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.
NAMA Wine Lake 
For once S&P seems to be calling it correctly. NAMA are already down 20% plus and history has shown that similar vehicles have lost in the region of 50%. The closest example being Securum, the Swedish asset management company, on which Peter Bacon based his proposal for NAMA.
There are many pros and cons against using a specialist unit such as NAMA as opposed to exploiting existing run-off expertise within the banks – but that is for another day, although Peter Mathews has expressed his opinions very forcibly on this and in my opinion has come down on the right side.
As per the IMF, NAMA are not helping their outcome by delaying engaging with the market at the re-based price levels.