAL Asset Management Agency will report a pre-impairment profit of “at least” €750 million for 2011, its chief executive Brendan McDonagh said in London last night.
This figure does not include impairment charges to reflect the current value of its portfolio compared to 2½ years ago when the loans were primed for transfer from the Irish banks.”
The more I see of the Agency the more I get a sense of deja vu. We have been here before and NAMA is slowly but surely morphing into Anglo Irish Bank.
Let’s go back to March 31st 2010, the day that Anglo reported results for the 15 months to December 2009. Just like NAMA yesterday, it announced a pre-impairment profit of €2.4 billion. But there was an impairment charge of …..wait for it…….. €15.1 billion resulting in the largest loss in Irish corporate history.
Have we learnt nothing. We hear the weasel words and spin again and give credence to this sh*te. What is the true loss? Are we going to get the REAL impairment charges to reflect the REAL current value of NAMA’s portfolio?
WHERE IS THE TRUTH?
Plus ca change…..
@WSTT, the presentation material used by Brendan McDonagh at the Chartered Accountants Ireland event in London last night was requested from NAMA first thing today and there has not yet been any response. Yes, it is deeply disappointing that although NAMA is, 12 weeks after the year end of 31st December 2011, able to give an estimate of pre-impairment profits of €750m, that Brendan was not able to give even a ballpark of the impairment charge for 2011, which it is estimated on here to be in the ballpark of €1bn.
It is also likely the NAMA’s “Effective Interest Rate” policy will come under the microscope in coming weeks and that NAMA will be forced to declare its approach to forecasting the future value of property. Remember that about one third to one half of the 2011 pre-impairment profit will be estimated interest which NAMA thinks it will get when the property underpinning the loans is eventually sold.