NAMA’s first tranche, the calculation of Long Term Economic Value and consideration, what it means for property prices..

Ever since the NAMA announcements in respect of the first tranche of loans on 30^th March, 2010, there has been debate about how NAMA calculated the Long Term Economic Value, the Current Market Value and the consideration paid. The summary of the figures from NAMA on 30^th March, 2010 are shown here. It should be stressed that the Anglo numbers are estimates and subject to audit and the latest from NAMA is that it may be several weeks before Anglo’s first tranche loans are transferred.

The NAMA Act and the LEV Regulations give some overall guidance as to how the CMV and LEV are calculated. However debate flowed, for example on the irisheconomy.ie website as to how the consideration paid was derived. There was also intense debate about the “haircut” or the discount being applied to NAMA loans as it was felt this would indicate the NAMA floor for CMVs and may point to where the property market will bottom out.

With respect to the last point, NAMA is expected to purchase €16.03bn of loans in the first tranche. It is not known whether these loans include rolled-up interest or to what precise assets they relate to (though in aggregate terms we know from page 2 of the NAMA first tranche press release that of the projected €8.5bn payable as consideration payable that €5.5bn was classed as “investment property”, €1.3bn classed as land including land where development was less than 30% complete, that €0.8bn was classed as hotels, €0.5bn as land where development was more than 30% complete and lastly €0.4bn was classed as residential property for resale). However IF

1. The first loans related 100% to residential property
2. The first loans include the same proportion of loan and rolled up interest as indicated in the draft NAMA business plan (ie €68bn of loans and €9bn of rolled-up interest)
3. The first loans were granted at a Loan to Values of 77% as indicated to be the estimated overall LTV in the draft business plan
4. The first loans are representative of the loans, LEVs and CMVs in the planned subsequent transfers.
5. The first loans were on asset values which were in proportion to the aggregate asset values in the draft NAMA business plan (ie values at origination of €88bn, implied peak values of €120bn) – note that the implied €120bn is rarely referred to in the media which often refers to the €88bn as being the peak value with the curious implication that every single NAMA loan was taken out during one month in 2007!  I cite as a source a statement from Brian Lenihan in the Dail on 12^th November, 2010 when the following exchange took place between FG Deputy Kieran O’Donnell (the full record of the day’s exchanges are available here) :

Deputy Kieran O’Donnell: Did the Minister look into the legal structures of the banks in terms of offshore subsidiaries, where those offshore subsidiaries are located and whether there are legal disclosure requirements in respect of those countries? The figure of €120 million as the gross loan book was mentioned by the Minister on a number of occasions. That loan book transpired to be €77 billion. That is a difference of  €43 billion. That is a 36% shortfall which is significant and requires explanation.

Deputy Brian Lenihan: The €120 billion included was a notional figure, based on the value of the collateral at peak; it was not a book value. It added to the book value the actual peak value of the property in measuring the decline since. This is important. This was part of the debate before NAMA but it was never suggested that this figure was the actual book value.

THEN

NAMA is placing a current market value (CMV) of €45bn (€16.03/77 * 68 = 14.2; 68/14.2 * 1^st tranche CMV 9.44) on assets that were worth €88bn at origination and €120bn at peak, in other words NAMA is valuing at 62% off the peak value. The original NAMA business plan was accompanied with the message that NAMA had to see a 10% total rise in asset values over 10 years to break even (IF THE NAMA LOAN DEFAULT RATE WAS 100%, NOT 20% AS IN THE DRAFT BUSINESS PLAN, AND THAT INSTEAD OF RECOVERING LOANS FROM BORROWERS NAMA HAD TO SELL OFF THE ASSETS).

The following is a copy of an email exchange with NAMA which throws some light on the calculation of the consideration paid. It would appear to this author that the “potential legal haircut for defects in title or security” will only be known to NAMA and there may be other inputs to the calculation as well.

