Archive for March 2nd, 2011

Some 61 days after NAMA provided them to the Minister for Finance, Brian Lenihan and some five months after the period end to which they relate, NAMA has just published its report and accounts for Q3, 2010. Here is the press statement. There will be a summary commentary here later and a detailed entry tomorrow.

NAMA continues its communication strategy that borrows heavily from A Few Good Men (“The truth. You can’t handle the truth”), Men in Black (“A person is smart. People are stupid”) and Ryanair (“That’s rubbish. Feck off or we’ll sue. Yo Mama so fat etc”). It would be nice if NAMA adopted the Ronseal communication strategy and just admitted they’re sitting on a potentially big loss because property markets have continued to tank but that NAMA is a 10-year project and the hope still is that markets will improve and that NAMA can add value. And that NAMA is struggling to cope with workloads which mean that some targets have slipped. Instead we have the NAMA chairman Frank Daly issue a Pollyanna statement which omits to mention the €35m loss in the quarter (yes there is a form of words but I don’t think the average punter would pick out a €35m loss from it) and instead emphasises the  temporary cash surplus  which results from some borrowers repaying money and NAMA not needing to redeem its bonds until 2020. And yet again we get this guff about “we have completed the examination of Business Plans from the 30 top debtors representing €27 billion in loan value and 40% of NAMA’s portfolio. We have signed, or are close to signing, Memoranda of Understanding with twelve of these” In January NAMA had 14 developers “close to signing” – it’s going backwards! And the bottom line is that ten months after Tranche 1 transferred, not a single agreement has been signed between NAMA and a developer (one may be close though).

Anyway here are the main headings from a summary review of the accounts. There will be a detailed entry tomorrow which will examine each of the NAMA group companies and financial statement lines.

(1) NAMA reported a loss of €35m for the quarter, very roughly comprising a profit on interest receivable from developers less interest payable on NAMA bonds of €18m less operating costs of €12m less loss on derivatives €27m less foreign exchange losses, mostly on loans €14m. For the three quarters since NAMA’s inception to the end of September, 2010, NAMA has reported a net loss of €34m. There are two points to note

(a) A large element of the losses is derivatives and these are “paper losses” and the NAMA chairman Frank Daly says that some of these reversed in the quarter ending 31st December 2010.  In simple terms derivatives are ongoing bets about interest rates that will be charged on loans and when interest rates are different to your bet you have gains or losses but until the loan is repaid the gains and losses are only on paper. It’s like owning a share in a company – its price can rise and fall but until you sell the share any profit or loss is on paper.

(b) NAMA has not revalued its €27bn loan portfolio balance at the end of Q3,2010 for which it paid €13bn. Because NAMA valued by reference to 30th November, 2009 these €13bn of loans (at NAMA’s book value) are worth just over €12bn but NAMA is not recognising these losses. NAMA has committed itself to revaluing its loans at the end of Q4,2010 but even then accounting rules may allow NAMA to avoid showing any loss. If the mainstream is talking with NAMA, it would be helpful if the question was posed “If you were to revalue your loans today by reference to the values of the underlying security, how much of a loss would you book?”

(2) Derivative losses: the view remains on here that there is a hornets nest in the derivatives book at NAMA. In Q1 NAMA booked €2m of losses, in Q2 €60m and in the latest reported Q3, €27m. According to the chairman’s statement “Derivative movements are marked to market against prevailing interest and exchange rates at the end of each quarter in line with accounting standards but this does not represent a permanent or indeed a cash loss for the period. Indeed the derivatives’ losses reported here were reversed by the end of 2010 as a result of increasing market interest rates and exchange rate fluctuations in the fourth quarter”

(3) Amazingly NAMA seems not to have acquired any loan from the banks since Tranche 2 which completed on 23rd August, 2010. So although NAMA was supposed to transfer Tranche 3 by 30th September, 2010 (which was abandoned on 30th September, 2010 with Minister Lenihan’s Big Bang announcements). NAMA says it generated €278m net in cash during the quarter (which will include interest and principal repayments less expenses) and that it advanced €126m for working capital and development.

(4) NAMA banks have foreclosed on 31 loans. NAMA had only sought a judgment against Paddy Shovlin and the Fitzpatrick brothers during the quarter. No real details are given of the 31 loans foreclosed. That will change with FG’s commitment to make a register publicly available.

(5) Performing loans are now down to 25% and a smaller proportion of loans in Tranche 2 are performing compared with Tranche 1. Again the notion of using the cumulative haircuts on the €20m+ exposures to the sub-€20m exposures at Bank of Ireland and AIB seems nuts because everything points to there being greater difficulty with the smaller loans.

(6) NAMA seems to have stopped providing analysis of the haircuts on loans acquired so we can’t see how many loans were acquired for nil consideration and how many with no haircut. No doubt this omission will be queried in the coming days.

(7) Professional fees are huge. In particular the €6m paid to Capita and the banks for managing loans. As usual there is little granularity here on the breakdown of fees paid.

There will be a more extensive entry tomorrow once the accounts have been reviewed in detail. If anything of great significance crops up, this entry will be added to.

