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Archive for August 4th, 2010

If you’re a NAMA financial institution and you’re fretting about good quality loans being transferred to NAMA (with a consequent hit in your books for NAMA enforcement and due diligence costs not to mention NAMA taking their slice off the top) then what do you do when NAMA come calling for these performing loans? Well if you’re Anglo you can dispute the eligibility of the loans and that’s apparently what Anglo did when they sought a review in respect of Paddy McKillen’s loans.

AIB on the other hand may have found another route. In their H2, 2010 results published today they reveal that their NAMA-bound loans may have reduced by a gross of €3.2bn (page 7 of the H2 results) from the original estimate of €23bn, because these €3.2bn of loans are UK-based loans and AIB expects to sell its UK business by September 2010. Now the UK has suffered less than Ireland in respect of property prices, residential is off 9% from the peak (according to the Nationwide Building Society the average price of a UK house at the end of July 2010 was £169,347 compared with a peak price in October 2007 of £186,044) and commercial capital values are 36% off the peak (by reference to the IPD monthly index) plus both sectors have turned in reasonable increases in the last 7-8 months (~9% for commercial and ~4% for residential) – the UK is not by any stretch back to the boom years in terms of either transaction levels or prices but it is recovering.

So eligible loan or not, if AIB sell their UK operation then that will apparently take €3.2bn of gross loans out of NAMA’s reach. The 2009 accounts (note 25 on page 183) show that the gross UK NAMA-bound loans were €3.722bn and had a provision of €0.232bn (6%) compared with a provision level of 20% for NAMA-bound loans on Irish assets (€3.722bn provision on €19.444bn of gross loans). So has AIB found a way of sending the non-performing trash to NAMA whilst selling off the better-performing UK loans? It certainly looks that way.

Also of interest, though peripheral to the above, is AIB are maintaining an 18% haircut provision (the same as the provision level in the 2009 accounts) on the remaining NAMA-bound loans which compares with a haircut of 42% on tranche 1 and 48% on tranche 2. What will our increasingly low-profile Financial Regulator have to say about that.

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Yesterday’s announcement that Paddy McKillen’s company, Metrospa Limited, had disposed of the freehold in two adjoining buildings on Old Bond Street in London was terrific news for Paddy – his agents described the price achieved, £18.2m, as “exceptional”. The buildings were apparently subject to a loan from Bank of Ireland. Was this loan NAMA-bound? Given that it was an loan to one of Paddy’s companies – Metrospa is one of the 15 companies that, together with Paddy, applied for a judicial review of NAMA’s dealings with Paddy’s loans – and the loan would seem to meet the associated loan criteria in the eligible assets regulation, then the presumption would be that it was NAMA-bound. Paddy and his companies were supposed to have been in the NAMA Top 10 developers in tranche 1, the transfer of which was completed at the start of May 2010. NAMA has stated that they have put on hold the transfer of any of Paddy’s loans to NAMA pending the outcome of Paddy’s judicial review proceedings – apparently the Cosgrave Property Group has taken Paddy’s Top 10 slot.  What is the financial effect of NAMA losing what appears to have been a good loan on the premises on Old Bond Street? This entry examines the sums.

Now at the start, I should say that the precise calculation of what NAMA is paying for loans is still not clear but the following draws from the Long term Economic Value Regulation, the EU Decision granting approval for NAMA and NAMA’s first tranche details. In summary NAMA values the loan by reference to the underlying security and the performance of the loan as at 30th November, 2009 (the Current Market Value – CMV). NAMA then values the loan on the basis of an improvement in its value by reference to long term values because the assumption was that in November 2009 the market was too distressed (the Long Term Economic Value – LEV). NAMA charges the banks a sum for costs (5% for enforcement and 0.25% for due diligence) and deducts from the LEV a premium for operating the NAMA scheme and bailing the banks out (1.7% above the Irish Govt bond yield as at 21st December 2009). By reference to tranche 1, the CMV was €7.45bn,the LEV was €8.27bn and the consideration paid by NAMA was €7.69bn (represents 7% deducted from the LEV – it is assumed that the 5.25% for due diligence and enforcement is charged separately to the banks).

So how might this have worked in respect of 11-12 Old Bond Street that Paddy just sold for £18.2m? Impossible to know without making assumptions. So let’s assume that the loan is a fully performing loan and will be repaid in full according to its loan agreement. Let’s assume that loan amount to have been £13.5m which would have represented a loan-to-value at sale of about 75%, not uncommon. NAMA would have valued the CMV at €13.5m, the LEV of the asset is probably higher but LEVs won’t be higher than the value of the loan (section 76(2)(c) NAMA Act) so again the LEV would have been €13.5m.

So NAMA would have charged the banks 5.25% for due diligence and enforcement (a total of €0.7m on a €13.5m loan and given that these loans are good according to Paddy the betting would be that the enforcement charge – €0.68m – would be pure profit to NAMA). NAMA would have deducted from the LEV of the loan its premium and on the assumption that these loans would be redeemed within 3 years then applying the 3-year discount rate (4.54%) would have result in a deduction of €0.61m from the loan. So NAMA would have paid €12.89m for a €13.5m loan and would have received €0.7m from the banks for due diligence and enforcement (most of which would have been profit). So if the loan was good and was going to be repaid in full NAMA would have made a profit of €1.3m on the loan at acquisition. And of course that’s only part of the story. If the loan is performing and pays interest at ECB + 2-3% then NAMA will make a nice profit on managing the loan because NAMA is paying less interest on its bonds and subordinated debt.  And it gets even better, NAMA needs cashflow so unless these are roll-up loans then NAMA would be getting some nice cashflow to offset its expenses and interest payments and not need bother the taxpayer for more handouts. But alas, in the words of the Von Trapp children we can wave “Goodbye, farewell, Auf Wiedersehn, goodnight” to this profit and positive cashflow because Paddy has sold the asset and presumably redeemed the loan. The loan should have transferred to NAMA in the middle of April if it was with Bank of Ireland.

Of course this was just a sub-€20m loan. What about NAMA losing the rest of Paddy’s loans? Anglo alone is reported to have €800m outstanding. What about BoI, AIB, INBS and EBS? Let’s guess that it’s €1bn in total. Then the initial cost to NAMA of not getting these loans would be over €100m (€50m in foregone enforcement fee profit and another €50m on the NAMA discount rate). Ouch!

So the big question – why did NAMA make the decision not to take Paddy’s loans pending the outcome of the judicial review which is likely to take at least another two months (and possibly a few years if Paddy loses and appeals the decision)? Has the Irish taxpayer just lost €100m on NAMA’s decision?

Remember for the background to the Paddy McKillen judicial review and all the latest news on the application, there is a dedicated tab here.

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