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Archive for December 31st, 2010

NAMA in 2011 – Ten Predictions

This blog is neutral on NAMA. In principle the agency is one feasible way of helping deal with a banking catastrophe by clearly valuing, and then removing loans of doubtful value from banks’ balance sheets in return for nice crisp NAMA bonds, then nursing those loans at the bottom of the cycle and hopefully generating a profit as prices recover. In practice over the past year NAMA has been outflanked and indeed swamped into irrelevance by the size of the losses crystallised in the banks, the loss of liquidity with a mighty bank run that is still ongoing at year end and a property market that has, in the main, continued to dive – all in the context of a credit drought especially for Irish property.

And in 2011, the prediction here is that it will be no different. In Quarter One of 2011 under the watchful eye of the IMF, the banks are required to do a bottom-up (and top-down) review of non-NAMA loans and off balancesheet exposures (derivatives in my book, but there are others). And I predict we will find more losses but am unsure as to the scale but wouldn’t be surprised to see another €20-40bn of losses. Credit unions are beginning to appear more significant on the radar and the betting is that a bailout will be needed to cover bad loans there also. At some point all of those against default may change their minds as the scale of the losses explodes. Who knows – perhaps Olli Rehn might even remember that the other pillar of financial probity in the Stability and Growth Pact is that debt:GDP should not exceed 60%.

However, more bank black holes might in themselves be rendered insignificant by the emerging spectre of a full-scale bank run. Corporate deposits have been fleeing out the door in recent months. And it is clear that the IMF and EU bailout has not put a stop to the flight. Despite Minister for Finance, Brian Lenihan’s assertions that as an island we will not see deposit flight, how long will it be before there are queues outside the six Irish banks to withdraw nearly €100bn of personal deposits and place the spondoolicks under the mattress or in non-Irish financial institutions? And what happens if the ECB stops shoring up the flight of deposits? And how much longer can we continue with the miracle that is the Central Bank of Ireland creating funding (backed by a State guarantee, natch) to replace fleeing deposits? Yes indeed, NAMA may well be insignificant in 2011, but let’s examine its prospects anyway – here’s what I think will be the Top 10 NAMA stories in 2011

(1) Bank of Ireland’s haircut – 42% according to NAMA in September, 2010. 40% according to Minister for Finance, Brian Lenihan in Octobr 2010. To me it just looks unrealistically low because (a) it is so out of line with other NAMA Participating Institutions (AIB 60%, Anglo 67%, EBS 60% and INBS 70%) and (b) the only publicised losses on Bank of Ireland development loans concerned McDaid Developments which saw 85% lossses  and (c) credible claims reaching this blog suggest that BoI was no better than other Participating Institutions with their credit practices during the latter stages of the boom. Deeper losses in BoI loans may be confirmed as NAMA undertakes a granular review of due diligence and loan by loan valuation in Quarter One. Will BoI need more capital? Will the State be the only source of capital? We already own 36.5% of BoI and if the February 2011 dividend on our remaining preference shares is paid in ordinary shares in lieu of cash then we just might end up with 50%+ and that is before we are called upon for any additional capital injections (€2.199bn needed in total by the end of February 2011)

(2) Just as Gerry Gannon and the missus stuffing the ample bootspace of the Range Rover with Brown Thomas shopping bags is likely to become an iconic image of the phoney impoverishment of developers, I think the sight of the first bulldozer demolishing the rotting fruit of the Celtic Tiger will also be memorable.

(3) Fianna Fail might be prepared to protect the confidentiality of NAMA’s operations but FF is unlikely to be in government after the general election (though I wouldn’t be surprised to see the election take place far later than is currently assumed. UPDATE 13th February, 2011. Cabinet member, Mary Hanafin admits that it was FF’s hope to “get the year” but blames the Green Party for pulling the rug from beneath the coalition). Neither Labour nor Fine Gael is expected to make dramatic changes to NAMA but they might effect some transparency measures that they have been vociferous about in opposition. Sinn Fein (riding in the mid-teens in the polls) would scrap NAMA and you would have to say there is an outside chance they will be in a coalition with Labour. Of course Fianna Fail might also end up as junior partners in a Fine Gael administration. The mind boggles but regardless, it is fair to say we have political uncertainty and certain political outcomes might change NAMA.

(4) Third party suppliers – and NAMA has engaged armies of them – should throw up a scandal or two during the year. NAMA’s “master loan service provider”, for example, is Capita and in the UK, the Capita parent has been a rich source of cock-up and intrigue. And despite NAMA’s claims about value for money, expect a few stories on what might be considered outrageous fees, conflicts of interest and traditional shenanigans.

(5) It can’t be emphasised enough that NAMA has only 100 staff, 42 of which are dedicated to managing loans. With an estimated €90bn of loans at par value en route to NAMA, the agency can’t possibly cope even with the assistance of teams at the five Participating Institutions and Capita. NAMA will be directly managing 175 developers representing some €50bn of loans at par value. It’s ludicrous and NAMA is setting itself up for failure. Expect frustration at NAMA’s slow decision making and possibly a tale or two of NAMA selling assets well below value.

