The NAMA Business Plan, 12 things to look out for …

With the imminent publication of the NAMA Business Plan, it is worth examining some of the headings and issues that are likely to be key for NAMA. There is a  draft Business Plan which was published in October 2009 and which the NAMA CEO has described as being for “illustrative purposes”. The NAMA CEO resolutely refused to answer questions about the content of a Business Plan when questioned at the Oireachtas Joint Committee on Finance and the Public Service in April 2010. So what should we be looking out for when the Business Plan is published, probably in the next few days.

1. Overall financial performance of the project – last October 2009, NAMA was forecasting a €5bn profit by 2020 (expressed as a Net Present Value). Last March 2010, Central Bank Governor, Patrick Honohan said that NAMA had a “fair shot” at breaking even. NAMA critics have predicted NAMA will make an overall loss, 46 academic economists including Professor Brian Lucey reckon NAMA might lose €20bn (based on the assets being worth €30bn), Constantin Gurdgiev thinks NAMA might lose between €9-22bn, before the first tranche transferred Morgan Kelly has pointed out that if property here fell by as much as Toyko during the Lost Decade NAMA could lose €35-40bn, former banker Peter Matthews has predicted NAMA will lose €11-26bn.

2. Performing loans and loan defaults – performing loans are not defined but would commonly be taken to mean loans which are not in breach of their original loan contract. Another definition would be those that are currently paying interest (because of some rolled-up interest provisions, the two definitions mightn’t have the same results). Performing loans are critical to NAMA as they will determine funding requirements (shortfall of interest paid versus interest received) and also the likelihood of default. First tranche performing loans were indicated to be around 33% whereas the draft plan estimated 40%. Defaults should be a consequence of non-performing loans and were estimated in the draft at 20% of the total loans, apparently based on the experience of Barclays Bank in the residential property market in the UK in the early 1990s which as has been detailed on here before may not be a reliable comparison.

3. Timing of disposals – last October 2009, the draft plan indicated that selling would start in 2014, ie that NAMA would hold onto assets for a few years presumably to allow for some stabilisation and recovery of the property market and to get as much as possible out of the borrowers. More recently there has been a prediction by Savills that NAMA may become a major vendor in the UK sooner rather than later and that it may hold onto assets for a longer period in Ireland. The IMF called for an orderly disposal of assets on Thursday which seemed to imply a more immediate disposal of assets.

4. Recovery in property market – famously in the draft plan this was to be a suspiciously-round 10% flat over 10 years. The NAMA Valuation Date has been set at 30^th November, 2009 and since then there have been substantial price drops. Recent estimates on here have indicated that the market may need recover 48% from the bottom in 2 years for NAMA “to break even”. Note NAMA will only need rely on a recovery in the market if there is default by borrowers (see 2, performing loans above) though arguably the two are linked. Will NAMA change the Valuation Date for the remaining 14 tranches? Given that the Minister for Finance, Brian Lenihan was reported to have called The Bottom (again) in April 2010, what will NAMA say about prices?

5. Funding requirements – in the draft plan NAMA was shown drawing down €54bn of bonds in 2010 and that was it. We recently learned that NAMA has had to get a €250m “advance” (interpreted to be a loan but “advance” has other more worrying meanings). NAMA has €100m of seed capital (€51m from so-called independent investors and €49m from the State). NAMA appears to have been paid upfront costs by the financial institutions. NAMA can borrow upto €5bn under the NAMA Act which is expected to be earmarked for development. Will more “advances” be required?

6. Operating expenses – although a small part of the overall NAMA expenditure, these will be closely watched to ensure there are no snouts in troughs. The recent revelation that the NAMA CEO, Brendan McDonagh was earning more than €500,000 per annum might have raised some eyebrows (though in the context of managing one of the world’s largest property funds, it mightn’t be seen as extraordinary). Plainly many of the professional providers of services to NAMA will be earning income from NAMA and the fact that some were associated with the bubble and crash attracts public unease. So these numbers will be examined closely. Of immense interest will be how the expenses are recharged to financial institutions, for example the Irish Times reported earlier this year that NAMA was making a €25m profit on its due diligence costs owing to minimum contracts.

7. Time horizon – originally envisioned as an 11-year operation (2010 – 2020), Brian Lenihan has referred to it as a 15-year operation and the NAMA management have referred to it as a 7-10 year operation. The public will want to see that NAMA is not overly concerned with working itself out of a job.

8. Haircut on loans – perhaps not such an issue for NAMA, but having consequences for the capital requirements of NAMA financial institutions (AIB, BoI, Anglo, EBS and INBS). The draft assumed 30%, tranche 1 actual was was 49.7%. The size of the haircut has been touted by some as a metric of how well NAMA is buying loans from the financial institutions.

9. Use of the development fund – not even mentioned in the draft. Section 50(3) of the NAMA Act allows NAMA to borrow upto €5bn which would appear to be earmarked for develoment. NAMA has stated that it is already providing “working capital” to borrowers but has already had to draw on €250m of a government advance, possibly some of its €100m capital and upfront reimbursement of due diligence and other costs from the financial institutions. Where will  the development money be spent, the construction sector in the State is on its knees and desperate for work but other projects eg the Battersea Power Station and indeed the lobbying from Northern Ireland may divert funds away from the State. If NAMA is now spending “working capital” how does it know that it is investing in the best projects as it has only acquired 20% of the loans.

10. Third party investors – not even mentioned in the draft but given weight in the NAMA CEO session at the Oireachtas Joint Committee on Finance and the Public Service in April 2010 when he talked about marrying up investors with distressed borrowers. This may be a huge untapped source of funding which could even match the €50bn or so of NAMA funding.

11. Write-offs of loans – when developers are seen to be enjoying comfortable lifestyles and wealth, this is likely to be a publicly controversial area. As has been pointed out here on several occasions, for example here and here, NAMA may have to bury the “pursue them to the ends of the earth” rhetoric in favour of the legal realities of corporate liability, ring-fenced SPVs, personal guarantees, the Family Home Protection Act and offshore jurisdictions. Write-offs will be seen as bail-outs, giving into the cronyism of politically connected developers and sticking two fingers up to the general population suffering under the burden of negative equity, new taxes, lower wages, unemployment, rising interest rates and repossessions.

12. Demolition information – this again is likely to be a publicly contentious area and with the cost of demolishing a single house having been put at €42-50,000, the question will be asked is NAMA demolishing because there is no demand for certain housing or to soak up the oversupply and put a floor under property prices to protect its other assets?

There will be extensive coverage here of the NAMA business plan when it is published, probably in the next few days.

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