NAMA Chairman Frank Daly speaks to the BBC (briefly!)

Yesterday the BBC’s Business Editor Robert Peston (the laid-back voice of the British recession) was in town where he seems to have found time for a few of the key players in the financial architecture as we confront a pretty difficult week on bond markets and with a final Anglo estimate due not to mention Tranche 3 of NAMA’s loans.

He had a 2 ½ minute piece with the NAMA Chairman Frank Daly in what looks like the hallway on the upper floors of Treasury Buildings. There’s nothing of note in the interview, it’s aim seems to have been to project a broadly-in-line business-as-usual position to international media. A few items

(1) Frank says that the transfer of the NAMA tranches should be complete by the end of 2010.

(2) Frank blames the bankers and developers “equally” for the crisis

(3) He still predicts NAMA will take on €80bn of loans

Now Robert says in his written piece that he “asked its chairman Frank Daly if its spending mandate of 80 billion Euros will be enough or will it be forced to buy even more bad loans”. That’s not quite how the interview went where it was more about asking Frank for his prediction of the total value of loans to be acquired. A recurring theme on here is that NAMA banks will have some €70bn of commercial property loans (ie non-residential mortgage lending on property) after NAMA has completed its transfers. Although these loans may not be as toxic as “land and development” loans they are still pretty poisonous and there is a lingering question whether these residual loans will be a drag on banks’ ability to attract funding once NAMA has completed its process. Should NAMA’s scope be expanded? It’s a question that has been asked on here before. The government seems more concerned at getting NAMA to complete its original remit and might seen any expansion of scope as an “unnecessary complication”.

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Is NAMA beginning to improve lending conditions in the State?

Sometimes I despair at the public sector – compare the websites of two State bodies, the recently formed Credit Review Office and NAMA. News this morning from the Independent that the former body has received 20 applications in the past 6 months from business borrowers denied loans at the NAMA banks – 20 applications! NAMA of course just manages €40bn-odd of loans and assets, employs directly and indirectly 500 people and an army of third party firms and will run up €200m of operating expenditure this year. The former organisation’s target audience is small-scale businesses, the latter’s includes some of the world’s biggest property funds. No wonder some developers don’t want to be associated with the NAMA brand!

Putting aside the fact that NAMA’s website looks like it was designed and coded by senior infants, there appears to be one glint of brightness with the news that the Credit Review Office (CRO) has received only 20 applications since it was set up in March 2010 from small and medium sized businesses, including sole traders and farmers, who have been denied loans at NAMA Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS). On the face of it, this would seem to indicate that small and medium sized enterprises (SMEs) are finding it easier to access credit.

What reinforces the feeling that credit conditions for SMEs are improving was the report yesterday from the Irish Small and Medium Enterprises Association Limited (ISME) that confirms that credit is more forthcoming (though it must be said that the improvement is marginal). ISME which claims to have 8,500 members polls members quarterly and in its latest report published yesterday, claims that

(1) 42% of companies who applied for funding in the last three months were refused credit by their banks, compared to 55% in the previous quarter (though compared with 42% in October 2009.

(2) 25% of respondents had requests/demands for a change in their banking facilities, down from a consistent 32% in the three previous quarters.

(3) 83% of firms outlined that the banks are making it more difficult for SMEs to access finance which represents a consistent 1-2% increase each quarter since October 2009

The CRO was set up pursuant to section 210 of the NAMA Act. Whilst we are in the middle of the NAMA process, it is worth stepping back to see the woods from the trees. NAMA exists to cleanse banks of a class of loans which have particularly suffered with the Irish property crash and to replace those loans with cash-exchangeable NAMA bonds which could then be used to lend to viable homes and businesses in the State. That is the NAMA principle. Subsequent to the passing of the Act, the government set up the CRO (there is a very helpful explanation of the role of the CRO from the Department of Finance here). In addition to the commitments encapsulated in the NAMA Act the government has made a commitment to make €3bn apiece available through Bank of Ireland and AIB to SMEs each year in both 2010 and 2011.

Now it should be said that lending to business generally has shown a marked decline – the latest from the Central Bank which covers the period to the end of May 2010 shows a worrying contraction in lending to non-financial businesses with overall outstanding lending to non-financial corporations down nearly 20% in just five months from January 2010 to May 2010.

So it would seem that businesses overall are accessing less credit than previously but that applications for credit for viable businesses is improving. The disharmony between the two is presumably the result of the economy continuing to contract. So possibly a victory for NAMA in the sense that credit is finally coming through for viable businesses but a Pyrrhic victory in the sense that there are fewer viable businesses out there seeking credit.

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NAMA Tranche 3 – five things to look out for.

