Part 1 of this two-part blogpost on NAMA’s cash position examined the targets that NAMA has imposed on itself for the redemption of its debt – remember NAMA used €32bn of IOUs to buy €74bn of loans from the banks, and these IOUs need to be honoured/redeemed/repaid by 2020; NAMA has published a plan which sets out by year the redemption of these IOUs, the first milestone in the plan, which is the payment of €7.5bn by the end of 2013, has recently been incorporated into the Memorandum of Understanding with the bailout Troika, but the other scheduled repayments haven’t (yet!) – they are:
End 2013 – repay €7.5bn (incorporated in Troika memorandum in May 2012)
End 2015 – repay additional €4.5bn (cumulatively €12bn)
End 2017 – repay additional €12bn (cumulatively €24bn)
End 2018 – repay additional €4.5bnn (cumulatively €28.5bn)
End 2019 – repay additional €1.5bn (cumulatively €30bn)
Remember NAMA is sitting atop a mountain of cash today, but it has a veritable Mariana Trench of IOUs that it needs redeem by 2020, so that cash mountain will be depleted. NAMA has a particularly large “funding cliff” at the end of 2017.
Part 1 assumed that NAMA could sell its loans and underlying property at the same price as it paid for the loans, which was by reference to property values in November 2009. This assumption is threatened by the fact that property in NAMA’s main market, Ireland, has declined by 20-30% since November 2009 and even though some other markets have improved – the UK, and London in particular, for example – the calculation on here is that, from today, NAMA needs a 25% increase in property values overall just to break even. Now a 25% increase between now and 2020 mightn’t seem so unrealistic, but in addition NAMA needs to cover its substantial operating costs and interest expense, and it is unlikely that NAMA will wait a full eight years before it disposes of 100% of the remainder of its property, most will be disposed of before 2020.
Despite NAMA’s claims to the contrary, it is simply impossible to predict today in 2012 if any growth in the value of NAMA’s assets will be offset by NAMA’s considerable annual operating costs, or indeed if the value of NAMA’s assets will decline further. It is ironic that NAMA has consistently bad-mouthed developers whose business plans were based on the wish to hold onto assets for as long as possible in the hope that prices would recover, because guess what, NAMA itself is, according to the well-informed word on the street, doing EXACTLY that in the case of Irish assets – holding onto the asset, collecting rent where possible, mothballing elsewhere and investing a relatively small amount of money in development.
Now we had NAMA to police developers and put a stop to fantastical hopes of property prices rebounding, but who exactly is policing NAMA to stop it doing the exact same thing?
NAMA will eventually run out of cash if it fails to generate enough from its loans to cover the original purchase price of the loans plus advances made to developers plus the Agency’s operating costs plus interest on the NAMA IOUs. What NAMA will ultimately get for its loans is difficult to predict but there are some actions which can minimise the risk of NAMA running out of cash.
(1) Do NOT let Minister for Finance, Michael Noonan copper-fasten more scheduled payments by NAMA into the Memorandum of Understanding with the Troika. This preserves the maximum freedom of action on NAMA’s part to manage the assets so as to maximise value by 2020.
(2) Open discussions with our EU partners to transfer the risk of the NAMA operation as part of the renegotiation of our banking debt. It is almost incredible that this has not even been considered, given the fact that NAMA paid €5.6bn in state-aid for the loans, which represents a premium over what the loans are worth, and that property in Ireland has declined 25-30% since. It MAY come good by 2020, it may not, NAMA can “hope” for a recovery and we can all “hope” they see their “hope” fulfilled. Right now, NAMA represents a massive downside risk.
(3) Ensure NAMA has adequate internal asset management expertise. NAMA is an unusual asset management company in that (a) it needs to wind down by a fixed point in the future, 2020 (b) it is not acquiring new assets, though it is spending relatively small sums on developing assets (c) it does not have the freedom to enter into joint venture and (d) it has an incredibly cheap source of funding in the Government-guaranteed IOUs it used to buy the loans. In the lightweight Geoghegan review of NAMA last year, the Agency was seen as not having an adequate commercial approach to deal with its portfolio. If you believe Minister Noonan, NAMA has remedied that deficiency but it is hard to see how exactly – the Agency hasn’t employed any new category of professional, it has just rearranged people under different department headings.
(4) Ensure there is someone outside NAMA to police the Agency and stop it generally hoarding property in the hope that the longer it is held, the better the prospects of recovering what was originally paid. Given that NAMA is running up substantial operating costs, this strategy cannot be unquestioningly accepted. NAMA recently told the High Court in London in the Paddy McKillen case “The Agency’s objective is to obtain the best achievable financial return for the Irish State on this portfolio, and in the case of each individual loan to achieve such a return as soon as practicable in order to reduce the value of the portfolio to zero as soon as commercially practicable.” Someone external to NAMA needs to challenge and police the Agency to ensure this happens.