“If there is one key message I can ask you to take away from today it is: there is no point approaching us with an offer which is significantly below what we paid – it is a waste of your time and ours as it is unlikely to be entertained.” NAMA CEO Brendan McDonagh speaking at the Corporate Restructuring Summit, September 2011
“In the case of property under the control of debtors, NAMA is precluded, under Section 202 of the NAMA Act 2009, from disclosing confidential information…However, in cases where NAMA receives enquiries from potential purchasers about specific properties under the control of debtors, it can facilitate contact with a view to enabling sales transactions to take place” Minister for Finance, Michael Noonan in a written reply to a question in the Oireachtas, February 2012
In recognition of tomorrow’s Oscars, it’s perhaps appropriate to remember one of the great films of the past that never got an Oscar nomination, The Parallax View. A great thriller of the 70s, it was part of a director’s trilogy which also comprised Klute and All The President’s Men, both of which got Oscar nods. Not only did The Parallax View provide you with detail of how to get an airplane to turn back – leave an anonymous note about a bomb, in a napkin in The Parallax View but I suppose scrawling it with lipstick in the wash-room would also do the trick – but the film gave public prominence to a great word “parallax” which means the changing direction of an object caused by you moving. It’s not quite Father Ted’s “this are small, those are far away”, but it’s close.
Its relevance to NAMA is that on one hand NAMA has inflexibly strict protocols for not disclosing the price paid to acquire loans or details of property under the Agency’s control unless it has been foreclosed. And on the other hand, NAMA and Minister Noonan are happy to act as if both details are in the public domain. In both cases there is a view of the Agency’s information disclosure at a fixed point which somehow changes as its CEO and the finance minister open their mouths.
Last year the NAMA CEO Brendan McDonagh took a swipe at bottom-feeding speculative buyers who were wasting their own, and NAMA’s time with unrealistic offers. Don’t come knocking on NAMA’s door with offers for property or loans below that paid by NAMA. But here’s the kicker – NAMA won’t tell you how much it paid for the loan and indeed is very protective of that information, and the debtor isn’t supposed to know and given the price included some convoluted calculations involving Long Term Economic Value and discounts for costs, plus there will have been due diligence on the security which won’t be generally available, how in God’s name are you, as a prospective purchaser of a NAMA asset, supposed to know what NAMA paid?
On Thursday in the Dail, the finance minister declined to provide a list of properties under NAMA’s control in a particular politician’s constituency citing confidentiality, though there is a public list of the small fraction of NAMA loans which have been foreclosed. Fair enough, NAMA has to abide by its own confidentiality rules. But then the Minister invites prospective purchasers of all NAMA property – both foreclosed and still controlled by the debtor – to contact NAMA directly to facilitate sales. How will prospective purchasers know what property is controlled by debtors but subject to a NAMA loan?
I think there are many that would like to see a register of everything NAMA controls together with the price paid. Fine Gael promised a register of all loans that are in default, and given 80% of NAMA loans are not performing and the loan to values of the remaining 20% may also mean these are in technical default, you might think delivering that promise would give us that information. But like NAMA’s protocols on information, those manifesto commitments are also subject to a parallax view.
I personally feel that Nama are making up the rules as they go along.
Are they a state body or private? Do FoI rules apply or not? How much are they going to pay for the loans? Are they going to chase the debtors for 100% of the loan value or not? Are they going to leave developers in charge of their bust companies or not? What’s confidential, what’s not? Are they a debt collection or an asset management agency? What is Nama’s strategy? Are they going o make a profit, or is Nama itself going to need a bailout?
Basically, Nama is a huge gravy train, filled up with people who have no clear strategy, no long term plan, and who are basically just winging it as they go along. There’s no direction, leadership, consistency or planning beyond a bare minimum scramble to meet basic requirements.
The contradictions, the u-turns, the shoddy accounts; they’re all symptoms of the underlying mess that is organisation at Nama. The whole mess has been papered over by “confidentiality”, and we will never get any transparency of indeed efficiency until someone takes Nama to court and forces them to become more transparent.
