NAMA has just confirmed that it has completed the transfer of the second tranche of loans and that the haircut applied to Anglo’s component of the tranche (€6.75bn) was 61.93%. Here is the final overview of tranche 2.
The information released today regarding the second tranche tells us that the Long Term Economic Values is 9.78% above the Current Market Value or of loans, down from 11% in the first tranche and telling us that NAMA needs a marginally smaller recovery in the property market than implied by tranche 1 to break-even on loans on which it needs foreclose. Remember NAMA is due to deliver the second Quarterly Report at the end of September 2010 which might contain further information. The Finance and Public Service Committee has committed to getting the NAMA CEO to attend a hearing soon after the Committee returns from the summer recess at the start of September, a few weeks before the Oireachtas returns. Also Anglo are due to make a statement by 31st August 2010 on its first half year performance (though if AIB’s recent half year report is anything to go, don’t bank on Anglo disclosing very much with respect to the either the remaining tranches of NAMA loans or indeed the residual NAMA loans – in its half year report two weeks ago AIB was projecting an 18% haircut on its remaining tranches despite running up 42% and 48% haircuts in tranches 1 and 2 respectively).
So what does tranche 2 tell us about NAMA? Very little with respect to the finances of NAMA – it has been said that INBS’s large 72% haircut in the second tranche was a result of taking hits on development land in Ireland and that future tranches would perform better, particularly those located in the UK. As regards Anglo, Mike Aynsley said in the Independent on Sunday last that “it [the haircut] depends on the mix of, and the number and the volume of, loans that are associated with the land”. So despite the haircuts in tranche 2 being higher than in tranche 1, you can’t necessarily project that on future tranches – the haircuts might be higher or lower. Though that won’t stop some commentators broadcasting their own jeremiads on the NAMA banks capitalization needs. NAMA is still predicting that it will transfer €81bn of loans though it’s not clear if this accounts for AIB’s sale of its UK operations or Anglo’s recent agreement to possibly withhold €2-4bn of US and UK loans. Page 13 of the detail of the Tranche 1 &2 transfers tells us that tranche 2 had more UK loans than tranche 1. That is worrying because the UK has experienced a modest recovery in residential and commercial prices since last November 30th, 2009 – NAMA’s Valuation Date. NAMA has now taken over loans on 48 hotels.
One thing tranche 2 does tell us is that NAMA is falling behind schedule. At the start of April 2010, the Irish Times who were displaying familiarity with NAMA at the time, were saying the second tranche should have transferred by “the end of May or early June”. At the Oireachtas hearing in April 2010 the NAMA CEO said the tranche 2 transfer would be complete in the “second quarter”. Why the delay? NAMA is not saying but it is a fact that on 19th July, 2010 NAMA confirmed it had completed tranche 2 for the other four banks and then went on to say that ““due to the amount of paperwork involved in the process”” there were delays with Anglo. So what about the remaining tranches – 13 in all if you take what was said at the NAMA Oireachtas hearing in April 2010. NAMA has been given until the end of February 2011 by the EU to complete the transfers but ultimately that is an artificial deadline and may be extended. However it should be remembered that the principle underpinning NAMA is that it cleans the banks of a class of loans, many of which are toxic, so that there can be clarity as regards the finances of the banks, and that the banks can consequently attract market capital and can return to lending to “viable businesses and households”. Delays at NAMA delay the achievement of that objective.
NAMA Wine Lake 
Loan assumption delays are not the only delays that will affect NAMA’s returns. NAMA has said it will not engage in the speculative hoarding of assets, but it is doing exactly that. There have been NO sales to date of any of NAMA’s loan assets.
The International Monetary Fund has advised that “moving ahead with early sales is important”.
The IMF said delays proved costly when a similar bad bank system was introduced in the US.
Apparently NAMA doesn’t understand that freezing the market only leads to further reduction in values as the stagnation continues. That reduction in values means that NAMA will collect less for its assets when it eventually does try to sell them.
The sooner they rebase the values and engage with the market – the better.
Given that NAMA has valued the loans by reference to asset values and long term economic values at 30th November, 2009 and has valued the LEVs at an average of 10% above the current market values at that date and given that property in Ireland has dropped 10% since that date then if NAMA were to sell today they would be making a substantial loss, around 25% of the LEVs of the loans. That is one of NAMA’s faults, it is not acquiring loans at the bottom and indeed there is no sign of residential or commercial capital values stabilising or rising so that problem is only going to be exacerbated in the short term.
NAMA say that they should be starting to make decisions on business plans from next month and that may well herald the start of sales.
Does this new information gives us any more clarity on the total recapitalization that the banks will ultimately need?
It feels like the CB/FR estimates could have been a little on the light side
I don’t think anything concrete can be taken from the tranche 2 information as regards consequences for the announced recapitalisations. Future tranches may have better or worse quality loans – with INBS for example there has been a suggestion that future tranches will have more of a UK element which will have a lower haircut.
The Central Bank governor’s estimate is for a net cost of €22-25bn for Anglo and €4bn for what is “mainly a small building society”. Notably Peter Mathews and Constantin Gurdgiev say that the Anglo losses will be greater than those predicted by the CB Governor. Who is right? I don’t know – I would have hoped that at this stage Anglo could reasonably accurately predict its losses on the NAMA portfolio but the history so far is that losses have been underestimated at every stage by Anglo and official sources. Take a look at an entry here last week which examines the differences between the CB Governor, Constantin Gurdgiev and Peter Mathews.
https://namawinelake.wordpress.com/2010/08/21/the-zizek-trilemma-and-anglo%e2%80%99s-nama-loans/
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