UPDATE(1): 3rd March, 2011. It was just after 5pm yesterday when NAMA’s PR representative, Ray Gordon circulated the report and accounts to the media so there wasn’t a great deal of time yesterday to analyse the contents and most media organisations seem to have relied on the press release to generate their news stories today (RTE here, Irish Independent here, Irish Times here, Irish Examiner here). There is not one mention of the €35m loss made by NAMA in Q3, 2010 which is a shameful reflection on the Irish media. It should be the headline and indeed if you cast you mind back to reporting of previous quarters’ NAMA reports/accounts “NAMA recorded a profit of €6m for the second quarter and has a loss of €1m in the year to date” said the Independent in November 2010 “The National Asset Management Agency (Nama) recorded a loss of €1 million in the first half of the year, it said today.” said the Irish Times “A report from the National Asset Management Agency shows that it recorded a profit of just over €6m during the second quarter of this year” said RTE. However for the latest quarter’s results released yesterday no media outlet seems to be able to report NAMA’s huge loss. Which is curious. UPDATE(2): 3rd March 2011. For rank ignorance you would do hard to beat the Evening Herald’s reporting of the NAMA Q3 accounts which simply says that NAMA income rose to €89.5m in Q3. No mention of costs. No mention of the loss.


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RTE presenter Richard Crowley: Do you have confidence that the outcome, that the results of these forthcoming stress tests will provide all of the information that you need to make a definitive decision?
Central Bank of Ireland governor, Patrick Honohan: It will use all of the information that is possibly there. We have engaged some, at high speed (it’s amazing when you pay large sums of money that the best consultants in the world can come flocking)! but we had to get, this was the instructions, we have got the most reputable people in the world, they’re doing very very detailed exercises of a type that we would never have embarked on I think, and the level of detail… So it will be based on the best information possible. We can’t say this is the only number but since we won’t be getting any new information (things change of course), we won’t be getting any new level, we’ll never repeat this level of the information. The capital that we put in should last for a while.

From RTE Prime Time, 1st March, 2011

In January of this year, a new company came onto the national stage when the Central Bank of Ireland (CBI) appointed the Boston Consulting Group, Barclays Capital and BlackRock Solutions Inc to carry out the stress test of the banks in the first quarter of 2011 as demanded by the IMF and EU as part of the bailout deal. The Boston Consulting Group (BCG) will be well-known to any business student – remember their cash-cows, stars and dogs in the context of their product life cycle matrix? BCG is a world-renowned consultancy and it is responsible for project-managing our stress tests. Barclays Capital is the investment banking division of Barclays, the well-known British high street bank and it is to “advise the [Central] Bank on the restructuring of the banking sector, while also contributing advice on PCAR and PLAR”. But what about this third company, BlackRock Solutions which is working on the meat of the stress tests?

In retrospect, it seems amazing that the Irish media greeted BlackRock casually as if it was a life-long acquaintance. The name “Blackrock” is of course familiar here – it’s the name of an upmarket suburb of Dublin as well as the former name of an Irish property company. That property company was called Blackrock International Land, probably most famous for being a spin-off of Fyffes and owning the Xerox Technology Park in Dundalk but changed its name in 2010 to Balmoral International Land. And the reason it changed its name was that BlackRock, the company now doing our stress tests, had a trademark dispute with it over the use of the name “Blackrock”. Which is why there’s a registered trade mark symbol in the title of this entry. This entry examines the company upon which Enda Kenny, Patrick Honohan, Eamon Gilmore, the IMF and the EU as well as the entire nation is relying to tell us the amount of additional capital required by our beleaguered banking sector. Who are they?

The company we have conducting our stress tests is a small division of the BlackRock group called BlackRock Solutions. The BlackRock group itself is reputedly the world’s biggest asset manager with assets under management of USD 3.56 trillion at the end of 2010 with 8,400 employees and offices in 30 countries including at the IFSC in Dublin. It built strong relationships with US regulators and was chosen by the Federal Reserve to value assets at Bear Stearns and AIG and indeed manages certain assets of these companies today. It is presumably this experience that recommended the group to our own CBI – “what’s good enough for the Fed is good enough for Dame Street”. It should be noted that the Memorandum of Understanding with the IMF/EU made it clear that the stress tests were to be carried out by a fresh pair of eyes not compromised by the Irish banking sector. Let’s remind ourselves what the IMF/EU agreement says with respect to the stress tests : “The diagnostic study should not be conducted by an audit or consultancy firm that has provided such services to the bank in the last three years. The central bank should also contract a specialized firm to help staff to oversee the consistency and integrity of the exercise”

Last night on Prime Time the Central Bank governor indicated that he was acting under instructions when he engaged BlackRock. Presumably instructions from the IMF or EU. I cannot find any tendering process on the government’s etendering system for this engagement with BlackRock (there is a tender won by  Barclays Capital in February 2011 but nothing for BlackRock or indeed BCG). It has not been disclosed how much BlackRock is to be paid for its work on the stress tests but an article in the Irish Times in January 2011 suggested that the three firms involved in the stress tests would be paid an overall total of less than €20m. Bloomberg reported in January 2011 BlackRock CEO, Larry Fink saying with respect to the assignment with the CBI “this is bigger than AIG with the Federal Reserve; this is bigger than what we did with the Bear Stearns; this is a gigantic assignment”.

