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Archive for August 25th, 2010

With many people on this side of the border scratching their heads today at S&P’s latest downgrade in Ireland’s credit rating partly attributable to NAMA, Northern Irish Minister of Finance and Personnel, Sammy Wilson, has been meeting with NAMA Chairman, Frank Daly and NAMA non-executive Board member, Peter Stewart about NAMA’s dealings with Northern Irish loans and declares himself happy with how NAMA is progressing. Mr Wilson is reported as saying that “without NAMA we might have had a catastrophe”.

NAMA is reported to have transferred loans with a face value of €360m relating to assets in Northern Ireland in its second tranche, which was completed last weekend. The identities of the borrowers and the assets securing the loans have not been disclosed by NAMA. In all, NAMA is expected to take over the loans of 150 borrowers in Northern Ireland with a nominal value of €5bn (out of a total NAMA portfolio of €81bn at face values).

According to the BBC, Mr Wilson said after the meeting “the meeting today I emphasized the strategic importance of Nama’s work for our economy and Nama representatives assured me again that there will be no ‘firesale’ of assets and that these will be carefully managed over the medium term”

Although the meeting today “was the first of what will be regular meetings following the establishment of the Northern Ireland Advisory Committee [chaired by Peter Stewart]”, Sammy Wilson was present at the Northern Ireland Chamber of Commerce meeting with NAMA in May 2010, in which NAMA sought to assure the local community that there would be neither firesales nor hoarding. “It will be in the interest of all of us that the underlying assets be disposed of in a phased and orderly manner and, where necessary, we will take whatever steps we consider necessary, and are within our power, to facilitate the return of an efficient market to the whole of this island. We at NAMA have no interest in either flooding any sector of the market with property assets or in hoarding assets, which would be equally damaging”

NAMA will need to be careful not to end up constrained by its placating words. It is noteworthy that Mr Wilson gave an interview to the Independent last Saturday in which Mr Wilson heaped praise on Minister for Finance, Brian Lenihan and the entire NAMA project – a subtext to the article was that Mr Wilson is on good terms with Mr Lenihan and regardless of the labyrinthine structure of NAMA, for all intents and purposes Mr Lenihan is the boss at NAMA. The principal objective of NAMA is to make a profit for the Irish taxpayer – that is enshrined in the NAMA Act. NAMA will start disposing of some assets later this year and criteria for disposal will be driven by economic rather than regional political considerations. If NAMA has bought loans at a heavy discount it may be able to offload those loans/underlying assets at what might be considered a firesale price but which generates a profit (and possibly more importantly for NAMA at present cashflow). NAMA has a finite €5bn development pot (which might be augmented by third party investment) and it seems likely that NAMA will have to prioritise how it spends that money against competing demands that are likely to exceed the sum available. Again those decisions should be on purely economic grounds. If Mr Wilson was a politician in the Oireachtas it would be illegal for him to lobby NAMA. Mr Wilson’s comments and language today could have the effect of seeking to commit NAMA to courses of action that may not maximize Irish taxpayer returns, and NAMA should be careful to deal with any such interpretations.

UPDATE: 26th August, 2010. The Irish Times reports on yesterday’s meeting and it seems clear that there will be extensive co-ordination between NAMA (through its Northern Ireland Committee) and the Executive (that is, the government) in Northern Ireland. The degree of co-ordination suggested would possibly be illegal in the State where lobbying NAMA by politicians is illegal and can carry a prison sentence. So why is NAMA allowing lobbying by politicians in one jurisdiction but outlawing it at home, creating an uneven playing field?

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Whilst the headlines today will focus on what the Independent calls a” hammer blow” to the State’s financial standing, buried in the detail of the Standard and Poors (S&P) press release (available here) is negative comment on NAMA. The downgrading of NAMA bonds in line with Irish sovereign debt is to be expected but S&P’s decision to classify NAMA’s bonds as State debt carries a worrying implication.

Remember that the decision by Eurostat in September, 2009 to classify NAMA’s debt (its bonds and subordinated debt consideration for loans bought from the five NAMA financial institutions) as non-government debt was “preliminary” (see letter here). There were a number of reasons Eurostat decided to classify the NAMA debt set-up as off-government-balance -sheet but the two main ones were that NAMA would make a profit (and that the possibility of the government being called upon to guarantee the debt without a NAMA profit was consideredunrealistic) and that NAMA was independent of government. The second condition was achieved through the shady creation of the NAMA SPV with independent investors owning 51% of the SPV – the reason the SPV is shady is that although we know the nominal identities of the investors (pension funds etc) we do not know what in money-laundering parlance would be called the Ultimate Beneficial Owners of the investment. Also the government retains full control over the SPV despite only owning 49% of the share capital. What about the first condition, the profitability of NAMA? Eurostat were assured that the assumptions underpinning NAMA’s finances were prudent and remember this was at a time when NAMA was projecting a €4.8bn Net Present Value over its 10 year life span. Of course more recently NAMA has produced another business plan whose base plan is to make a €1bn Net Present Value (though two other scenarios with NPVs of minus €0.8bn and €3.8bn are also shown).

S&P’s decision to classify 100% of NAMA’s debt as government debt reflects a belief that the government is exposed to losses of 100% of that debt (estimated by NAMA and S&P at €40bn). To suggest that NAMA’s losses may be in the order of €40bn goes beyond what even the most pessimistic of economists has been predicting but the S&P assessment would seem to doubt the NAMA business plan projection of a €1bn NPV.

It should be said that an early reaction by Ireland’s respected National Treasury Management Agency to the S&P release has been to characterise its treatment of NAMA debt as “flawed”. Perhaps Eurostat will have something to say about their original decision, which was preliminary after all. This topic was explored at some length in a recent entry on here.

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