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.