In respect of communication with NAMA, it is probably worth remembering Enda Kenny’s statement in the Dail on 23^rd March, 2010 when he questioned how NAMA could operate with 65/70 people when Goldman Sachs were managing a similar scale of asset value with 3,000 people. No doubt they are very busy people indeed and I have redacted the name of the person at NAMA who provided the information but as shown on NAMA’s own website they have a general email address of info@nama.ie. I suppose it’s also to be borne in mind that NAMA has many critics, some of whom might use any information from NAMA in a deliberately malign way.

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EU publishes its Decision approving NAMA, 2010 (N725/2009)

This is the link to the EU Decision which was announced on 26th February, 2010. The Decision itself was not made public at that point in order that it be censored for any confidential information. Today we have the Decision though we don’t know to what extent it has been redacted. The Decision is nearly 40 pages long and contains some interesting overview information of NAMA and its contextual setting in dealing with the Irish crisis. Comments and analysis will appear on here later today but in the meantime Emmet Oliver at the Independent has produced his own analysis of what is contained in the Decision.

Thus far the following appears to be of interest:

1. Rewards available to the private investors in the Master SPV appear to have been redacted (pages 7 and 8). The impression previously given was that private investors would be rewarded in line with government bond returns. The EU Decision describes a profit share arrangement and a further contingent equity bonus, both subject to maximums but the maximums have been redacted. Why?

2. Institutions of systemic importance are described on page 37 as having scored more than 60% on the following criteria ( I wonder how Anglo scored? The EU assures us on page 35 “Concerning the potential participation of Anglo Irish Bank in the Scheme, this participation will be assessed according to eligibility criteria for applicant
institutions which the Commission has found to be objective and non-discriminatory”)

i. Level of deposits in the State (1 is 0% market share, 10 is dominant market position);

ii. Number of retail depositors in the State (1 is 0 depositors, 10 is dominant market position);

iii. Number of customer accounts in the State (1 is 0 customer accounts, 10 is dominant market position);

iv.  Existence and scale of branch network in the State (1 is no branches, 10 is complete branch network);

v. Position in Irish mortgage market (1 is no market participation, 10 is dominant market position);

vi. Position in Irish SME lending market (1 is no market participation, 10 is dominant market position);

vii. Position in other business lending market (1 is no market participation, 10 is dominant market position);

viii. Position in Irish consumer lending (1 is no market participation, 10 is dominant market position);

ix. Number of borrowers in Ireland (1 is no lending function, 10 is dominant market position);

x. Role played in State’s payment system (1 is no role in payment system, 10 is control over State’s payment system)

3. NAMA sought powers to obtain information about individuals from the Revenue. Those powers seem to have been denied because they would have placed NAMA at a competitive advantage over other credit institutions (page 19).This aspect of the EU Decision will pique the interest of many observers.

4. Security offered by developers included “personal guarantees, art, share portfolios, wine collections; helicopters and life insurance policies.” (page 14, note 20)

5. Although the Commission didn’t think the NAMA scheme consideration for loans at around €54bn was worth of censoring, it did consider the value aggregate value of the assets to which the loans related were confidential. (Page 2). Strange, what could be confidential about the aggregate values of the property and given the estimate of average haircut (35%) is given elsewhere in the document, it’s not as if market moving capitalisation requirements were being suppressed.

6. Notwithstanding point 5 above the NAMA overall financial overview is set out on page 6 which shows that the property assets had a value of €94.2bn at origination, were secured on 77% LTV loans or €72.5bn which now have €10bn of roll-up interest and the assets are now worth €47bn, representing a 50% fall from the values at origination and given that not all loans were taken out at the peak and their “vintage breakdown” was not provided by Ireland, the assumption will be that values have dropped at more than 50% which is consistent with the Dail response by Brian Lenihan in November 2009 which was that €120bn was the value of NAMA loans assets at their peak value.

7. The planned scheduling of the tranches is shown on page 10 but there is an obvious mismatch between the cumulative book value of the loans at €77bn compared with €82.5bn elsewhere in the document.

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