Okay, the question is slightly tongue-in-cheek. After all, the NAMA principle was to cleanse banks of a class of loan which had been particularly hard hit by the bursting of our property bubble and replace those loans whose values were uncertain though on average far less than their face value with nice clean exchangeable NAMA bonds (State guaranteed and exchangeable at the ECB for cash). That was the idea.
Of course from the off, NAMA was offering 95% of consideration to the five financial institutions in NAMA bonds – the remaining 5% was in subordinated debt which would only be honoured if NAMA made a profit. So even near the beginning there was a question mark hanging over the 5% subordinated debt. Luckily the subordinated debt pays 10-year Irish government bond rates plus 0.75% (currently giving you almost just over 6.6% in total) which might go some way to sweetening the loss of the actual face value of debt itself should NAMA make a loss in the next 9 years.
But what about the NAMA bonds that make up 95% of the consideration for the loans. According to independent banking consultant Peter Mathews, the bonds were only worth 80% of their face value and I am referring here to his response at the Oireachtas Finance and Public Service Committee hearing in July 2010 when he said “If they wish, they can get a loan of approximately 80% of the face value of the bonds from the ECB. An interest rate of 0.5% above the ECB rate has to be paid on such a loan. That is what the banks will have to pay for the loans they will get after they offer the security of the bonds.” That seems to conflict with the ECB’s own position which is that the bonds can be exchanged for cash equivalent for 98.5% of their face value – the link to the ECB is here and thanks to the user eoin on the irisheconomy.ie blog here is an easier to read summary is here. And indeed that is how AIB and BoI have valued the NAMA bonds, applying a 1.5% discount to their face value. However as noted by Simon Carswell in today’s Irish Times, Anglo has applied a 9% discount to the NAMA bonds. This comes from the recent Anglo Interim Report for the six months ending 30 June 2010.
Note 11 (page 43 of the Interim Report) “During the period the Bank transferred loans to NAMA with a gross value of €9,924m (before provisions for impairment of €2,461m), and related derivatives with a fair value on date of disposal of €182m. Of the nominal consideration received, €4,451m, or 95%, comprised Government Guaranteed Floating Rate Notes, with the remaining 5% comprising Callable Perpetual Subordinated Fixed Rate Bonds. The senior floating rate notes are classified as Government debt securities at amortised cost (note 22) at an initial fair value of €4,056m. The subordinated bonds are classified as available-for-sale financial assets (note 20). The initial fair value of the subordinated bonds on acquisition was €121m.” (the face value of the subordinated bonds was €234m).
Note 22 on page 51 states “The Bank has determined the initial fair value of these notes as €4.1bn. As market prices are not currently available for these
securities, in order to determine an initial fair value the Bank has used a valuation technique, based on a discounted cash flow methodology, which references observable market data. The valuation approach adopted takes into consideration the coupon attaching to the notes, the yield on comparable Irish sovereign bonds, the extendible feature of the notes at the option of the issuer and the indicative repayment dates contained in the NAMA business plan. It is possible that an alternative valuation approach could give rise to a range of values that are higher than the current approach. The Bank may reassess the approach adopted when preparing the annual report for the year ended 31 December 2010.”
Overall this seems like a strange approach, not just by reference to it differing to the approach at AIB and BoI but because the ECB does seem to give some certainty as to the values. Discounting the subordinated debt by only 48% on the other hand may be optimistic given the speculation as to NAMA’s lifetime profitability.
NAMA Wine Lake 