The BlackRock Solutions unit which is undertaking the stress tests is headed by Rob Goldstein and had a turnover of USD $460m in 2010. It provides people and software to help value and analyse assets, liabilities and derivatives. According to its own case studies the unit has been “engaged by a European central bank to advise with respect to domestic banks’ exposure to troubled loans in Eastern Europe” and “selected by a leading bank holding company to provide advice and valuation services with respect to a $20 billion diversified credit portfolio managed by a partially-owned, European-based asset management”

The BlackRock group has a number of operating units and one that is of interest on here is BlackRock Realty because it might end up as a client of NAMA, either in the sense that it buys assets or potentially manages assets – remember Enda Kenny thinks NAMA’s management of assets should be outsourced to 3-4 asset management companies. In 2008 BlackRock took a drubbing on its investments in commercial mortgage-backed securities which tanked in the aftermath of the sub-prime crisis and it was famously involved in what was described as one of the worst New York real estate deals of the US housing bubble – a USD $5.4bn investment in 11,000 apartments on 80 acres in New York. The deal, vividly written about in the NY Magazine, was intended to see a return through upgrading properties and separately challenging the regulated rents of some tenants. As the NY Times said “the new owners failed in their efforts to increase net income by steadily renovating and deregulating vacant apartments while raising rents substantially” and it is understood BlackRock lost heavily on the investment. So BlackRock itself is far from infallible though you should bear in mind that the above two examples are in the context of a colossal company with a great many projects under management.

Last week Reuters reported that BlackRock was teaming up with a UK small business landlord to invest up to GBP £100m “in freehold multi-let industrial or office buildings in London and the adjacent South East region”. The joint venture may well end up bidding for NAMA properties. There must therefore be a concern that BlackRock ends up on both sides of the transaction in any future deleveraging of our banks or indeed sales by NAMA.

BlackRock Solutions prides itself on being able to develop models that can assess values and markets. But before we all convert to a cargo cult to worship these BlackRock models that will tell us later this month how much more we need shovel into our banking sector, let’s remember that ultimately these models will need deal with something as ordinary as forecasting how much longer a borrower will continue servicing their mortgage on an three bed semi on an  unfinished estate in Leitrim and must bear in mind imminent changes to our bankruptcy laws, an ingrained tendency to emigrate and a nation that gave the word the term “boycott” (and I am aware of auction sales of distressed property where no-one will bid out of respect for the foreclosed seller). And that must be a key concern : that BlackRock will not be able to robustly forecast losses which mean that the stress tests provide unreliable information.

We will learn some more about BlackRock in the coming weeks. The IMF has said that the results of the stress tests should be clearly communicated so as to instill confidence in our banks.  But let’s remember that (a) BlackRock is not infallible (b) it may be on the other side of transactions if bank assets are sold and (c) although a global company it is valuing assets, liabilities and derivatives in an Irish context in which its abilities might well be tested.

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Property services powerhouse and NAMA valuation panel member, CB Richard Ellis has just published its first bi-monthly (every two months) report looking at the commercial rental sector in Ireland. The press release is here and the (very slightly longer) report itself is here. This is the snapshot of current rents in Ireland including Belfast.


As with many reports from the property sector, this is a basically upbeat assessment in terms of tone – read the first sentence of the report a couple of times and see that it is actually forecasting an almost 20% drop in activity in 2011 compared with 2010 but the tone is casual. The report does highlight the threat to the property sector from the FG/Labour proposals to deal with upward only rent reviews retrospectively and concludes that such a move will seriously damage the sector. The report claims that 2011 has gotten off to a good start and that prime rents are stabilizing, having fallen 50% from peak. This is the second report (see below) which highlights the fact that there is little new space under construction. Indeed, according to CBRE, there are only five new Grade A buildings in Dublin 2 and 4 with over 75,000 sq ft. There is still a chasm between rental levels in Dublin and Belfast.

Elsewhere, competing property services giant Cushman and Wakefield has published its 2011 “Office Space Across the World” report (free registration required) which concludes that Dublin is now the 26th most expensive city in the world for office rents, down from 17th last year. At €448 per sq metre (€42 psf) occupancy cost for Central Business District locations, and that includes rents, rates and service charges, costs are down 13% from last year. Just comparing rents alone and excluding taxes and service charges, we are even lower ranked. For non-CBD locations we are ranked 22nd with occupancy costs of €244 psm (€23 psf). Rents in Europe overall declined by just over 1% in 2010, though several cities notably bucked the trend including London where rents in the City and West End were up 25-30%. The C&W report also claims that there is an imminent shortage of large prime office in Dublin, which might go some way to explaining Google’s recent acquisitions.

(C&W review of Ireland’s office sector, click to enlarge)

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