It’s enough to make you want to go home and put the duvet over your head. Alan Dukes, Anglo’s chairman since June this year is reported by RTE to have today called for another NAMA to be set up to act as a receptacle for banks’ remaining distressed loans once NAMA has concluded its work. The five NAMA Participating Institutions will still have some €70bn of commercial property lending (including some land and development, eg sub-€20m at AIB,BoI, sub-€5m at Anglo), a significant proportion of which will be impaired. Alan wants these impaired loans transferred to a new NAMA organisation.
It is gobsmackingly incredible that focus is now turning to the non-NAMA loans. It is bewildering that these issues had not been considered in the context of Anglo at the start of September 2010 when the Minister for Finance Brian Lenihan announced the Asset Recovery Bank and Funding Bank split (and by the way, reports this morning indicate that nearly eight weeks after that ministerial announcement, the new Anglo plan (that’s version 3.0 after v1.0 was ridiculed and v2.0 never even made it to a formal decision by the EU) still hasn’t been prepared – according to the Independent this morning “the Government and the bank are currently working on a plan to submit to the EU Commission and Finance Minister Brian Lenihan claims it is likely to get the support of the commission”)
The subject of the PIs’ residual loans has been the subject of several entries on here (examples here and here). Calls to have NAMA absorb these residual loans have been dismissed as being an “unnecessary distraction”.
UPDATE: 29th October, 2010. Simon Carswell in the Irish Times today claims that Alan Dukes confirmed to reporters outside his formal presentation to the Leinster Society of Chartered Accountants Ireland that a plan has in fact been sent to the European Commission – “the bank had sent the European Commission the revised Government plan for the creation of the funding and asset recovery banks out of Anglo, he [Alan Dukes] said” This is at odds with the Independent report yesterday morning (see above) – perhaps the plan was sent sometime yesterday afternoon!It seems to me having read Simon’s article that Alan Dukes is not exactly settled on the Asset Recovery Bank and Funding Bank split and that he is still clinging to some future for Anglo, possibly as a capitalised receptacle of other distressed loans but with some new lending capability. That Alan Dukes is recognising the scale of problems with non-NAMA loans (and I estimate these non-residential mortgage property loans to be €70bn+ and that includes the €6.6bn of €5-20m land and development loans that will not remain with AIB and BoI following the Minister’s decision to increase the threshold for those two banks only) is to be welcomed, although it is bizarre that it is only happening at this late stage. But that there seems to be uncertainty about Anglo’s future shows a lack of planning.
NAMA Wine Lake 
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I told you, two negatives make a positive…problem sovled.
We have no banks left in any sort of a healthy condition. Bank of Ireland looks the least decrepit of them, but it is only an illusion.
The fact is that when NAMA begins to dispose of property in the New Year, we will have no commercial banks available to fund the purchase. The only money that will be available will be from Hedge Funds and Vulture Funds. It’s already waiting on the sidelines or circling overhead like it’s namesake (I understand now why they are known as vulture funds). That money expects (and gets) a return of 15% plus per annum – Our Sovereign Bonds are getting there. :-)
The consequence of the lack of normal bank credit and the reliance on expensive vulture capital will push purchase prices lower, because the only element that can decline to achieve their required level of return is the purchase price itself.
The Economist confirms that we are still in a falling market. Our bankrupt banking system ensures that we will continue in an escalating downward price spiral that will be fueled by the the avariciousness of the Funds, the paucity of banking facilities, and the consequent lack of competition.
Not a good outlook for NAMA’s profit potential.
If the venerable Bank of Ireland – stress-tested and PCARed, is unable to get 3-year funding for less than 5.9% (add issue costs and payment for the State-guarantee and you’re probably looking at 6.5%+) and is only oversubscribed 1.3 times, then what hope is there for NAMA and its €5bn of development funding (€2.5bn was supposed to have been issued already but that programme seems to have been abandoned). With the first 10 developers seeking €1.5bn (and according to the Sunday Tribune €250m might have been authorised) then what choice does NAMA have but to sell, sell, sell (by proxy of course because it hasn’t taken possession of any property yet aside perhaps from Paddy Shovlin’s). I must say that I think there are cracks appearing in the principles upon which NAMA was founded – Alan Dukes’ contribution although bewildering poses a legitimate question about non-NAMA distressed loans, 4 of the 5 NAMA banks are now zombies effectively and BoI isn’t too far behind, NAMA has very limited management and disposal expertise in the context of €70bn of loans, demand for credit is subdued in the business economy and if you believe the ISME and Credit Review Office the credit environment is easing for small businesses, whilst NAMA might put credible values on parts of the banks’ balance sheets the capital value of the NAMA bonds is not sufficient to enable lending because banks are still undercapitalised. Overall goalposts are moving and now might be a good time to take stock of where we are and what we set out to achieve.
I do feel that NAMA can now go one of only 2 ways. One is firesale which is what WSTT is alledging whereby assets are sold at or close to their transfer value (note not original loan balance) which is the most likely scenario under any IMF/EU enforcement. The other is that NAMA becomes a zombie developer with a large unsaleable and undevelopable land bank for fear of selling at too low a price or waiting for the market to come back (sound familiar Anglo and INBS???) I do not believe it will be able to raise anything like €5bn which is not even near what is needed to derive income out of most of the underlying assets. Remember Tranches 1 and 2 had a relatively large element of ‘investment’ properties. When the Land and development loans are added, there will be very little room to manouvere and minimal income produced from the portfolio. I just wonder which is the more likely course of action. Any thoughts?
