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Archive for April 16th, 2010

NAMA doesn’t have a business plan. A so-called draft business plan was produced and debated in September and October 2009. The NAMA CEO this week referred to it as being for “illustrative purposes”. 7 months after the draft business plan publication and having practically bought €16bn of NAMA loans, during this week’s hearing, members of the Oireachtas Joint Committee on Finance and the Public Service repeatedly sought a proper business plan or at least the key parameters that would underpin any plan. The NAMA CEO would not yield and resisted an increasing barrage of demands coming from the members of the Committee. The NAMA CEO stated that a business plan should be published by June 2010 and that its path before then would include a review by the NAMA board and by the Minister of Finance.

A question asked of NAMA is why that organisation is unable to produce a business plan now when it is insisting on borrowers producing business plans within 30 days of their loans transferring to NAMA. The answer in a nutshell was that the developers will be intimately familiar with their loans and assets and asset markets – NAMA was uncovering horror upon horror in the financial institutions’ loanbooks and was still scoping out what the overall financial parameters would be. I have no doubt that this is the case but…anyone who has ever obtained a business loan from a bank is familiar with the plans required, the profit and loss, the balance sheet, the cash flow, the key assumptions – basically the information to give the bank the confidence that they have a fair chance of getting their money back. Businesses will be familiar with planning for different scenarios and stress-testing their own abilities to repay loans and they will be familiar with dealing with unknowns. A business wouldn’t get a €50k loan unless such plans were in place (and in addition would probably be required to provide security) and yet here is NAMA spending €50bn where it appears to have confidence in valuing the assets and the loans in the first tranche (worth 20% of the total of the NAMA loans) and having 8-10 months experience of dealing with the banks, and being supported by the top names in accounting and audit, and here they are saying “Wait until we have spent perhaps €20bn and we’ll tell you what the plan looks like”.

Whilst watching the Committee hearing, an uneasy sense grew that responsibility for transparency in NAMA was falling between several stools. The Minister for Finance Brian Lenihan has reminded us on many occasions that NAMA is “independent” and its principal objective is to protect taxpayers’ investment – its principal objective is not transparency and stopping to consult with every Richard, Kieran and Joan along the way. The NAMA CEO seems commendably focussed on his principal objective and I would have little concern that he won’t meet his obligations for disclosure set out in the NAMA Act but that doesn’t include producing a business plan. NAMA reports to the NTMA and the NTMA reports to the Department of Finance who reports to the government. So whose responsibility is NAMA transparency? Is it NAMA’s, the NTMA’s or the Department of Finance’s?

Having been fobbed off by the NAMA CEO about a business plan, the Opposition must confront the government (mind you, this is not a party-political matter and members of the government may wish to confront their political colleagues). The fears and concerns from the lack of a business plan should be firmly placed before the government and the public. The disadvantages of producing the plan now (diverting some effort from NAMA’s limited resource, public and political interference causing delays to NAMA, basing assumptions on incomplete data which might turn out to be wrong) would seem to me to be outweighed by the advantages (we’re a democracy and €50bn is being spent on our behalf so we’re entitled to the information however inconvenient it is to produce and our government including opposition is entitled to question and debate it, widespread study of the plan may lead to valuable contributions which might lead to NAMA seizing unseen opportunities or avoiding planned pitfalls, policy or decisions might change in respect of the remaining 80% of the NAMA loan tranches).

Beyond the government, there is nothing to stop the public speculating on what might be in the new NAMA business plan when it is eventually published so in the absence of a NAMA business plan and based on what was in the draft business plan and extrapolating what we know about the first tranche (perhaps incorrectly but it’s the best we have), NAMAwinelake is proud to introduce an outsider’s attempt at a NAMA Business Plan. A google documents spreadsheet will appear shortly under the NAMA Business Plan tab above and contains a NAMA forecast profit and loss account, balance sheet and cash flow. The aim is to stimulate discussion and pre-empt mistakes either within NAMA or in how NAMA will interact with the wider economy. The first spreadsheet incorporates the information in the draft business plan – later updates will incorporate and extrapolate more recent information.