On the bright side, last Thursday, Justices Hardimann et al at the Supreme Court overturned a section of the Offences Against the State Act which the Gardai had been “overapplying” for some years. So there’s hope that Nama may yet be opened up to public scrutiny. But someone is going to have to take them on in a court of law first.
@OMF
“I personally feel that Nama are making up the rules as they go along.”
That criticism is widespread among many funds that visit them. It is a valid criticism, IMO.
“Are they a state body or private?” Good question. I believe that NAMA is a public authority by reason of Regulation 3(1)(vi) of SI 133/2007. NAMA does not believe it. It seems to me to be a matter for the be-wigged ones at some stage.
“Do FoI rules apply or not?” They should but – according to NAMA – they don’t.
“How much are they going to pay for the loans?” Circa €31.8 billion.
“Are they going to chase the debtors for 100% of the loan value or not?” No, it’s an impotent exercise. 100% of the loan value will never be recovered. They will however, chase the debtors for as much as they can extract from them – contrary to most debtors hopes and belief.
“Are they going to leave developers in charge of their bust companies or not?” No, they are using the developers at present to keep the companies alive and preserve as much value as possible in order to sell the underlying assets – which is NAMA’s brief. Many developers do not understand this and think that appeasement will enable them to survive. It won’t.
“What’s confidential, what’s not?” In NAMA, everything is confidential except what leaks from there. The staff “entrance examination” was by all accounts like something out of the CIA induction. However this is Ireland and there are only two degrees of separation. Everything eventually leaks.
“Are they a debt collection or an asset management agency?” Right now, they think and act like a debt collection agency, but that will have to change shortly, as they will have to turn their focus to managing and/or selling the bulk of their portfolio which is in Ireland – a difficult task.
“What is Nama’s strategy?” This goes back to your first point. The strategy initially was to sell the low hanging fruit i.e. the investment properties overseas, particularly in London and to chase the WAGs to reverse transfers, snatch any un-mortgaged properties owned by the debtors and take control of all rental income.. In other words act like a debt collector. They don’t know what to do next, because the easy part is done and they now have to make decisions on virtually unsaleable assets. They are out of their depth.
“Are they going to make a profit” No, they will recoup about €21 billion at best. In other words NAMA is on course to lose €11 billion on its purchase price of €31.8 billion or a massive €53 billion on the par value of the loans. It will however argue that NAMA was not responsible for €42 billion of that loss – that’s down to the banks.
“Is Nama itself going to need a bailout?” Yes. It is currently cash rich which distorts the perception. But cashflow is not profitability and it is losing money and hiding the losses that are contained in its balance sheet. If it continues to use its cashflow to repay its bonds it will need a bailout by the end of 2013 (IMO) rather than declaring that it needs it later.
“Basically, Nama is a huge gravy train, filled up with people who have no clear strategy, no long term plan, and who are basically just winging it as they go along. There’s no direction, leadership, consistency or planning beyond a bare minimum scramble to meet basic requirements.” I couldn’t have put it better!
We have to throw in the EU – at least at nominee status. The EU Economics Commission forecast late last that the euro region is headed for an outright economic contraction this year led by the usual suspects, the PIGS (just to be nice I left Ireland out)
They then said that the second half of this year MIGHT see a modest rebound, only to announce in the next breath that the totally b*ggered members of the EU adhere to a policy of austerity. So, given its record, it deserves its place alongside NAMA as a nominee. For in this no one can justly charge the commission with clear, much less imaginative, thinking.
Well let’s look at the imaginative thinking. The euro members face the unpleasant task of dealing with more than €2 trillion of euro debt coming due this year. The devices dreamed up by the powers-that-be to cope with this is the LTRO, a finagle engaged in by the policy makers, the banks and private bondholders in the floundering nations’ debt in order to bolster the balance sheets of the banks – not mind you to be used to supply liquidity to the various bust economies – just to help keep the banks alive to pay their bondholders. And who pays for it? We do – the taxpayer – by paying 5% plus on the sovereign debt that the banks are told to invest their 1% LTRO funds into. Every day in every way … someone (mainly those who are deemed to look after our interests) are out to shaft you.
