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Archive for November 18th, 2010

The transcript of the entire hearing is now available from the Oireachtas here. NAMA has now made available the brief opening statements by the NAMA Chairman and CEO. Senior NAMA personnel were today quizzed by the Oireachtas Committee on Public Accounts (PCA) for some four hours and we received probably the most detailed assessment of the state of the agency with quite a few surprises. NAMA was represented by its CEO, Brendan McDonagh, its Chairman, Frank Daly, its Head of Portfolio Management, John Mulcahy and Head of Legal and Tax, Aideen O’Reilly. The PCA has cross party representation and I think it fair to say that the questioning was challenging and in some cases combative. So here’s what we learned:

(1) To 11th November, NAMA has absorbed €53bn of loans at par value for a consideration of €23bn. By the end of the year NAMA expects to absorb a final total of €73bn of loans at par value for a consideration of €31bn.

(2) Full due diligence and valuation has been undertaken in respect of 5,500 out of the final total of 11,000 loans and the loans presently being transferred under the accelerated programme will be subjected to final due diligence in the first quarter of 2011 and if there is any underpayment or overpayment then that will be balanced with the PI. NAMA don’t expect the final tallies to be materially different to the results from the accelerated programme.

(3) NAMA expects to have some control over some 140 hotels with 90 in the State, 40 in the UK, 5 in Germany, 2 in the Czech Republic. This is considerably more than had been indicated by the Tourism Minister just a few weeks ago. In terms of the State, the estimate was that each hotel had 120-150 rooms so that would mean NAMA would control over 10,000 of the 60,000 rooms available. NAMA’s control in the sector may be dwarfed by the control of Bank of Scotland.

(4) Costs of converting hotels to nursing homes/hospitals might be prohibitively high and NAMA has established communication channels with the HSE. NAMA is not supporting zombie hotels but is trying to ensure effective management practices are adhered to. There may well be hotel closures in the State but these closures may be non-NAMA hotels.

(5)  NAMA will directly manage 170 developers worth €58bn with the remaining 680 being managed at the PIs, either directly or through Capita. About 40 developers will also be prominent construction companies.

(6) NAMA’s estimate of NPV is still around €1bn – unchanged from its central scenario in the June 2010 Business Plan.

(7) NAMA maintains it is one of the most transparent organisations with onerous reporting obligations – however it will still closely guard commercial confidentiality and it refused to name NAMA developers, even the Top 10. It claims that transparency of commercial transactions would jeopardise its objective of maximising income and may also see NAMA landed in the High Court for breach of confidentiality under s202 of the NAMA Act.

(8) NAMA claims that its primary objective is to recover the sum NAMA pays for the loan plus any additional advances made by NAMA. Its secondary objective is to recover the entire par value of the loan.

(9) On the developer business plans, by the end of today NAMA expects 12 plans to have been approved by the NAMA board. So far there are five Business Plans which have been approved, something which requires a contractual sign-up by NAMA and the developer. There are 16 Business Plans that have passed through the NAMA Credit Committee. NAMA expects to have “reviewed” 30 Business Plans by mid-December, 2010. This was worrying in the sense that there may well be a damaging delays with the other 820 Business Plans.

(10) On performing loans, NAMA expects that by the end of the year that some 25% loans will be performing (down from 29% at the end of Q2, 2010). Importantly NAMA defines a performing loan where interest is actually being repaid in cash. This is at odds with the banks’ definition which merely allows for the loans to be performing in accordance with the loan agreement which may provide for rolled-up interest, for example.

(11) In general NAMA want to see 25% of loans repaid by 2013 and 40% by 2014.

(12) In respect of Tranche 1, 100% of lending was underpinned by personal guarantees. NAMA claims to be ruthless in getting developers to bring unencumbered assets to the table and claim that one developer declared additional assets of €50m following pressure from NAMA. There is widespread evidence of assets having been transferred (“the majority” so far)  to spouses and family and NAMA is seeking to have these transfers set aside where they have the effect of disadvantaging NAMA (as opposed to their being an intent – s211 of the NAMA Act). NAMA claim that they will pursue outstanding debts to the maximum extent “feasible”.

(13) NAMA says that under the NAMA Act they are forbidden from selling assets back to the same developer as the original borrower and that in the case of limited companies, they are aware of the spirit of the legislation and will try to comply with it but cannot give a 100% guarantee.

(14) Loans in Northern Ireland and the State are expected to suffer the same level of discount. The UK, US and elsewhere in Europe will have lower discounts. That was interesting to me because I would have thought that NI would be closer to mainland UK in terms of property performance but NAMA claim NI is closer to  the State.

(15) With respect to salaries at NAMA, they still produce the same old guff about confidentiality. However NAMA said that it expects that of the €25m overhead payment to the NTMA that 70%+ (perhaps even 90%) will relate to the salaries of some 102 staff. I took the €25m to be a full year – wasn’t clear. However at 102 staff and for €17.5m, that equates to a per head cost of some €175,000 per annum. However it was unclear if €25m was for one year, whether 70% or 90% was salary and whether it related to 87 staff employed today or the 102 NAMA expects to have at full strength.

