Archive for July 13th, 2010

This is a fairly detailed examination of the accounting in NAMA’s first quarterly accounts. Some of it might not be of any great general interest. So at the outset, just to extract a summary of the important and generally interesting information.

1. NAMA is only recognising loans at their NAMA-purchase price in its accounts. Although NAMA says that it is going to pursue borrowers for the full original amount outstanding, this accounting treatment gives rise to unease as it will become unclear as time goes on how much is really being written off.

2. NAMA appears to be accruing interest payable from the debtors based on the sum paid by NAMA, not on the original loan at the bank. Again this gives rise to unease.

3. The NAMA SPV made a loss of €7m for the period ending 31 March 2010 because it incurred large unrechargeable costs (€2.5m to PwC for advice, €1m to Capita for managing the loans, €2.2m for costs recharged from the NTMA, €0.5m for tax,legal and other financial advice and €1.4m as a loss on derivatives (!) partly offset by foreign exchange gains of €0.5m). There was no real trading taking place for the 2 days from when the loans were acquired on 29th March, 2010.

4. The NAMA Board incurred fees of €118k between 21st December 2009 and 31st March, 2010. Assuming Brendan McDonagh and John Corrigan are paid by the NTMA (through the €2.1m recharge referred to in 3. above) then the fees for the other 6 members would appear to be €35k per month which looks about right. What looks odd is that they weren’t paid for the three months odd and NAMA accrued their fees at the end of March 2010.

5. The calculation of due diligence and enforcement fees payable from the banks still looks like jiggery-pokery. We were given to understand by the Irish Times that NAMA had made a profit of €25m on these fees but that’s certainly not apparent.

6. It is not clear if any pre-December 2009 costs have been charged to NAMA. Given that NAMA is a joint venture between the State and some private investors why would we not charge costs associated with the set-up of NAMA before its official coming into existence on 22nd December 2009.

7. Although the average haircut for tranche 1 was 50% there were some good quality loans in there (18% of the total at the banks) where the haircut was just over 10%.

8. That loss of €1.4m in two days on derivatives is worrying. NAMA have acquired €14bn of derivatives and it is not clear if there is risk attached to these instruments. There have been suggestions that there could be risk in the order of €1-3bn.

9. There’s a massive accrual of €16m in the balance sheet which has no explanation.

NAMA has been split into a number of different companies. Here is the NAMAwinelake version of the consolidated accounts.

In terms of the detail

1. Where are the costs payable to the valuers

2. Where are the costs payable to the derivatives valuer (Societe general)

3. Where are the costs payable to loans audit co-ordinator (KPMG)

4. What about pre-startup expenses?

5. Why is interest on loans acquired on 29th March 2010 (bullet point 3 page 1) so low at €58k? €814m of loans were acquired from INBS and EBS. NAMA has told us the average interest receivable rate is ECB + 2%. ECB is currently 1%. So 3% of €814m for two days (assume loans acquired at midnight on 29th) would be €134k approx (€814m * 0.03 / 365 * 2). Is interest not being calculated on the original sum owing? The sum paid for the loans was €371,016k (note 8, page 55) and that would be €61k approx for 2 days (€371,016 * 0.03/365 * 2). Whilst not exact, perhaps the average interest rate is less than ECB + 2%, it would appear that NAMA is calculating interest due based on the consideration it pays the institutions.

6. NAMA has valued the loans at the acquisition value, ie the first loans from INBS and EBS are valued at €371m, and not at their original value. NAMA’s accounting policy is to value at acquisition cost or at a revalued cost, which is fine. But it would be more comforting if the loans were shown at the original value with a bad debt provision for the difference between acquisition cost and nominal value of the loan. This would underline the “bail-out” and indeed would give greater confidence that NAMA were going to pursue the full nominal sum.

7. Board fees look too low if they include all Board members (Brendan McDonagh and John Corrigan).

8. If the advance of €49m from the Central Fund took place on 29th March, 2010 as stated on page 15 PDF, then how is the €8k interest in the period calculated. For two days interest this would indicate a rate of interest of 6% (€49m * 0.06 / 365 * 2). Elsewhere it the date of the payment from the Central Fund is shown as 26th March 2010 (page 27 PDF) which would imply a 1.25% interest rate (€49m * 0.0125 / 365 * 5).

9. The NAMA Investment company seems to be lending the NAMA SPV €100m at an annual rate of 4% interest payable (€100m * 0.06/365 * 3 = c€33k).

10. The NAMA SPV calculation of interest due on the first government guaranteed and subordinated debt at €28k indicates a 3.75% yield on 10 year bonds which looks low). The government guaranteed (assuming the loans were bought at midnight on 29th March, 2010) should be €352m at ECB (1%) for 2 days = €19k approx. The subordinated debt interest is calculated by reference to 10-year bond yields plus 0.75% at date of issue and should be at 5.75% approx but appears to be at 4.5% which look low (€19m at 3.75% yield on 10 year bond + 0.75%).

