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Archive for October 25th, 2010

Really? This is an extract from the NAMA Developer Business Plan Data Pack with an example inserted by me.

The statement from NAMA comes today after reports over the weekend that NAMA was effectively paying developers salaries up to €200,000 per annum. RTE put this to NAMA and the reply seems puzzling when you consider the process by which NAMA is agreeing developer business plans.

To review : once NAMA take over a developer’s loans from the NAMA PI (Participating Institution – AIB, Anglo, BoI, EBS and INBS) they require the developer to produce a business plan normally within 30 days. And not just any old business plan, NAMA provides developers with a very detailed template that the developers must complete.

And lo and behold! That template makes very clear the reward that the developer plans to receive. Of course NAMA may seek modifications to the business plan but it seems disingenuous for NAMA to claim it doesn’t specify a salary when it demands developers to specify a salary and it is part of the business plan that becomes subject to review. Even if what NAMA claims is true – that they only specify an allowance for the company and it is up to the owners to divvy that allowance between various salaries and overheads – then that too is disingenuous as NAMA should know the range of rewards on offer to the business owner.

This is an area which NAMA needs navigate with care. Remember the political rhetoric about NAMA not being a bailout for developers? NAMA is being faced with cold reality where it needs partners to complete projects and the decision might be between paying a third party developer unconnected with NAMA €250,000 per annum to finish the project or pay the NAMA developer €200,000. And for all the criticism and anger, the reality is that a developer that knows their project inside-out may well deliver a better result for NAMA. And in that case is NAMA to cut off its nose to spite its face and engage the clean sleeve third party at a higher cost (and a higher risk of project failure)? Common sense would suggest not but NAMA needs be sympathetic to a public pumped up on rhetoric and which is paying for actions in which these €200,000-a-year developers had more than a small hand. But for NAMA to say it doesn’t specify salaries is, I think, misleading – the whole process of agreeing a business plan will surely make NAMA aware in very great detail the reward on offer to the developer. Or if it doesn’t is NAMA adequately reviewing business plans?

UPDATE: 26th October, 2010. This issue is not being handled well by either NAMA or the government.  In what seems like a very poorly worded position on RTE radio yesterday reported in the Irish Times today, the Minister for Justice and Law Reform Dermot Ahern says “Ultimately, there will be excessive pain for these people one way or the other” (and many people might feel that losing a business which had limited liability and being offered employment by NAMA at rates which might yield €200k per annum is not “excessive” pain – indeed it is probably very “manageable”) and developers  will “potentially lose their family homes and all the assets that they have” (no they won’t if they’re married and seek protection under the Family Home Protection Act – the Minister knows this perfectly well but he is overcompensating for a public that is very uneasy about multi €100k rewards for developers). NAMA itself is saying that it is imposing 50-75% reductions on developer overheads but that it is not taking control of developers’ rewards which I think many people will find disingenuous.

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It left a bitter taste in the mouth to learn last week that Google was effectively reducing its tax liability in Ireland (which with a tax rate of 12.5% is amongst the most competitive countries in the EU) by routing some of its income through the Netherlands and Bermuda. Google is reckoned to have legally avoided €2.6bn in taxes here in the last three years and Google’s used of these avoidance methods is not believed to be unique. Such revelations bolster the public appetite for a change to the corporation tax rate regardless of any threatened withdrawal of income – after all both Google and the State know the rules of the game, they route their income through Ireland and we provide a stable reputable environment where they will pay one of the lowest tax rates in the world. What Google is doing just doesn’t seem like cricket. However seeing David Clerkin’s piece in the Sunday Business Post on an apparent tax loophole involving the difference between interest payable and interest actually paid, I am at a loss as to why Google pays any tax here at all. The loophole allows companies to reduce their taxable income by deducting interest payable, regardless of whether or not any money actually changes hands in interest payments. Surely Google could rustle up an overseas bank in a tax free jurisdiction that could charge Google interest on some manufactured loan and Google could use that liability to reduce its tax bill – no money would have to change hands after all.

Although David Clerkin in the Sunday Business Post positions his article in the context of NAMA-bound developers, the point that he makes, that businesses are allowed deduct interest from their turnover before they calculate tax – and here’s the important bit, regardless of whether or not the interest is in fact paid – means that the tax coffers are being deprived right across the economy through businesses claiming interest expenses that may never in fact be paid. Consider the following two chaps, Developer A and Developer B (and by the way it could just as easily be Farmer A and B or Dentist A and B or the presenter of Frontline). Both have €200m loans which they used to buy office blocks. Both get net rent of €10m per annum. And here’s where the differences start – Developer A is charged and then pays €10m of interest which wipes out any profit from his revenue and also leaves him with no cash. Developer A doesn’t pay any tax because he has just broken even but it will be a cold Christmas at his house this year. Developer B is also charged €10m of interest by his bank. But Developer B gives the bank a story to stall them, Because our tax laws allow accrued interest to be charged against income, Developer B also pays no tax claiming that he too has just broken even. However Developer B still has the €10m in cash which will end up being used to fund all sorts of entertainment this Christmas. The bank on the other hand might never see the interest and because we are likely to be the owners of the bank, we end up losing for the second time (the first being deprived of tax income).

