It’s now over two months since NAMA started to acquire the first loans of the First Tranche. At the time, there was much debate as to the derivation of the numbers – why was the consideration paid, substantially lower than the long-term economic value (LEV)? How precisely did the recovery and default discounts work? Were they in respect of the first tranche only or the total predicted loans of €81bn? What went largely unnoticed was the fact that on average the LEV was 11% more than the current market value (CMV). This post examines the effect of this on NAMA’s future financial prospects.
The valuation date, by reference to which the CMVs were assessed in the First Tranche, was 30th November, 2009. Why 30th November 2009? The banks were required to submit their First Tranche data before Christmas 2009 and the valuers had to value to a specific date so 30th November, 2009 was as good as any, particularly against a background of statements from the Minister for Finance that we were close to the bottom in September 2009. Many commentators have pointed out that the market has continued to fall since then and that NAMA may be disadvantaging the taxpayer by perhaps €5bn by sticking with this date. It is unclear from the NAMA Act if the Minister for Finance can designate a new date for future tranches but he would certainly be protecting the taxpayer’s investment in NAMA if he were to do just that.
So, the First Tranche has a CMV of say 100 and a LEV of 111. Since 30th November, 2009 the residential market has fallen by reference to the Permanent TSB/ESRI index by 3.6% in December 2009 and 4.8% in Quarter 1 of 2010 (a cumulative compound fall of 8.2%) so the CMV of the First Tranche is now worth 91.8. Are further falls in prospect for residential property? Who can say but the betting would be yes. But let’s say that March 2010 was the bottom. To break even NAMA would need see the 91.8 increase in value to 110 over the next 9-10 years, ie an increase of 2% per annum compound over 9.5 years (91.8 * (1.02)^9.5). To sell at 5 years NAMA would need see an increase annually of 3.75%. Achievable? Maybe but if residential property were to drop further then both that drop and the time it takes to reach the bottom could severely impact NAMA eg if property were to drop another 18% in the next two years as suggested by Moody’s then at the start of 2013 the CMV would be 75.2 and in the remaining 7.5 years of NAMA’s lifespan, property would need to rise by 5.25% each year compound to get back to the LEV. Again perhaps achievable. Factor in the cost of NAMA’s debt which is running at about 1%+ and you will be looking at 6-7% per annum compound growth to break even. Perhaps achievable but a long way off the 1% per annum flat rate of growth over 10 years that NAMA set out as a basis to break even last October 2009.
The above analysis relates to residential. There is a mixed picture on commercial. However in the coming weeks when NAMA unveils its Business Plan, much attention will focus on how the market has changed since last November 30th and also the recovery needed so that NAMA can break even.
NAMA Wine Lake 
Excuse me if I appear to be asking a somewhat ridiculous question, but from a layman’s perspective, if NAMA buys assets for a CMV of 100 as you’ve suggested, and the value of these assets in time falls to 91.8, shouldn’t the value of the underlying property need to recover to only 100 in order to breakeven. Surely a recovery to 110 will lead to a 10% return for the taxpayer (albeit over 10 years).
Is it the fact that you are allowing for some sort of inflation and thus a return to value of the underlying property to 110 is only a nominal return for the taxpayer and not a real return? Thus 110 is only a breakeven point in real terms?
Or could it be that you are factoring in interest repayments on the debt issued to fund the NAMA purchases? do NAMA need a return to value of 110 just to cover prinicpal and interest payments or to put in another way, break-even? I guess this would appear not not be the case given your analysis on the ‘Draft’ business plan. From this we see that cash flow from the loans aquired should be more than enough (at EURIBOR +2%) to cover any interest payments on govt securities issued to fund the purchase in the first place.
Maybe you could clarify? Thanks.
Not a ridiciulous question at all – the short answer is that it was always intended that NAMA pay the LEV because it was felt that property was on the floor and would recover and that it was unfair to force the banks to hand over loans at the bottom of the economic cycyle.
The longer answer is way back in September 2009 when NAMA presented its draft Business Plan, the overall numbers were:
Nominal value of loans including rolled up interest to be acquired from the banks: €77bn, CMV: €47bn LEV: €54bn. So from the start NAMA were going to pay not the CMV but the LEV and the LEV premium last September was estimated at €7bn. At the time there was uproar that the State was paying the banks €7bn more than the property underpinning the loans was worth.
NAMA explained that all that was required was a 10% increase in the CMV over 10 years to break even (ie the €47bn CMV increased in value by 10% to €51.7bn – because 5% of the NAMA consideration was being paid in contingent subordinated debt which would not be paid if NAMA didn’t make a profit the €54bn would be reduced by €2.7bn to €51.3bn if NAMA didn’t make a profit).
So from the start NAMA was paying the LEV, not the CMV. This is set out in the NAMA Act and LEV Regulation.
What most people were curious about with the first tranche was that the LEV was more than the consideration paid. NAMA have not explained that exactly but indicated that the enforecement and foreclosure discounts (which came about through the LEV regulation and EU Decision) were deducted from the LEV to get the consideration paid. I don’t think anyone outside of NAMA knows precisely how the consideration paid in the first tranche was calculated yet – perhaps the Business Plan or June Quarter reporting will clarify matters.
Lastly there are two key MUTUALLY EXCLUSIVE assumptions in the NAMA draft business plan – 1. that only 20% of borrowers by value wouldn’t repay their loans and 2. if 100% of borrowers didn’t repay then the property market would need pick up by 10% flat rate total over 10 years for NAMA to break even. No-one outside of NAMA thinks that the 20% is still realistic so NAMA is likely to have to rely on a pick up in property prices. Given it has paid 11% more than the property was worth and property dropped after 30 November 2009, that key assumption 2 is going to have to change dramatically.
OK, that clarifies it. Thanks very much.
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