I think it might be time to step back and review where we are and where we want to be. I have always been neutral on NAMA but it seems that many of the goalposts have moved and I wonder if a different configuration would be significantly better, a configuration that recognised the changed circumstances in (1) NAMA’s apparent inability to raise funds (2) The banks’ which are undercapitalised after the NAMA process (3) The non-NAMA impaired loans (4) NAMA’s skimping on valuation and due diligence with 2/3rds of the loans (5) The EU’s rejection of the Anglo restructuring plan (6) Property still falling in value (7) A weaker than expected economy (8) NAMA’s under-resourcing for disposing/managing loans (9) The withdrawal of non-NAMA banks (10) Uncertainty in supply and population projections
I think it needs a new post by itself.
Alan Dukes is losing the plot – his incoherent ramble this morning on radio porporting that Ireland needed a second bad bank included the erroneous claim that Anglo has €60 billion loan assets on its balance sheet post Nama transfers. The actual figure is closer to €30 billion (Anglo Interim Accounts).
This appears to be totally hamfisted effort to resurrect what has already been rejected – a rejuvenated Anglo. What is worse, Dukes had not done the basic research – not only does he not know his own bank’s numbers, he also said he had no idea what value of loans would be involved in HIS scheme from the other banks!
It is a disgrace that a well remunerated bank chairman does’nt have the first clue as to the size of his bank’s balance sheet – this is another example of the unprofessional slopiness that we appear to readily accept in Ireland.
As a former IFA economist, one wonders what the logic was of putting this man in charge of a bank – he clearly does’nt have a commercial bone in his body.
I never had any faith in Duke’s financial ability ever since he was Minister for Finance and announced in his budget that a reduction in VAT on concrete blocks meant a consequent reduction in house prices. Duh, no – the VAT on the price of a house remains the same.
Anyway, the point I was making was not so much that NAMA would choose to have a firesale, but that the result of our banking collapse and the lack of bank credit would create a situation where there would be no competition for assets and those assets would, of necessity, fall further in value to accommodate the profit requirements of the only players in the marketplace – the vulture funds. In effect this would cause a firesale.
We are seeing the first beginnings of it here – in a different way, but the cause is the same. No liquidity and no bank lending. My friend who works in a major mortgage brokers tells me that currently for every five applications, four are rejected.
http://www.thepropertypin.com/viewtopic.php?f=4&t=33859
Ultimately the distressed loans will turn into physical assets when NAMA has to step in and take ownership. Where are the buyers going to come from?
For example, UK based property groups may see opportunity but from my discussions they are concerned about medium term growth prospects for Ireland, and, with an investment horizon of 5 years, concerned to who they may offload to in a few years (given that NAMA will by then may have a larger portfolio to offload and be competition)
NWL mentioned these two points regarding the ever moving goalposts of NAMA
(6) Property still falling in value (7) A weaker than expected economy.
Are these really things that caught you by surprise? ….
I doubt it.
I know it sounds California fuzzy wuzzy , but in all seriousness, I think I can see from afar that even the coldest most calculating commentators have let hope sway their usually excellent judgment.
You have to be a Nobel economist to talk about emotions in the market and be taken seriously….so humor me.
The time frames, the oversupply, the lack of growth, the unemployment are plain to see. They cannot be ‘wished’ away.
Pretend you are a foreigner and look at Ireland through his eyes. It’s scary. And, amazingly, your numbers come out different.
But NWL misjudging something as basic as 6 and 7 above…I cannot see it…it can only be your emotions.
Go take a cold shower.
Well in fairness SF CA, a few things have changed and you might say they should have been predictable but I don’t think it’s black and white. At the start of this year for example many pundits were saying that residential property would bottom out by Q2 and that it would rise in Q3, Q4. As far as I can see most property is still falling at a considerable rate. Commercial property was producing outstanding yields at the end of 2009 but rents have continued to collapse and I would say we are now some way from the bottom in commercial also.
As regards the economy generally, if you had said in mid-2009 that we would have 10-year bond rates at 6.92% today, that would have been seen as extreme. The global economy has not recovered to any great extent. The bank bailout costs have certainly ballooned from what? €4bn at the start of 2009 to €35-66bntoday ignorining NAMA (the €66bn is Peter Mathews’ estimate and he has been consistently accurate in calling the numbers in this crisis, so you would have to say the €66bn was credible). Non-NAMA banks have high-tailed it out of the State. Could all of this been predicted? Perhaps but it is far worse than I expected. And for the future, I must say at this stage that I would put the probability of IMF/EU intervention/rescue at 25%+.
@GonzoForever. You have a good grasp of the situation “on the ground”.
I am aware of various developers who, in the first instance, made offers to buy back loans from NAMA at prices that would give them (NAMA) a profit. They were rejected.
Subsequently they introduced NAMA directly to the Funds that were supporting the bid. These approaches were also rejected.
It seems that NAMA is more concerned with the political fallout that would overwhelm it if it concluded a deal with anyone either introduced by, or perceived as even remotely connected with the debtor, than actually selling the loan / property.
While this mindset may have limited downside with respect to the “low hanging” fruit making up about 20% of NAMA’s portfolio. What happens to the other 80%? Who is going to buy that, if the obvious purchasers are excluded? And what effect will it have on the ultimate sales values?