(16) NAMA doesn’t acquire performance bonds from the banks. These are insurance policies that banks had with developers that the banks would need pay development levies to local authorities if the developer was unable too (for example the developer went bust). NAMA didn’t acquire these and there must be a question as to these liabilities in the banks.

(17) NAMA was asked if they held concerns about any “landmines” at the banks in respect of derivatives. NAMA referred the questioner to the Financial Regulator, Matthew Elderfield but the NAMA CEO said that when he was employed with the NTMA prior to his appointment to NAMA he did not observe any significant risk in bank derivatives. Nobody thought of asking NAMA about the €78m derivatives loss in the NAMA accounts in Q2.

(18) NAMA has abandoned its €5bn fundraising for now, although it is still putting the programmes in place so that it can go to the market when conditions improve. NAMA is generating positive cash flow (€650m so far) and has been able to pay interest, repay €250m capital to the DoF and €350m development spend (of which €47m had been spent to the end of Q2).

(19) So far NAMA has overseen the sale of €250m of assets (sales completed and cash received). Another €350m is in the pipeline to conclude by year end but some of this might fall through. Lending syndicates in which NAMA is involved (eg with Ulster Bank) have sold €1bn of property but only a part of this will affect NAMA. Sales have been of overseas properties.

(20) Disposals will be accelerating “soon”. NAMA will bring some property to the market at teaser rates to test the bottom. John Mulcahy claims that “most commentators” say we’re either at the bottom or close to it. Really, John?

(21) It was probably just the way he articulated it but Brendan McDonagh was asked about non-NAMA lending losses and he replied that “if Mr Elderfield has said he’s done his PCAR” then Brendan McDonagh would have no reason to dispute that the banks are recognising (for the purposes of their capital raising) loans losses adequately.

(22) Willie O’Dea can stop agonising about contacting NAMA about the fierce state of an estate in his constituency. As long as he isn’t lobbying NAMA, then NAMA welcome communication from public representatives about health hazards from property that may now belong to NAMA.

(23) The CPA asked NAMA to write to the Financial Regulator with any evidence of fraud in the figures provided by the banks last year and that the Gardai be involved as appropriate.

(24) Property has declined in value by 9% in the State since last November 2009 (NAMA’s valuation date) and increased by 6% in the UK so rule of thumb NAMA’s portfolio of €31bn will be worth 3% less today, that is a paper loss of €0.9bn though since the 5% subordinated debt is not payable unless NAMA breaks eve, arguably there is no loss. I would have said the loss was greater.

(25) As far as NAMA is concerned NAMA bonds are still exchangeable at the ECB, and there is no restriction on their exchangeability.

(26) The majority of the €5-20m exposures at AIB and BoI excluded by the Minister in September from NAMA’s ambit are in the State.

(27) Although NAMA paid €5m for legal due diligence in the first Tranche, this resulted in a reduction in the sums paid to the banks of €250m.

(28) Enforcement proceedings have been approved in 18 cases and an additional 15 were recommended by the banks but rejected by NAMA. A small proportion of the 18 cases will go to court because NAMA feel that once the developers get notification of court proceedings they will start picking up the phone and engaging with NAMA.

(29) NAMA has been contacted by a lot of “bottom feeders”. NAMA will not be exploited by vulture funds.

(30) The Comptroller and Auditor General will produce a report on NAMA’s year end accounts (to 31st December, 2010) and on NAMA’s processes to manage loans by April 2011. I can’t wait! Particularly if it is of the same dreadful quality as the report on the acquisition process.

(31) NAMA is still trotting out that line from the Economist magazine in August 2010 that Ireland’s response to the financial crisis is the right one. It’s a little disheartening that no-one is really saying anything positive about the agency which after all has transferred a huge loan portfolio. Presumably once NAMA starts to manage the business plans and make more disposals that position may change.

(32) The LTV on acquired loans is closer to 100% than 77% last August 2009 and this reflects the continuing downturn in prices and also the equity release practices in banks. The final average discount is likely to 58% being 30% in the Draft Business Plan, 23% worse LTV’s and 5% for poor loan documentation.

(33) NAMA will change the market for insolvency in Ireland and is keen to implement the UK practice of having property insolvency practitioners which are distinct (and far cheaper) than corporate insolvency practitioners.

(34) EU approval of Tranche 2 is expected “shortly”

(35) NAMA is receiving an average of Euribor + 2.5% on its lending to developers.

Overall the NAMA team gave a robust and in Frank Daly’s case a polished performance. Brendan McDonagh exuded an air of competence and quiet confidence – let’s hope that continues with the next (and most important) phase – management of the loans and disposals. The overall quality of the questioning by deputies was dreadful – “if NAMA had secured €54bn of funds at 1%, could they not lend to the rest of the economy” – that type of thing. Credit to the NAMA for its patience in responding fully to most questions.

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