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Archive for March 3rd, 2011

This is an entry on here yesterday which summarises the results provided by NAMA yesterday in respect of its performance in the third quarter, 1st July – 30th September, 2010. This entry will examine the detail of the reporting and cast an accountant’s eye on what is contained in the reports.

The NAMA accounts pack is quite difficult to unpick. The accounts are quarterly accounts so NAMA might expect some indulgence whilst we wait for what will presumably be more detailed end of year reporting, which is due from NAMA in less than four weeks. That said it seems incredible that the NAMA balance sheet does not balance because it omits retained losses, there are a few boo-boos like the claim that €249m was repaid in October to the central fund when the Exchequer Statement says it was €250m. NAMA has also cut the amount of detail given so we cannot see how many loans were acquired with a nil haircut. This is a special category of loan because it represents loans advanced after April 2009 which NAMA agreed it would not discount because otherwise funding would freeze up for developments until NAMA had acquired the loans. Was there unscrutinised moral hazard or other shenanigans during this post April 2009 period? Who knows but what we no longer know is how many loans were acquired with no haircut. And to the detail itself:

(1) Directors fees – the NAMA board has nine members including the CEO Brendan McDonagh and chairman Frank Daly and the NTMA CEO, John Corrigan.  €425,000 was paid to the seven board members excluding the NAMA CEO and chairman (including the NTMA CEO by the way). (Note 4, page 8). Former IMFer, Steven Seelig joined the NAMA board on 26th May 2010 and the others were appointed on 22nd December, 2009.  That means that seven board members worked a total of 60.2-man months (6*9.33 plus 1 x 4.2) which means the average director fee per month is €7,060 which equates to just under €85,000 per annum. But hang on a second, I thought they were earning €50,000 each per annum. When did they get a 70% pay increase (and remember this is on top of the 35% increase in March 2010 when the fees were increased to €50,000)?

(2) Investments and loans from the Department of Finance to NAMA. There is still some suspicion on here as to why DoF changed the classification of the €49m investment/loan made to NAMA in March 2010 which allowed the State to own 49% of the NAMA SPV. Regardless NAMA classifies the €49m as a loan and in addition NAMA received an advance of €250m in May 2010. NAMA was able to repay the €250m (not €249m as incorrectly shown in Note 9 on page 9 of the NAMA accounts) advance with interest of €1,065,625 (confirmed by DoF on 3rd November – equating to 1% per annum) in October, 2010. According the February 2011 Exchequer Statement published yesterday the remaining €49m has also been repaid.

(3) There is now a cash flow included in the accounts (page 18) which shows during the quarter NAMA paid suppliers €32m, advanced €126m to developers, received €420m from developers for loan repayment and a further €56m from derivatives (see below) and paid out interest of €30m on NAMA bonds. All told NAMA generated net cash of €278m during the quarter.

(4) NAMA’s internal operating costs which include its employee salaries, accommodation and facilities came to €4.1m in the quarter. The NAMA CEO has indicated that a full year’s costs will now be in the order of €25m. Alongside the internal costs, NAMA spent another €8.8m on third parties which is not reimbursable, mostly with Capita/banks (€5.7m) and for financial advice (€1.3m). On top of that, NAMA spent €8.4m on due diligence and valuation which is reimbursable by the banks.

(5) In presentational terms, NAMA’s accounts are beginning to be dominated by derivatives and hedging, which make examination of the performance of the agency difficult because we don’t really have a sense of exposures on the derivatives which some have suggested may be very toxic and might expose the agency to billions of euros losses. Against that, we know that NAMA engaged a specialist company, Societe Generale Securities Services to value derivatives on acquisition so we should have some confidence in the acquisition value of the derivatives. What is worrying is that we have little indication of future exposures, though it should be said that the NAMA chairman Frank Daly said that the next quarter reported, Q4, 2010, should see some reversal of the losses so far incurred on derivatives.

(6) The real story with NAMA’s business is that the agency is having huge problems with the loans it has taken over. €420m in cash was received in the quarter from developers and another €73m was received by banks in respect of NAMA-bound loans which will be passed onto NAMA. So the total cash generated on the entire NAMA portfolio (the loans transferred in tranches and the NAMA-bound loans still waiting in the banks) was €493m for the quarter which equates to almost €2bn for four quarters. But in the context of €71bn of loans you can see that there is huge underperformance of loans in the sense that they are not being repaid. These problems are hinted at with the notes in the NAMA report, in particular the following:

NAMA’s cash flow at the minute looks wonderful because it is being repaid some interest and capital but the agency only has to pay out interest at just over 1% on the bonds used to acquire the loans and also of course its not insubstantial operating costs. If NAMA had to repay its bonds today it would be grossly insolvent. And that insolvency is being hidden by the temporary cash surplus. Is it not incumbent upon the NAMA chairman to at least allude to this fact?

(7) There will be all sorts of conspiracy theories as to why the Minister for Finance waited over 70 days to publish the report and accounts which were delivered to him on 22nd December, 2010 (the date on the covering letter accompanying the report and accounts) and whether there was an attempt to suppress bad news during an election campaign. The accounts produced are worrying, not because they show a €35m loss for the quarter but because they show the dreadful state of the loan portfolio (and remember that in most of NAMA’s markets, conditions deteriorated during the past five months since the accounts period end so the condition today is likely to be worse). NAMA overpaid for loans by reference to values today, the estimate on here is that the overpayment was in the order of €2bn+. NAMA is a ten year project and the hope is that markets will recover more than the carrying costs of these loans. In 2009 that was probably a decent bet but today with the IMF in the country, an arguably unsustainable national debt and even a threat to our participation in the euro, it is not at all probable that there will be a sufficient recovery in NAMA’s main market, Ireland by 2020. And remember that the IMF and others are pressing NAMA to release property into the market now. Given the unquestioning acceptance of the report and accounts in the mass media yesterday and today, perhaps Minister Lenihan shouldn’t have been all that worried. But if I was Patrick Nulty the Labour candidate eliminated from the Dublin West constituency count which then meant Brian Lenihan was the only Fianna Fail candidate to retain a Dublin seat, I would feel a little aggrieved that I was not able to say on the doorsteps that NAMA had made a loss of €35m so far and that it faces a hitherto-unrecognised challenge with recovering loans which are mostly delinquent. And not that it makes a huge amount of financial difference but saying that the NAMA board members were apparently given undisclosed 70% pay-rises wouldn’t have hurt either.

Below is the presentation of the P&Ls and Balance Sheets for the main NAMA companies using what I think are clearer headings than those used by NAMA. They still look messy, but I hope they are of some help to some of you.

(Click to enlarge)

(Click to enlarge)

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