11. There seems to be a lot of jiggery pokery going on in the NAMA SPV with respect to due diligence and enforcement costs. In the LEV Regulation the reference to due diligence and enforcement costs is contained in the definition of Standard Discount  Rate:

Standard discount rate. 8. The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets is 5.25 per cent (made up of 5 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions).

However it is not clear how the calculation operates. Stepping back, the intention seems to be that NAMA is entitled to deduct from the amount it pays the banks a sum to cover NAMA’s costs for valuing the loan at the outset and potentially pursue defaulting borrowers through the courts/appointing receivers and any other losses or expenses that might be incurred in settling matters with a defaulting borrower. However this is not clear from the accounts.

In the revised first tranche data NAMA produces what it calls “NAMA – forecast upfront recovery of costs on total portfolio – accrued as assets acquired in each tranche based on long term economic value” and then goes on to show the following calculations for enforcement and due diligence “in €ms – Recovery of Enforcement Costs (8.27/15.3*81=43.8*5%) 2,190 and Recovery of Due Diligence Costs(8.27/15.3*81*0.25%)  110 Total costs recovered from participating institutions 2,300” The implication from this calculation is that NAMA is calculating the due diligence costs at 0.25% of the estimated nominal value of the portfolio in the banks’ books (€81bn) but that only a fraction of the 0.25% * 81bn will in fact be payable to NAMA – that fraction being the LEV of the entire portfolio divided by the nominal value of the portfolio in the banks’ books. Now NAMA says it “released” €8,971k of due diligence expenses to its P&L in the period and that this sum €8,971k is payable by the banks (so the net effect is zero). The estimated total amount of due diligence recoverable from the banks is €110,000k so why for the first tranche which was for €15.3bn out of €81bn nominal value of the portfolio at the banks (ie 15.3/81 = 19% * €110,000k = €20,900k) €20,900k not released? EBS and INBS accounted for €0.51bn out of €8.27bn LEV from the first tranche (6%). It just doesn’t seem to make sense why NAMA choose to recognize €8,971k of due diligence costs and “release” €8,971k of due diligence costs. NAMA have not apparently decided to recognize foreclosure costs at all even though they say (page 56, pdf) that such costs recoverable amount to €350m – why not recognize the income and make a provision against it for any future enforcement, it would have been clearer. The “release” of due diligence expenses to the P&L implies there is some prepayment in the balance sheet – in note 12 (page 56 PDF) there is a liability of €6,142k for due diligence costs and in note 9 (page 55 PDF) there is a receivable from three of the banks (AIB, BoI and Anglo) of €14,374k for due diligence.

12. It is unclear how the NAMA SPV managed to turn a €100m loan from the Investment company into €100,437k of cash in two days. It is also unclear how NAMA took on €371,016k of loans and only paid €371,000k of government guaranteed and subordinated debt – where’s the €16k difference. There is no note to support the €2,074k receivable from the banks nor, more importantly, a €16,412k general accrual.

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Today sees the publication of the quarterly DAFT.ie property market price review and also the Department of the Environment Heritage and Local Government housing market report for 2009. Whilst both reports suffer from basic flaws – in DAFT.ie’s case, basing the report on asking prices and in the DoEHLG’s case, being six months out of date and not being hedonic – both are predicting further falls but it is unclear what the predictions are.

In the case of DAFT.ie, Jim Power is the guest contributor this quarter and he predicts that prices will drop 12% in 2010. As they appear to have dropped 7.5% so far to the end of June according to DAFT.ie, I guess that means a further drop of 5% is in prospect. What about beyond 2010? Jim doesn’t say but he does suggest we are entering The Bottom zone.

The DoEHLG is most certainly not predicting The Bottom anytime soon. By reference to the unusually long period of the boom and examining historical busts, there is the suggestion that we are still some way off The Bottom. For a report which is supposed to be an objective examination of data there seems to be an unhealthy emphasis on positives which might lead to a rebound in prices. There is also a shameful reliance on asking price reports (from DAFT.ie and myhome.ie) to corroborate non-hedonic data that is now six months out of date – shameful because Michael Finneran is the housing minister at the DoEHLG responsible for implementing an House Price Database which would give accurate and uptodate information on all property transactions. The DoEHLG report also seems to still rely on CSO population projections which suggest  growth in net inward migration.

And lastly, DAFT.ie say that prices fell nationally by 4% in the second quarter. The DoEHLG figures are six months out of date and are particularly out of kilter (after accounting for Q1, 2010 movements) for Dublin with DAFT.ie, myhome.ie and even the Permanent TSB/ESRI). The NAMA key market statistics at the top of this page are based on the Permanent TSB/ESRI House Price Index which will be published for Q2, 2010 in a couple of weeks – this is the State’s only hedonic index based on actual prices.

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