Definitely a contender.
While we are at it, we might just as well introduce nominees for best foreign director and best foreign comedy.
The nominee has to be Nicolas Sarkozy, faced with the prospect of the Continent sliding into a serious recession, the possibility of losing an election and the EU coming apart at the seams – he has sought a way to alleviate these challenging problems. He decreed that young women can no longer be called mademoiselle.
All official documents will henceforth identify them as madame. All problems solved. A French solution to a French problem! Voila!
@NWL
NAMA and politics aside for a moment, we should sympathise with Mr Noonan on the death of wife Florence. The removal is from Griffins funeral home in Limerick this evening.
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@NWL
The Minister’s Dail reply that you quote above, presumably written by NAMA, goes straight to the hear of what is wrong with NAMA.
“However, in cases where NAMA receives enquiries from potential purchasers about specific properties under the control of debtors, it can facilitate contact with a view to enabling sales transactions to take place”.
Lets repeat the contradiction
“…specific properties under the control of debtors…..”. So here is the National Asset Management Agency whose job it is to recover debts based on underlying collateral telling us that the properties are still ‘under the control of debtors’.
This is farcical.
@OMF /@WSTT
Good questions and good answers. But one point is given emphasis it does not deserve. Whether NAMA makes a profit or loss.
I do not think the important issue is whether NAMA makes a profit or loss at this point.
The old theory was that sunk cost are irrelevant to future investments decisions. NAMA for better or worse has paid ~31.8 billion(@WSTT) for the loans. That part is over. The money is gone.
The essential point is that NAMA collects the debts but more importantly manages the assets to ‘get full value for the taxpayer’.
So what is full value for the taxpayer?
Suppose NAMA decides to lease all properties at a reduced rent, thereby putting immediate and sustained downward pressure on both residential and commercial rents in the country. This will not help NAMA books but it most certainly help the country to be more competitive. This is the direction that NAMA should be going rather than defending the UORR laws that are severely damaging the country.
The other issues are derelict buildings, unfinished buildings and finished but vacant buildings. How on earth is the taxpayer value being preserved by allowing these buildings to lie derelict and decaying throughout the country?
In addition should immediately drop its “Route 1″ policy of selling only in favour of lease / rent.
We should forget about whether NAMA can make a ‘profit’ or not on the original acquisition costs from the banks. It is almost an irrelevant book keeping exercise, because the major part of the lifetime costs are already incurred . We should concern ourselves only with the future policies of NAMA and make sure that those policies are consistent with the sound economic management of its resources for the long term benefit of the country.
@WSTT:
I am surprised that you think NAMA may run out of funds as early as 2013. However if NAMA is able to bilid up a significant rent roll before then, it should be possible to use that rent roll to back bond rollovers.
@JR, NAMA has indicated that it intends to repay €7.5 billion of its bonds by the end of 2013. It says that it has almost €4 billion of cash at present. It needs to sell another €4 billion within the next 21 months to cover its expenses and repay its liabilities.
But it has sold its best assets, the next €4 billion will be a hard sell. If it succeeds in doing so, it will alter the risk profile of its loanbook. It is selling all its income producing assets and is being left with the non-performing dregs. It’s performing assets have already fallen to just 21% of its loanbook at September 2011, and under any analysis must be 19% or less at February 2012.
Its costs continue to rise, but its income is dropping rapidly. On NAMA’s current performance, it will need a capital injection sometime around the end of 2013, in my opinion.
@WSTT
But look at this another way. NAMA borrowed approx ~31 billions. It has paid back some bonds and still has 4 billion cash.
Assume Net debt currently =~ 24 billion. (This is just a guess).
It would take a net rent roll of approx 1 billion to fund the outstanding debt at an interest rate of 4%. I think that is route NAMA should go rather than a selling of assets.
The question is, could it generate that kind of rent. If it could, it would set a baseline breakeven for NAMA. At that point it could dispose of properties over 20,30 or even 50 years. [After all Germany only paid the last of its Versailles reparations debt a few year ago-Approx 90 years.]
However it cost base would have to come down dramatically.