(6) The NAMA Act anticipated that NAMA would have up to €5bn of funding available for, essentially, finishing out projects. NAMA launched its funding programmes in September 2010 but as far as I can tell they have been scrapped through presumably someone thought of mentioning the need for NAMA development funding to the IMF/EU in November? Both the securing of development funding and divvying it up amongst household-name developers in 2011 is likely to be newsworthy.

(7) So far NAMA has successfully sought a judgment against Paddy Shovlin and the Fitzpatrick brothers. Apparently 22 other actions have been initiated by the Participating Institutions on behalf of NAMA. But as the Prime Time Investigates programme before Christmas showed, NAMA will have its plate full with pursuing assets and unravelling corporate and legal structures designed to protect wealth. And of course NAMA will be liquidating and foreclosing – already NAMA has appointed receivers to Bernard McNamara companies and just before Christmas to Paddy Doyle and Paddy Burke companies. Pierse and the Whelan group are in liquidation and NAMA is a key creditor to both and in early January we will find out McInerney’s fate where again, NAMA is a key creditor.

(8) Paddy McKillen, the developer valued at some €75m by the Sunday Times in 2009 sought the help of the courts in stopping NAMA taking over his loans. He comprehensively lost in the High Court here in November and the betting is that he will lose his appeal at the Supreme Court which is due to issue a judgment early in the New Year. Will he appeal to Europe if he loses? More importantly why on earth has NAMA not already quickly moved to absorb his loans. Of course should Paddy see some success from his appeal, it may have ramifications for NAMA’s general operation.

(9) My prediction is that the Irish residential prices will drop 5% this year (unemployment, falling wages, increased taxes, upward pressure on mortgage rates, repossessions and distressed sales, emigration, overhang in supply, anaemic GDP growth, stamp duty for first time buyers, a continuing mortgage drought more than offsetting a decline in new build, reduction in stamp duty for movers, wealth and income in some pockets of the economy). I predict commercial will drop 10% as capital values catch up with the blindingly obvious fact that rents dropping like stones will drag capital values down. Residential prices in the UK will remain stagnant with minor growth in London and a 5-10% decline in Northern Ireland. I expect UK commercial to grow by less than 5% though London’s growth may skew the average which might see stagnation across much of the UK. So NAMA which has a target of reducing its loans by 40% by 2013 will have its work cut out in planning how to manage loans and prioritising disposals.

(10) The unknown unknown in Donald Rumsfeld’s parlance. With €90bn of loans, 100-odd employees, political administration, short-term rollover funding of NAMA bonds which depend on the ECB for continuing support, global property assets, poor transparency, €5bn of development funding, annual operating costs of €200m and crises elsewhere in the domestic economy and in Europe, there is more than enough scope for something spectacular.

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The Nationwide Building Society has this morning published its UK House Price data for December 2010. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £162,763 (compared with GBP £163,398 in November and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 12.5% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of December 2010 being GBP £162,763 (or €189,476  at GBP 1 = EUR 1.1596) is only 4.64% below the €198,689 which the Permanent TSB/ESRI said was the average nationally here at the end of September 2010.

With the latest release from Nationwide, UK house prices have risen by just one pound since 30th November, 2009 the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index has declined to 911 meaning that average prices of NAMA property must increase by a weighted average of 9.7% for NAMA to breakeven on a gross basis.

The short-term outlook for UK residential remains modestly negative.  Last month, the newly created Office for Budgetary Responsibility (OBR) issued its latest forecast and predicts the UK economy to grow (by reference to GDP) by a respectable 1.8% in 2010, and sees 2011 growth at 2.1% and 2012 at 2.6%. Unemployment is forecast to peak at 8% in 2011 and property will drop by 2.7% over the next 12 months. Mortgage approvals are dropping off with confidence at the low and middle market in the doldrums with reasonable supply (boosted by the abolition of Home Information Packs (similar in part to our BERs) in June 2010) and anaemic demand dampened by the prospect of public sector job cuts, VAT rises and an €81bn fiscal adjustment.

The EU bank stress tests published at the end of July 2010 suggested a base case of no change which is almost spot on with the 0.41% increase for the 12 months ending December 2010.

The Nationwide has also released its quarterly series which shows the performance of different regions within the UK. Over the past year Northern Ireland has been the worst performing region with a drop of 8.9% (seasonally adjusted) and the best has been East Anglia with a rise of 3.8% and London has risen by 2.7%. The regional breakdown of NAMA’s British assets is not known though Sean Mulryan has significant residential developments in London and NAMA’s most expensive asset, the Battersea Power Station site which has a residential development element, is also in London. It is estimated on here that 20% of NAMA’s British assets are residential with the remaining 80% commercial. NAMA has an estimated €4bn of assets in Northern Ireland.

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