Archive for February 21st, 2011

The Sunday Business Post yesterday reported that NAMA is to take a “significant” impairment charge in 2010 in respect of its loan acquisitions from Irish banks. The newspaper appears to have had some direct contact with NAMA and quotes the agency as saying “the view of the Board is that it would be run counter to its statutory objectives under the Act for Nama to take this impairment charge while paying the interest on the Nama subordinated debt.” The newspaper does not estimate the impairment charge but misleadingly says “a subsequent fall [from 30th November, 2009 – NAMA’s valuation date] of 8 to 10 per cent in commercial property values has meant that it will have to write down this value [the value of loans acquired]”.

It seems that some people have deduced that if NAMA is paying €30bn for loans then it will therefore have lost €2.4-3bn. It is more complicated than that and you need bear the following in mind when trying to estimate the losses at the agency for 2010.

(1) NAMA has taken over loans relating to both residential and commercial property. Some associated lending may relate to assorted securities eg wine collections, helicopters. The rough estimate on here from examining NAMA’s business plan and tranche detail information is that 80% of NAMA loans relates to commercial property and 20% to residential.
(2) NAMA has taken over loans secured on property in Ireland and in other territories. The security representing 66% of loans by value was supposed to be in Ireland, 5% in Northern Ireland and 21% in mainland UK (mostly thought to be London). The remaining ~8% is scattered around the world.
(3) We track on here the change from 30th November, 2009 in index prices for both commercial and residential property in Ireland and the UK. You can see a summary at the top of this page.
(4) The consideration given by NAMA in return for loans comprises senior bonds  and subordinated bonds, the former making up 95% of consideration and the latter 5%. The subordinated bonds will not be honoured if NAMA does not make a profit over its estimated 10-year lifespan.
(5) NAMA has paid a premium to banks on top of the market value of the property underpinning the loans, The premium is called Long Term Economic Value and on average has been 10% of the market value of the loans in tranches one and two.
(6) NAMA has acquired €71bn of loans to the end of December 2010 and paid a total of €30bn in consideration.
(7) If NAMA makes a loss overall at the end of its lifespan, then a levy can be imposed on the participating NAMA banks in proportion to the value of the loans they transferred to the agency. Given the condition of Anglo, INBS, EBS and AIB, this levy business is rubbish. And even Bank of  Ireland which will account for less than 15% of NAMA’s loans may not be in any position to pay any levy.

Taking account of all of the above, it is calculated on here that the value of the loans bought for €30bn will be €25.5bn but since €1.5bn of the consideration representing subordinated bonds will not be honoured if NAMA makes a loss, NAMA’s net impairment will be €3bn. The detail is below, you might also like to look at the entry on the NWL index

As it happens, the estimated net impairment.for 2010 at €3bn is close to the figure calculated by taking the (incorrect) SBP estimate of commercial property decline in Ireland and multiplying it by the NAMA consideration. That is co-incidence.

It should be said that NAMA is a 10-year project and the hope on NAMA’s part is that prices recover. Indeed NAMA just needs a blended average increase of 12% in prices to break even at a gross profit level. I think Ireland will be challenging for the next couple of years. After that we’re into true crystal ball territory but I would have said that if the economy is competently managed and we confront our debt then NAMA can still break even or indeed make a profit but it will be a challenge and I do not think the next two years will be pretty for the agency.

And to conclude it should be said that accounting rules may allow NAMA to avoid full revaluations of the loans in 2010 and I would be surprised if the Q3, 2010 accounts which are now very overdue will revalue the loans. It should also be said that the above calculations are based on general indices and don’t examine territories beyond the UK and Ireland. NAMA has taken over specific properties which may perform better or worse than the indices and NAMA has not published a reliable split of property outside of the UK and Ireland.


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Last week’s announcements by NAMA were interesting in that it is unusual for NAMA to give a general update outside of its report and accounts unless it is making a formal presentation, and even then there tends to be few details disclosed. Exceptionally, the NAMA Chairman did deliver a pre-Christmas message which gave a general update on progress at the agency on the same day RTE screened a sensational Prime Time programme on developers’ debts – the image of Gerry Gannon and the Missus stuffing the ample boot of the silver Range Rover with Brown Thomas bags will linger.

The announcements last week were curious though – NAMA oversaw a sale by Treasury unit, REO to Google. Big whoop, since according to NAMA it oversaw sales of €1.6bn in 2010. NAMA stated that the sale price achieved covered both the NAMA acquisition cost and additional development outlay. That was no mean achievement given commercial prices in Ireland are down 10%-plus since NAMA’s chosen valuation date, 30th November, 2009 and NAMA paid an average 10% long term economic value premium. But what NAMA didn’t disclose was whether the taxpayer made a loss because NAMA will have to write off part of the face value of the loan. Of course NAMA may seek to recover the shortfall from other Treasury lending, unless the loan was non-recourse or otherwise ring-fenced. But the sale was hardly spectacular in the context of €1.6bn of disposals in 2010.