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Long before Daniel Craig was flexing his facial muscles and narrowing his eyes at some dastardly criminal mastermind, 007 had to confront what was in my opinion, the best Bond villain, Auric Goldfinger, a man whose business and passion was gold. Not only did Mr Goldfinger get to rattle 007 who asked him if “you expect me to talk” which was met with the flip “No Mr Bond, I expect you to die”.But Mr Goldfinger had probably the most fiendish plan of all the Bond villains – he was going to break into Fort Knox, the US gold depository. But Auric was no simple criminal, he wasn’t going to steal the stuff. No, Auric was going to render the gold in Fort Knox useless by exploding an atomic bomb which would contaminate the gold with radiation. All with the aim of increasing the value of his own gold. Or to express it in another (more clunky) way, he was going to demolish part of the existing supply of gold in order to put a floor under the values of his own gold.

And so to Brendan McDonagh, the NAMA CEO who is acquiring property loans, on which the property was originally worth €88bn (or €92.5bn if you believe the figures contained in the EU Decision of 26th February, 2010). In the first instance according to the draft business plan NAMA is hoping that 80% of borrowers will repay their loans 100% – in the other 20% of cases the property is to be repossessed and sold off. So even in the draft business plan NAMA is expecting to become a significant property owner. The property market (including all of its subsectors) has collapsed in Ireland and various claims that the bottom was reached have proven to be incorrect. In respect of residential property, whilst the Minister for Finance might claim recently that we are at the bottom (again), others like respected Trinity College Dublin Finance Professor, Brian Lucey  says that to suggest we are now at the bottom flies in the face of historical evidence and cites a fellow professor, Morgan Kelly who predicted a 50% drop from peak values which would indicate another 18 months of falls. Whilst the speculation up until recently was whether NAMA would hold onto the repossessed property or dispose of it quickly, following the NAMA CEO appearance at the Oireachtas Joint Committee on Finance and the Public Service on 13th April, 2010, it has been confirmed that an option that will be considered (and is expected to be actualized) will be demolition. The most tangible defence given for the demolition option was health and safety, and that defence would probably attract widespread approval. However the concern is that NAMA like Mr Goldfinder will demolish property to place a floor under the value of the remaining property – what’s the point in trying to sell two 3-bed semis when there is only one buyer – demolish one and then the buyer loses his advantage and faces a higher price and better still the message goes out to other buyers that there is no excess supply to drag prices lower.

Of course if NAMA were to adopt the approach of demolishing dwellings to place a floor under the values of their other property, they might be considered to be distorting the market place and acting uncompetitively, something which could carry expensive consequences for NAMA. Of more concern perhaps is that the economy is throwing away assets which might be used to create wealth and foster competitiveness (or meet social needs). So I hope Auric Goldfinger’s resemblance to Brendan McDonagh ends at the passion that they both obviously have for the job at hand, and that NAMA’s actions are considered in the context of the wider economy.

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Whilst Iceland begins to resemble Peter Jackson’s imaginings of Mordor, there is an atmostphere of complete clarity with our closer nothern neighbours who have the foresight to see the advantages that NAMA can bring to the region. CEF, the Construction Employers Federation and a close neighbour of our own CIF, has advised members not to bury their heads and to start preparing their business plans for NAMA because, according to John Armstrong CEF MD, “Nama will also have the working capital to develop sites.” NAMA of course has a €5bn development pot and for an industry on its knees in this State, it would be a welcome fillip where falling margins and employment are prevalent. NAMA will be running a roadshow in Belfast on 14th May, 2010.

What is Tom Parlon and CIF doing to facilitate its members in accessing NAMA’s working capital? Solidly-prepared and stress-tested business plans may attract NAMA’s scarce resources.

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