Seems so.
To recap, NAMA bought €74bn worth of loans from five banks – AIB,. Anglo, Bank ofIreland, EBS and INBS. NAMA paid €32bn* for these loans, comprising €30bn in so-called “senior debt” and €2bn in so-called “subordinated bonds”. The intention was that NAMA would generate at least enough from its activities between now and 2020 to pay off the €32bn. In fact, according to the first NAMA business plan, the expectation was to pay off what NAMA paid for the loans and make a profit of €5bn. In NAMA’s second business plan the projection was to pay off what NAMA paid for the loans and make a profit of €1bn. It now seems that NAMA’s outlook has taken a turn for the worse with NAMA expecting to pay off the “senior debt” but there is, remarkably, no word about “subordinated bonds”
On Tuesday this week, the Sinn Fein finance spokesperson Pearse Doherty asked Minister for Finance, Michael Noonan to comment on NAMA’s prospects in light of the recent Comptroller and Auditor General report which said that NAMA will face considerable challenges in meeting its profit objectives over its lifetime. The Minister trotted out the by-now traditional NAMA mantra of it being confident the Agency would break even, but there was a nuanced change in the statement in that there is no longer any reference to “subordinated bonds”, only to the “senior debt”. The full exchange is here (with emphasis added)
“Deputy Pearse Doherty: following the recent publication of a special report by the Comptroller and Auditor General, if he will confirm that he accepts the judgment that the National Assets Management Agency will face considerable challenges in achieving its income goal in order to break even by 2020; if he will confirm that if there is any shortfall in NAMA’s financial position by 2020, it is the State that will underwrite any loss. [27947/12]
Minister for Finance, Michael Noonan: I am advised by NAMA that its Board has recently completed a review of its strategy and has re-affirmed its expectation that NAMA will at least break even over its projected ten-year lifetime, meaning that it is on course to recoup for the taxpayer, at a minimum, the Senior Bonds issued as consideration for acquired loans in addition to recovery of its carrying costs and the working and development capital expenditure it has advanced to debtors. Based on the Agency’s record to date, I have no reason to doubt the Agency’s confidence that it will achieve its targets over its lifetime.
I refer the Deputy to Section 225 of the National Asset Management Agency Act 2009, which sets out the circumstances in which a surcharge may be applied to the participating institutions if there is a shortfall in NAMA’s financial position following the completion of NAMA’s operations. Section 225 was included specifically to avoid a situation where the State would have to underwrite any loss that NAMA may make.”
So what happens if NAMA doesn’t generate enough to repay the “subordinated bonds”? The good news is that it is the banks which will need write off the unpaid bonds as a loss. The bad news is that we own Anglo and INBS 100%, AIB and EBS 99% and Bank of Ireland 15%. Bank of Ireland has only €280m of the “subordinated bonds”, so the vast majority of the loss will fall on the shoulders of the taxpayer. Of course, Minister Noonan made reference to “at a minimum” and “at least break even” in his response, but the quiet dropping of reference to the “subordinated bonds” will give support to those who are pessimistic about NAMA’s prospects and they may see this as a deterioration in the outlook for NAMA.
* To be precise, up to March 2012, NAMA had issued €30.23bn of “senior debt” and €1.594bn of “subordinated bonds”. NAMA has so far repaid €1.25bn of “senior debt” meaning that there was €28.97bn of “senior debt” owed by NAMA in March 2012.
@NWL, You have to read between the spin. It’s all about the meaning of the word “may” as in “…a surcharge may be applied to the participating institutions”. In legalese, that does not mean “will”. If the government was to say “will” and mean it, the banks’ share prices would never recover and the government would never be able to sell the taxpayers’ interest in them.
The banks will never take the hit. It will be down to the taxpayer again – and it won’t just be another two billion…… add in the mortgage losses……. and the personal loan losses …… and the SME losses…..
@ NWL,
“Minister Noonan made reference to “at a minimum” and “at least break even” in his response, but the quiet dropping of reference to the “subordinated bonds”…”
I think Noonan’s angle is to avoid a NAMA capital call.
@Ahura, but here’s the problem. NAMA was always going to be cash rich in its initial phase because it was taking on a mix of loans, some performing secured by good assets in liquid markets, others delinquent secured by unattractive assets in credit-starved markets. So NAMA has been generating cash on the former, and that shouldn’t surprise anyone. The problem is that once NAMA goes below 20% impaired loans, then we start getting problems with NAMA being unable to cover its interest obligations on its bonds and its operating costs, and only disposals of loans/assets will shore up that deficit. But pretty soon, those disposals will hit a wall as NAMA has to a large extent disposed of the performing loans secured with good assets in liquid markets. So NAMA either runs out of cash or it disposes of assets at levels which crystallise losses and which make more likely NAMA making an overall loss by 2020.
This issue was examined in some detail in NAMA’s opening months, and now might be a good time to revisit. But at the outset, it was estimated that 20% performing loans was about the point at which NAMA would start having problems.
Unfortunately it isn’t easy to figure out when NAMA will go cashflow negative. Between delaying paying off namabonds (/issuing more) and using an ‘assumed’ interest income, it’s hard to tell.