The announcement that NAMA would repay €250m of NAMA bonds “in the coming weeks” was also curious. NAMA is awash with cash apparently with the claim that the agency will have €1bn cash on hand even after making redeeming €250m of bonds. You would have to ask why the NAMA business plan didn’t anticipate using the early recovery of loans to fund development. Indeed why would NAMA need the €5bn development pot legislated for in the NAMA Act if early repayments could be used for working capital/development advances. This looks to me like a gigantic cock-up in the creation of the business plan. Remember the draft Business Plan in 2009 – it didn’t even consider early repayment of NAMA bonds until 2014.

But it was the third part of the announcement, that NAMA would repay a €49m loan, that was regarded as the most intriguing here. NAMA said “the Board of NAMA has also authorised the repayment of €49 million to the Minister for Finance. The money was advanced to the Agency in March 2010 as a loan by the Minister for Finance and was used to inject ordinary equity into the special purpose vehicle, National Asset Management Agency Investment Limited. This repayment is also ahead of schedule.”

Indeed the repayment is “ahead of schedule” (about nine years ahead, because it was the NAMA seed capital was to be repaid to the State when NAMA was ultimately wound up). And what’s this “loan” business? Wasn’t the €49m an investment by the State in NAMA?

Yes it was an investment but was reclassified by the Department of Finance in the December 2010 Exchequer Statement. Let’s take a look at the history of the State investment in NAMA

(1) 16th October, 2009. Eurostat issues its “preliminary view” on the accounting treatment of NAMA bonds in the context of Ireland’s national debt and concludes that because the NAMA SPV is at arms length to the State with 51% private investment that NAMA bonds can remain off the national balance sheet – welcome news indeed for a State whose debt is teetering towards 100% of GDP. The “view” is based on NAMA being publicly owned and investing in 49% of the equity of the NAMA SPV in whose name the bonds are issued.

(2) 28th April, 2010. Minister for Finance, Brian Lenihan reveals the names of the private investors that own 51% of NAMA. They include a 17% shareholding each in the names of Allied Irish Banks Investment Managers, part of the AIB group and New Ireland Assurance, part of the Bank of Ireland group.

(3) 10th September, 2010. AIB agrees to sell its 70.5% holding in Polish bank Bank Zachodni WBK SA (“Zachodni”) to Spanish bank Banco Santander (“Santander”). The sale will be subject to shareholder and regulator approvals.

(4) 28th November, 2010. As part of the IMF/EU bailout, the Financial Regulator issues new capital requirements for Irish banks which includes a €9.765bn requirement for AIB to be fulfilled by end February, 2011.

(5) 23rd December, 2010. State effectively nationalises AIB with immediate control of 49% of the bank’s ordinary share capital and control over Convertible Non Voting (CNV) shares which would be converted to ordinary shares when AIB had completed its disposal of Zachodni to Santander. When the CNV shares are converted to ordinary shares, the State will then own 90%+ of AIB.

(6) December, 2010 – the Department of Finance reclassified the €49m as a loan and says “It was felt that it would be more appropriate that the monies advanced be classified as a loan to NAMA as opposed to share capital acquired as this share capital isn’t directly held by the Exchequer but held by NAMA.”

(7) 7th February, 2011. With the announcement by Santander that it was bidding for 100% of Zachodni, AIB issued a release to the effect that the sale of its interest in Zachodni would complete soon after 24th February, 2011

(8) NAMA announces the forthcoming repayment of the €49m loan to the central fund (Department of Finance)

(9) 19th February, 2011. Santander receives approval from Polish banking authorities (the Financial Supervisory Commission in Warsaw) for its purchase of AIB’s stake in Zachodni

And lastly any day now, we are expecting an announcement that the CNV shares in AIB have been converted to ordinary shares and that the State now owns 90%+ of AIB. And as AIB owns 17% of NAMA already presumably at that point we will have majority control of NAMA and the €30bn of State-guaranteed bonds issued by NAMA will come onto the national debt?

So back to the curious case of the €49m repayment. Is the repayment of the €49m at this point an attempt to ensure the €30bn of State-guaranteed bonds stay off the national balance sheet? And if NAMA is no longer using State funds to invest in the NAMA SPV then how exactly it funding its 49% stake? The above might be a shaggy dog view on why NAMA is repaying €49m now but it does seem curious, on here at least, why NAMA is repaying a relatively small sum at this point.

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