I heard Eddie Hobbs on the radio today saying that 1% of asset is a usual management fee. That could be a little low given the type of property NAMA has, but that is the figure they should be aiming for:
1% of assets of approx 25 billion= 250 million annually.
@JR
NAMA paid for the loans it acquired from the five participating institutions by issuing Senior Debt securities to the value of 95% of the total consideration and Subordinated Debt securities for the remaining 5%. In the case of the latter, payment of interest and ultimate redemption is subject to NAMA’s financial performance. All securities were issued in Euro.
At 13th February 2012, NAMA owed €28,970,000,000 in current outstanding senior note issues. There was also €1,594,000,000 in outstanding subordinated bond issuance to participating institutions. It had redeemed €1,250,000,000 of senior notes.
The interest rate on the senior notes is equivalent to the 6 month euribor rate – currently 1.3% per annum.
The interest rate on the subordinated bonds is the 10-year Irish Government Bond rate on the day of first issue plus a margin of 0.75% i.e. 5.264%
Therefore, before it pays anyone, NAMA has to find approximately €460 million to pay the interest on its bonds.
Less than 20% of NAMA’s loanbook is performing. That is approximately €6 billion of performing loans. If it is assumed that the total income from those loans is a generous 7% yield, it means that the total income that might possibly be available to NAMA would be €420 million. With outgoings of €460 million on its bonds and annual costs of €250 million, it is running at a current annual loss €50 million.
As it disposes of more of its performing loans and changes its risk profile, this loss will increase exponentially.
@WSTT, the interest payable on the subordinated bonds seems linked to NAMA’s profitability, eg it didn’t pay anything for 2010 because the Agency “hadn’t met its objectives” The 21% of performing loans is by reference to the par value of the loans, not NAMA’s acquisition value, so it’s 21% of €74bn and the average interest as recently disclosed by NAMA was 3.4% up to September 2011, probably 2.9% now and NAMA also generates 0.38% on the non-performing loans. It doesn’t change the profitability greatly and still means NAMA is in the amber zone. NAMA is also generating trading profit by selling loans or seeing loans redeemed at greater than the acquisition cost.
Yes, as the low lying fruit get depleted, if loans continue to go south then NAMA’s annual operating profitability may get precarious. And that is before impairment charges.
@JR, Apologies , it’s late…. That loss should of course be -
Annual Income: €420 million,
Annual Outgoings: €460 million (interest) + €250 million (overheads) = €710 million
Annual Loss: €290 million
@NWL Thanks for that. Yes the subordinated bonds are discretionary. Specifically the issue document stated that, “On each Interest Payment Date commencing on 1 March 2011 the Issuer may declare the Interest payable if the Board of the Issuer deems it appropriate to do so if the Issuer is achieving is objectives. Interest not declared in any year will not accumulate.”
I take your point regarding the percentage of the performing loans being referenced to the par value and will revisit the numbers….. never do sums in your head at night!
Why not do it Greek style (not literally) with the NAMA debt? Swap it out with zero coupon bonds at 40 years.
@NWL, Had a nap! Based on the 9 month figures, The 2011 out-turn looks to me as follows (at a minimum as the agency had a good fourth quarter):
(€ millions)
Interest income 2011 projected €1,159,644
Interest expenses 2011 ditto. -€508,295
Net interest income 2011 ditto. €651,349
Add Profit from disposals €243,771
Total €895,120
Administration, suppliers & services -€226,667
Profit before impairments €668,453
So three questions worth asking –
1) What is the real impairment value on the book for the year (not the NAMA spin)?
2) How much will the interest income reduce annually as the agency sells its income producing assets?
3) How long before the graph of the reduced income as a result of the sales programme of the prime assets and the ongoing expenses cross?
@WSTT, millions and “billens” – as Brendan McDonagh would say – always benefit from clear heads! Other than the above being €k rather than €millions, that looks reasonable to me as the 2011 out-turn before impairment charges. But even more authoritatively, NAMA itself says it projects its 2011 operating profit at €600m. So no dispute there.
