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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