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Archive for January 7th, 2011

NAMA’s first set of accounts for the period ending 31st March, 2010 were delivered to the Department of Finance at the end of June 2010 in accordance with the timescales set out in section 55 of the NAMA Act and were published on 7th July, 2010. The second set of accounts for Q2, 2010 were presumably delivered by the end of September 2010 and published on 2nd November, 2010. When will the Q3, 2010 accounts, that were due to be delivered by NAMA to DoF by the end of December 2010, be published? Going on the limited experience of Q1 and Q2, anytime between now and the first week of February. This entry looks ahead to what NAMA’s report for Q3, 2010 might reveal.

(1) NAMA is likely to show a profit for Q3 (it reported a loss of €7m for Q1 and profit of €6m for Q2). But the number one question that should be asked of NAMA is “what loss would you show if you revalued your loan assets”. My estimate of the loss would be in the €2-3bn range. Why? Because NAMA is valuing loans according to property values at November 2009 (and paying a Long Term Economic Value premium of some 10% to boot). Although some NAMA markets (UK commercial property, Far East property and some US micro-markets) have improved, two thirds of NAMA loan assets are located in Ireland where both residential and commercial are down some 10% since November 2009. Revalue those NAMA loans according to September 2010 values and you will see a revaluation loss in the order of €2-3bn (very roughly by the end of Q3, NAMA had  T1, T2 and most of T3 totalling some €18bn at NAMA-consideration value or €16bn without LEV and that two thirds had dropped by 10% and one third had risen by 10%). NAMA is unlikely to have revalued its loan assets on a quarterly basis so that loss is unlikely to be shown anywhere in the Q3 accounts but it should be the subject of the number one question put to NAMA and the DoF when the accounts are published. “At the time it was set up in 2009 people were saying that Nama would lose money, but it hasn’t. They said that it would pay over the odds for loans, and again it hasn’t.” said Green Party minister, John Gormley, in an interview with the Independent last week – sadly he is wrong on both counts, but he might be forgiven by NAMA not revaluing loans on a quarterly basis. Of course it should be stressed that revaluation losses are “paper losses” and property prices might recover and erase any temporary loss.

(2) Derivative losses: In just two days to the end of March 2010, NAMA managed to make a loss of €1.4m on derivatives it had taken over from the banks. And in Q2, the agency racked up additional derivative losses of €60.335m (note 6 on page 26). These losses were reported as “paper losses” because they simply reflected the movement in NAMA’s exposure which could theoretically reverse in future. I can’t help but worry that there is a hornets nest here which might swell into colossal losses in future periods and it is all the more frustrating because so little information has been released on the nature of these derivatives that NAMA is absorbing. NAMA engaged an experienced third party bank, Societe General, to help it value derivative exposures being absorbed.

(3) Repayments of capital: By the end of September 2010, NAMA had taken over loans at an estimated par value of some €40bn (it’s unclear because Tranche 3 was abandoned on 30th September 2010 but is likely to have substantially transferred anyway). NAMA said before Christmas that it had approved the sale of €1.6bn of assets (upto €2bn according to the NTMA’s statement today). Surely some substantial capital was repaid. In Q2, NAMA saw €117m being repaid in cash by developers though NAMA did not split this between interest generated in Q2 and capital repayments. But we can surely expect to see some substantial “low lying fruit” capital repayment to the end of September 2010.

(4) Interest received: From inception to the end of June, 2010 NAMA generated €91m in interest from developers. Practically all of this was generated in Q2. but it is unclear from NAMA’s accounts how much of this was paid in cash to NAMA. This interest receivable figure should increase substantially in Q3.

(5) Working capital advances to developers: In Q2, NAMA made €47m available to developers. This figure is set to increase with more cash starved projects being transferred to the agency in Q3. In October 2010, NAMA repaid the €250m loan it received from the Department of Finance in May 2010 (together with interest of €1,065,625) so any further advances from NAMA are likely to have been made from loan and interest repayments from developers. NAMA’s funding programmes seem to have been abandoned for the time being but the next report might give some clarity as to how the €5bn provided for in the NAMA Act is to be raised by NAMA.

(6) Legal cases. Now this should be interesting because NAMA is required to set out details of legal cases with which it is involved. And memorably NAMA was rattling its saber at the start of September, 2010 boldly asserting that it would be taking action against 12 developers involving €300m imminently. Even if the cases are commenced by proxy by NAMA Participating Institutions, it should be the case that NAMA provides details. In terms of formal cases involving NAMA there was (i) the successful application for an order against Paddy Shovlin and the Fitzpatrick brothers (ii) the successful defence against Paddy McKillen (iii) the case where NAMA is listed as an interested party where Clare developers, John Flanagan and Gerard Lillis are contesting the appointment of NAMA Board member Brian McEnery as a receiver to their companies and a declaration that Anglo and NAMA are “amenable to judicial review”.  I believe this last case (referenced 2010/967 JR at the High Court) is still outstanding. In November and December 2010, NAMA successfully sought the appointment of receivers to two Bernard McNamara companies and to Paddy Doyle and Paddy Burke companies and a liquidator was appointed to the Whelan group.

(7) Performing loans. NAMA has now more or less given a working definition of what it means by performing loans – operating in accordance with loan agreements AND repaying interest AND arrears of no more than 30 days. In the October 2009 draft Business Plan the predicted % of loans that would be performing was 40%, this had fallen to 33% by April 2010 and was 25% in the June 2010 Business Plan but was up at 29% In June 2010 by reference to the par value of the loan.

(8) Breakdown of loans received: How many loans were bought for zero consideration. Just as interesting, how many were bought with practically no haircut whatsoever. Remember NAMA has not produced any information on tranches since completing the acquisition of the Tranche 2 in August 2010. Tranche 3 was abandoned in September 2010 and although we have had mini-tranche updates from AIB in November and December 2010, there is likely to have been substantial loan acquisition in August and September that hasn’t hitherto been reported.

(9) Professional fees: I don’t think people generally realise the extent of the vast army of firms providing services to NAMA. 64 firms of solicitors in Ireland alone, another 8 in the UK, 30-odd valuation companies,  the outsourcing giant Capita and individual organisations providing a host of other services. It is truly immense and so also are the fees. NAMA was expecting to have operating costs of €240m in its first year of operation. It is difficult to tell how much has been spent and on what companies from NAMA’s accounting treatment of these costs which are sometimes charged to the Profit and Loss account and sometimes to the Balance Sheet but the next report might provide some detailed information.

(10) Accounting transparency. I must say, putting on an accountant’s hat, that it is quite difficult to extract information from NAMA’s accounts. That is partly due to there being six-odd companies in the group and a lot of intercompany transactions involving loans and interest. NAMA now show in notes to the accounts the nominal value of loans as well as the consideration paid by NAMA for the loans (Brian Flanagan might be a little happier) but it is difficult to understand how NAMA calculates the interest due on loans (is it for the nominal amount or on the consideration paid by NAMA). NAMA doesn’t split cash receipts from developers between interest and capital. It is unclear if cash receipts include involves NAMA’s reported control of rent rolls. Elsewhere when NAMA pays for professional services it might record the expense in its profit and loss account or its balance sheet and it becomes difficult to establish exactly how much is being paid by NAMA to third party service providers.

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