The Tribune contacted the Department of Finance who said, in a general sense, that the issue may be looked at in the run-up to the Budget. It would be interesting to know across the economy the amount of tax that has been foregone through the use of this loophole. Sadly published accounts from the banks don’t make it easy to see what interest has been charged and what interest has in fact been received.

It would appear to have been a legal loophole that cost the taxpayer hundreds of millions in respect of the Irish Glass Bottle site where the canny Paul Coulson transformed a lease worth €20m in 2002 into €274m four years later because of a government failure to amend a law which allowed leaseholders to buy the freehold of a property being leased for a fraction of its true value. It should not be a major exercise to estimate the cost of this present tax loophole but remember, although NAMA-bound developers might to some extent benefit, the probability is that businesses throughout the economy are availing themselves of this loophole.

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The next few days should see a flood of information emanating from NAMA. Anglo’s final tranche of €19bn of loans at par value is due to be transferred. NAMA is due to pay back an advance it received in May 2010 of €250m plus interest to the Exchequer (let’s hope the interest rate is better than the rate we have to date received on our €3.5bn investment in AIB, that 8% dividend paid in May by way of ordinary shares was worth €78.5m on Friday last, representing just 2.23% of the €3.5bn investment in preference shares). NAMA’s report and accounts for the second quarter of 2010 are also due – in fact they are very much overdue as section 55 of the NAMA Act requires NAMA to have produced the report and accounts covering the period up to 30th June, 2010 by the end of September 2010 and the Minister for Finance Brian Lenihan should have laid these accounts before the Oireachtas (and I would have expected an update on the nama.ie website). NAMA might also be close to concluding sales of loans and property (property sales of course will be by the developers themselves under the auspices of NAMA). NAMA has also been trying to flog €2.5bn of euro commercial debt to finance its short-term operations, perhaps we might get an update on that as there seems to be a distinct lack of appetite for Irish debt from anyone other than the ECB. So brace yourself for a flood of information. And don’t be surprised if the flood coincides with unNAMA-related details of overall budgetary parameters that will inform the detailed budget in December 2010. It is quite amusing in a wry sort of way that major news on the operation of one of the world’s biggest property funds is likely to be sidelined by other economic news for what is a relatively small economy.

The last flood of information from NAMA was at the start of July 2010 when it produced its first report and accounts for the quarter ending 31st March 2010 (again, section 55 of the NAMA Act prescribes its date of preparation). We also received the same day the new NAMA Business Plan. And for good measure we received the five NAMA Codes of Practice. The recess schedule in the Dail meant that the publications were subjected to scant debate. Mind you, I notice there has been no great urgency for the Oireachtas Joint Committee on Finance and the Public Sector to get NAMA CEO Brendan McDonagh back for a grilling on that Business Plan. There was no reason why the Business Plan and Codes of Practice mightn’t have had staggered publication dates but like proverbial buses NAMA decided they should all arrive at once.

However just because NAMA (and the Department of Finance whom I’m assuming is responsible for the delays in publishing the NAMA quarterly report and accounts) chooses to bunch together its information releases doesn’t mean that all the topics won’t be thoroughly examined on here. Now is that a cloud in the sky I see hoving into view?

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It came as a surprise to many that in May 2010, NAMA needed a €250m “working capital advance” repayable in October 2010. A surprise because NAMA already had €100m of capital (€51m from the “independent” private sector and €49m from the State) and also NAMA had taken over €16bn of loans and at least a third were supposed to be performing. Anyway, a €250m advance was provided by the Minister for Finance and was revealed in the Dail a day before it was disclosed in the May 2010 Exchequer statement. Today NAMA has less than a week to repay the €250m. This entry examines the likelihood of that happening, the probability of another bail-out (or “working capital buffer advance” in the language of Upper Merrion Street). The entry again asks about NAMA’s quarterly report and accounts which was due by the end of September 2010 (relating to the second quarter to 30th June 2010) – why is there a delay and is the delay due to the consideration of any excision from the report?