Going forward though, NAMA has at least four possibilities for profit. By deploying additional advances – which, remember cost NAMA just over 1% interest per annum – NAMA can unlock loans and turn them into performing loans. So if you have a stalled part-completed office block, take the Anglo HQ as an example, then that is likely to be an unperforming loan. But if NAMA were to add a development advance, then it could be completed, rented and would then provide some income return in the short term and a more valuable asset in the medium term. The question is whether NAMA’s additional advance on the development would be less than the additional income generated. Maybe not in the Anglo HQ case, but there must be quite a few stalled developments where NAMA’s money could get the development which is not presently performing, over the line so that it is performing to an economic extent.
The second opportunity for NAMA is the great unknown of the behaviour of property prices in the medium term. The short term doesn’t look great, particularly for residential which is undergoing a slow-burn decline with all the distortions and supports available, but is commercial closer to a bottom from which a foundation for growth will be laid? And if it is, and we have undershot might NAMA see annual increases greater than its interest costs and operating costs? NAMA is certainly hoping so and claims we are seeing a stabilisation of commercial prices, but then again, it would say that. But beyond the short-termist rhetoric, might NAMA see commercial prices bounce in its 9-year remaining lifetime?
The third opportunity for NAMA must be its ability to package loans and eventually property into portfolios where the value of the whole is greater than the sum of the parts. Might QIFs or REITs or vanilla portfolio sales give NAMA a better chance to generate profits over acquisition values?
The fourth opportunity for NAMA is its size and access to expertise. How many smaller developers with loans < €5m at Anglo, EBS and INBS might see their amateur forays into property rescued by NAMA appointing expert receivers or subjecting the failed businesses to NAMA's economy-of-scales expertise?
@WSTT/NWL
Thanks for those figures.
takin the WSTT figures above if projected ‘interest’ income of 1.2billion. Suppose NAMA was a stand alone entity.
Interest Income 1.2 billion
Administration .2 billion
Net Income before Interest 1.0 billion
Interest as (@WSTT) .65
Profit (excl disposals) .35 billion.
The point I am trying to get at here is how to avoid the the scenario outlined by WSTT of dumping good assets capable of producing good yields into a into a a terrible market and being left with residual junk which will of zero sale value and incapable of producing any income.
In farming terms the good land is now being sold to pay down the loans and the bad land retained. It is extremely foolish and shortsighted and will come unstuck very quickly.
It seems to me that the current ‘interest’ income if enhanced through finishing other properties should be capable of giving NAMA a net profit sufficient to roll over bonds and return a continuing profit.
I also note from my first look at the accounts that they are designed with the mentality of ‘debt collection’ as distinct from asset management.
Why for instance does NAMA only have loans and receivables on its books. Where are the assets now under its control? Where is the information on these. Why would they still be classified as ‘loans and receivables’ when they are clearly not loans or receivables from third parties but assets under the direct control of NAMA.
Interest and similar Income: Very vague and probably not an accurate heading. One would hardly expect ‘lease or rental’ income to be lumped in with ‘interest income’. They are clearly very different in nature. So where is the rental income from properties.
The organization and accounts strike me as being designed for debt collection. The concept of asset management does not yet appear to have asserted itself within NAMA.
It is high time that it did.
Do you think NAMA is up to going against these guys:
http://www.bloomberg.com/news/2012-02-24/blackstone-s-gray-joins-board-as-real-estate-rises-to-71-of-firm-s-profit.html
Kind of difficult being on the sell side.
@Jake Watts
+1
“All are being purchased at a significant discount to replacement cost,” he said. “This, along with the volume of troubled commercial real estate loans already in the system, are coming due in the next few years to drive a very active pipeline of attractive opportunities for us.”
These people want assets for nothing or less.
I just hope that NAMA has the smarts to stay out the ring. I have a lot of doubts about that.
They would probably start by offering about $10 billion for the whole kit and caboodle. The Irish taxpayer would be left with the $20 billion loss. The ECB would demand that Ireland take the offer in order to pay down NAMA bonds. If NAMA runs out of funds in 2013 (@WSTT) that scenario is a real possibility.
Will Ireland have the guts to say NO?