With NAMA saying as late as last week that it expected to effect the transfer of Tranche 3 of the loans from the five NAMA Participating Institutions (the PIs – AIB, Anglo, BoI, EBS and INBS) by the end of September, 2010 anticipation is growing to see what surprises this Tranche will reveal. Here are five things to look out for:

(1) The par value of the loans being transferred. NAMA has been consistently saying that the par value will be €12bn with €4bn from Anglo, €3bn apiece from AIB and INBS and €2bn from BoI and practically nothing from EBS. There is informed speculation that difficulties with the paperwork (again!) and examining security (again!) may reduce the total. With NAMA some two months behind its own imposed schedule with respect to Tranche 2, will we see Tranche 3 either reduced in value or delayed?

(2) The haircuts. Or the discounts applied by NAMA to the loans bought from the PIs. INBS had a 72.4% haircut in Tranche 2 – ie INBS received 28c in the euro on its loans transferred in that tranche. It was said at the time that future INBS tranches would have a larger UK element where property prices have not suffered to the same extent as Ireland – what will the INBS haircut be on Tranche 3 on what is almost half of the entire INBS NAMA-bound portfolio.

Anglo, which is possibly keeping our Central Bank governor awake at nights at the moment (he is required to add his authority to the “final” estimate of Anglo’s costs due out in the next few days) – Anglo will be watched closely to see how the haircuts applied thus far might predict the final Anglo costs.

In general Tranche 3 is being seen as interesting because it will include about 50 borrowers and the developments acquired might be more representative of the smaller-scale developers who will be absorbed in the remaining tranches and to that extent the haircut on Tranche 3 might be seen as more representative than Tranches 1 and 2 that dealt with 50 of the larger-scale developers which included multi €bn exposures.

Interestingly yesterday both the BBC and RTE reported that a Northern Ireland developer McDaid Developments (Ireland) Limited which was reportedly placed in administration in June 2010 with GBP £42m of BoI loans may cost BoI GBP £36m in losses (both the BBC and RTE seem to say that the company’s assets will realise GBP £8m and less than GBP £1m is owed to unsecured creditors which would presumably mean that BoI’s losses were less than GBP £35m?). A GBP £36m loss on a GBP £42m loan would equate to an 85% haircut. And that was with BoI whose lending practices were reportedly sounder than Anglo’s. BoI has had a 36% haircut in Tranches 1 and 2. Will these smaller-scale developers increase the haircuts? We’ll see.

(3) The Long Term Economic Value (LEV) compared with the Current Market Value (CMV) of the loans acquired. A controversial aspect of the NAMA scheme is that the PIs are being paid for their loans not at the values they are worth today (or more correctly were worth on 30^th November, 2009 which is NAMA’s Valuation Date) but what they will be worth over a longer period of time. When NAMA published its draft Business Plan in October 2009, the estimate was that the LEV would be 15% higher than the CMV but the experience of Tranches 1 and 2 was that it was 11% and 9% respectively with an average of 10%. The higher the LEV compared with the CMV, the more risk NAMA is taking that prices will recover.

(4) The split of loans between the various property categories. It is one of NAMA’s paradoxes that it is primarily supposed to be taking over “land and development” loans and yet in tranches 1 and 2 these loans accounted for less than 30% of the total – the reason: NAMA is taking over loans associated with land and development so it ends up with commercial property, investments, hotels etc. Speaking of hotels, the Irish Hotel Federation will be looking out to see how many more hotels have entered the NAMA sphere of control – in tranches 1 and 2, NAMA acquired 48 hotels secured on loans, 35 in the State and 13 elsewhere. NAMA may well end up with 100 of the 900-odd hotels in the State.

(5) The future – NAMA might provide some information on the future tranches.

NAMA has an EU deadline of February 2011 to transfer all the loans, though as has been suggested here several times ultimately moving that deadline will be no big deal – the more important point is that NAMA’s objective is to replace a class of assets that has high overall “toxicity” in the PIs with cash-exchangeable NAMA bonds and that banks can use these to restore credit conditions in the economy. That is the real risk to the State from delays in NAMA’s acquisition stage.

Will NAMA be reducing the amount of paperwork required so that it can complete due diligence of loans acquired. Famously NAMA requires 1000 items of data for each loan and banks are not happy with the burden that places on them. Reducing the data requirements might expedite transfers but will it make valuations riskier and will the EU accept the valuations?

What is happening with NAMA-bound loans at the PIs that are being disposed of? AIB in the UK is disposing of €3.2bn of loans, Anglo €1bn in the UK and US and BoI has reduced its estimate of NAMA-bound loans from €16bn to €12.2bn. Why is NAMA allowing these loans to slip away and will it provide an update?

Hopefully we’ll have answers to the above in the next couple of days.

UPDATE: 30th September, 2010. With this morning’s announcements from the Minister for Finance Brian Lenihan and the Central Bank Governor and Financial Regulator, it remains unclear if Tranche 3 has been abandoned. NAMA will hopefull issue a statement later today to confirm the tranche arrangements in light of the earlier announcements.

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