I believe NAMA is facing a liquidity crisis – remember that term from the banking crisis? It’s supposed to refer to a situation where NAMA is due cash (either in interest or capital or from its euro paper programme) but can’t actually lay its hands on the readies, and meanwhile there are developers pleading for working capital and indeed salaries around the €200k per annum mark if you believe some of yesterday’s newspaper reporting. The reasons I believe NAMA is facing a liquidity crisis are as follows:

(1) Although the NAMA Act allows NAMA to raise up to €5bn in lending to assist with working capital needs and in particular to help with finishing out projects, NAMA only initiated the programme to raise some of this money at the start of September 2010. At the time NAMA confirmed that it intended issuing €2.5bn of short-term debt and that the debt would be State-guaranteed.  Four weeks later the government announced its withdrawal from the bond markets until 2011 citing ridiculously high interest rates. Where does that leave NAMA with its State-guaranteed paper? There has not been any update to the programme by NAMA since the start of September 2010. Has it been abandoned?

(2) NAMA unexpectedly received €250m as a “working capital buffer advance” in May 2010. This advance was to be recoupable in October 2010. The advance was not signposted at all in the Dail and was only revealed at the start of June 2010 when Deputy Richard Bruton asked a question about NAMA’s funding (as it happened the next day the May 2010 Exchequer statement revealed the existence of the advance).

(3) Although we don’t yet have the second quarter NAMA report and accounts we do know that the proportion of performing loans has reduced from 40% in the draft Business Plan to 33% in April 2010 to 25% in June 2010. Has the situation since improved? What exactly is a performing loan and does it denote loans which might have roll-up interest provisions? If we had the Q2 accounts we might be able to surmise the cash flow from “performing loans”. Alas we don’t. It was supposed to have been delivered by NAMA to the Department of Finance by 30th September, 2010. Remember it relates to the second quarter ending 30th June, 2010 so it’s not as if NAMA had to rush to produce the information – it had 90 days. Has NAMA produced the report and accounts and if so, why is the Department of Finance sitting on it? We have learned to be very cautious when we get broadbrush statements from the DoF in recent times – “turning the corner”, “broadly in line with expectations”, the god of all gods “international confidence”. I wouldn’t be surprised if the DoF were to say they were too busy with dealing with the budget deficit, the consequences of the banking bailout announcements in September or indeed contingency planning for IMF/EU intervention. But still, are they unable to release a report and accounts which after all should have been produced by professionals in NAMA.

(4) The Independent reports that some six of the first ten developer business plans have been approved by NAMA and that each makes a call on NAMA for additional funding. The Independent also reported some weeks ago that NAMA had spent €40m in the second quarter on “working capital advances”. The Top 10 developers reportedly asked for €1.5bn in advance funding.

(5) NAMA needed to pay the first tranche of interest on NAMA bonds in September 2010. Back of the envelope calculations on here suggest the payment will have been close to €30m.

(6) Three weeks ago in the Dail, Minister for Finance Brian Lenihan said that NAMA would spend €215m on professional fees in 2011. He didn’t give numbers for 2010. But it would not be improbable that NAMA has spent €100m+ in quarters two and three.

(7) Although Brendan McDonagh said that NAMA was at an advanced stage with disposing of €500m of property in September, 2010 there has not been any official announcement of any sale. There was confusion in September 2010 about whether NAMA intended the €500m to relate to the sale of loans or of real property (if the latter then the sale would have been by developers under the auspices of NAMA as NAMA has not yet foreclosed on any property, with a potential exception of Paddy Shovlin and the Fitzpatrick brothers’ property securing loans from Bank of Ireland). There has been speculation that NAMA is close to overseeing the sale of property in London and Ireland. On Friday last the FT reported that a sale of a GBP 11m property in the UK might have been agreed by NAMA. And one of the NAMA putative Top 30 Tom McFeely and Larry O’Mahony are said to be the owners of the 30 flats in Mulhuddart (with Martin Ferris acting as receiver) which have been on the market for some time and which HT Meagher O’Reilly said last week had been sold for €1.9m. NAMA hasn’t made any announcements and the sale of the Mulhuddart flats may take some time to complete.

Add these together and it seems probable that NAMA will be unable not only to make the €250m repayment to the Exchequer in October 2010 but may require an additional advance. If we had the overdue report and accounts, we might be able to estimate the probability. No Opposition politician has raised the issue of overdue accounts in the Dail. There are other more pressing economic issues of course but the quarterly report and accounts will be one of the few ways in which NAMA makes itself modestly transparent. If NAMA does require another advance and fails to make the repayment of the €250m May 2010 advance, then some might ask whether in addition to a liquidity crisis, NAMA is suffering from a solvency crisis (that is where its debts represented by its NAMA bonds exceed the value of the assets it has taken over). Déjà vu to 2008? I hope not.

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