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.
So the NAMA losses begin, but of course we are deprived of the the information to calculate them as per the NAMA plan. The lack of transparency and honesty with the tax payer continues unabated even in the week of a General election. The same dishonest thesis runs through the so called banking resolution legislation, even more in our faces there. NAMA SPV and the right to conceal information from those paying for the interest, losses and the fat cat salaries of NAMA and its cohorts should be illegal. Full stop. Instead, it was legislated for in such a way by Lehihan and his attorney general as to make it “legal” and there is not a whimper about changing that by those seeking a supposed mandate from the people to govern responsibly.
Again, the CB and the regulator were silent and ineffectual when the legislation was being drawn up while the department of finance’s fingerprints are all over the legislation. That is what is wrong with Ireland, but, like the boom itself, it will not last. Ultimately NAMA will be seen as a hubristic experiment in waste which literally stopped the system from cleaning itself and regenerating itself. Now it will take 25 years and NAMA will be extended because it is a gravy train too good to ever stop. I would be very surprised if those who’s lively hoods are wiped out, for instance. hoteliers treated simply as collateral damage by NAMA do not take their case(s) to the European Court of Justice.
The NAMA saga is likely to collapse before its 10 year time span for many reasons.
The one that is evident right now relates to the beginnings of the corruption that will follow. The embers are glowing in the only market that exists for NAMA product at present – in London.
The Paddies were the “marks” when they flooded into the London estate agents armed with Anglo’s (or AIB’s) cheque books. The old school tie brigade and the masonic lodges saw a big “V” (for victim) on the foreheads of the nouveau riche Irishmen… and they stuffed them with expensive property.
They are now conspiring to buy back that same property at substantial discounts, based on “back door” approaches to NAMA and on sweetheart deals with London based Receivers appointed by the Irish banks and NAMA.
Yes, the wind of corruption will blow strongly before this is over, fanning those embers into flames – and it will have started in the clubs and masonic lodges of London. A half dozen underpriced sales and it will not take long before it all becomes common knowledge.
No, I’m not paranoid. Just more aware than most – and certainly more so than the naive “wet behind the ear” dummies in NAMA.
Hi WSTT,
I wondered about the “Paddy premium” on the way up – https://namawinelake.wordpress.com/2011/02/07/the-myth-of-the-paddy-premium-and-the-reality-of-the-nama-knock-down/
But it is a matter of fact that on the way down NAMA association invokes perceptions of distressed, desperate, untested, inexperienced. In a recent sale of a property in the City of London where the seller’s agents were cock-a-hoop with a 6.6% yield the following reason was offered for the high yield “It is a strong price as the unit is considerably over-rented and when analysed on an estimated rental value basis, the yield hardens significantly”
http://www.independent.ie/business/commercial-property/irish-investors-euro27m-london-eaterie-sale-2542185.html
I have no reason to challenge the account given by the selling agents but I wonder if “over-rented” will crop up more frequently in future as NAMA is negotiated down on prices.
wstt:
you are not paranoid, but you will be called a lot worse by others for pointing out such a painful truth.
As regards general comments on the board about NAMA as an election non-issue, transparency, corruption, and on and on…I am wondering if maybe people in general are under-estimating the sheer scale of NAMA and what it means. Not being in Ireland right now it is hard to judge this. But it is hard to see why it was mentioned so sparingly in most election coverage I have seen.
NWL,
1. Do you think NAMA are being political? They released the generally positive news on the sale to Google before the election but are holding the bad news until after the election?
2. On the sale to Google – there was an indo article that suggested the sale price fell short of the amount borrowed by the developers (as distinct from NAMA’s acquisition price). If so, how are NAMA chasing this shortfall or has it been forgiven?
Hi Ahura,
1. No I don’t think NAMA is political in the sense that it supports one party over another. Whether Minister for Finance, Brian Lenihan is being political is another matter but the question remains why has the Minister sat on the NAMA report and accounts for Q3, 2010 for 53 days now. I think NAMA will seize opportunities to publicise success. And why not? In my opinion the agency has stayed silent on bad news eg the delays in signing agreements with developers, the loss on acquired loans through the deteriorating property market, under-resourcing. One of NAMA’s key stakeholders will be politicians/the Taoiseach/Minister for Finance/Department of Finance and I have no doubt that the agency acts to maintain good relations with these stakeholders.
2. Given the date of acquisition of the Montevetro site by Treasury/REO and prevailing yields/rents/property values/LTVs at that time, I think it is safe to say that NAMA has made a substantial loss on the sale by reference to the nominal value of the loan (including interest outstanding). NAMA didn’t allude to this at all last week and consequently the agency has not explained if it can pursue any shortfall (if the loan was non-recourse or corporately ringfenced in an SPV for example, NAMA may not be able to pursue any shortfall) or if any debt has been forgiven or if the outstanding debt has been added to the remaining Treasury/REO balance. I think the sale price for Montevetro was terrific in the present climate. However there might be questions as to whether NAMA should have refrained from selling for a few years.
Thanks NWL,
Re 2. For me, the most positive element of the Montevetro deal was it indicates Google has long term plans for its Irish operations. REO do seem to have been pretty sophisticated re funding or at least their Opera Finance CMH securitisation would suggest so.
I don’t see much benefit in keeping (non-performing) developers in the game. What are they bringing to the party/ what is their expertise? Finishing off projects could be done by project/site managers. My view is the best way to maximise additional recoveries is to foreclose.
Does anyone know the yield the Google building sold at?
Hi Frank, as I understand it, the building wasn’t rented but at say, €35 psf per annum and given the 210,000 sq ft and €99.9m reported sale price, the yield would have been 7.35%. Google is believed to be paying €32.50 psf for Gordon House across the street so on that basis €35 might be reasonable for Montevetro. However I do know that just around the corner on Clare Street, the Department of Transport was expected to pay €20 psf after a rent review for a more traditionally prestigious building but with dated accommodation. At €20 psf, the yield on Montevetro would have been 4%.
Of course NAMA will make a loss , I predict everything and I mean everything will make a loss if the ECB continues to make a example of Ireland.
Listening again and again to the “leaders” debate they appear clueless that tax does not raise revenue – so sad.
Will one trained economist do hes ot her duty and appear on television and state taxes do not create money only banks can and at the moment only CBs can.
Inflate the shit out of this titanic malinvestment and lets be done with this sorry episode in our history.