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Archive for May 4th, 2011

Not really but since these elections only come around once every four years, an entry devoted to our good neighbours seems appropriate. Sammy Wilson the incumbent Minister of Finance and Personnel will be returned as a MLA for East Antrim and the betting is that his party, the DUP, will be returned as the largest party. Although there had been talk of giving up some of his roles, Sammy is likely to continue in his existing post and will continue to be NAMA’s main political contact in the North. This is unlikely to be the election that gives Sinn Fein what seems like an inevitable breakthrough and the party is likely to come a close second behind the DUP. And it seems the SDLP and UUP will continue to be the joint-third-place parties.

NAMA has a reported GBP 3.35bn of loans that relate to Northern Ireland and the issues the agency faces include a sluggish local property market – in terms of the entire UK, the North has suffered most it seems from the 2007/8 financial crisis, residential prices are still slipping and commercial is shaky. In the North NAMA faces a different type of political challenge to the one it faces down here – in the Republic the agency faces what has been a prickly incoming government, in the North the agency faces an executive that can be suspicious of the agency’s motives and is concerned that the agency might unleash fire sales or dysfunctionally hoard assets, the North is also eager to get fair dibs on NAMA’s €5bn development pot. Belfast-man Paddy McKillen is NAMA’s most famous refusenik and the speculation is that the other refuseniks representing some €1.5bn of loans are also from the North. Just like this side of the border, politicians and developers in the North have a symbiotic relationship and it would be surprising if some developers hadn’t lobbied their political contacts for influence in NAMA’s decision-making. It’s no accident that NAMA has a dedicatedNorthern Ireland committee, chaired by Peter Stewart, given the delicacies involved.

Let’s hope they have a peaceful and democratic day in the North tomorrow.

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The Minister for Finance, Michael Noonan gave the green-light this morning for the publication of the report and accounts for NAMA for the quarter ending 31st December, 2010. The outstanding feature of  the accounts is the €1bn provision that NAMA has created for losses on the loans it has acquired from the NAMA Participating Institutions (PIs – AIB, Anglo, Bank of Ireland, EBS and INBS). To summarise, NAMA has acquired loans worth €71bn at face value, paid €29bn for them but now believes the loans are worth €28bn. This entry examines the €1bn provision and argues that it vastly overestimates the current value of the loans that NAMA has acquired.

First up, it should be said that the €1bn provision is an estimate and is unaudited. But that said, NAMA claim that the full accounts for the agency were handed over to the agency’s auditor, the Comptroller and Auditor General, in February, 2011 so you would expect the €1bn provision to be not too far off what will be reported in NAMA’s audited annual accounts in June 2011. Secondly, the provision is prepared in accordance with International Financial Reporting Standards (IFRS) and it is IFRS 9 that will be particularly applicable to the valuation of the €29bn of loans in the annual accounts; and that IFRS will still allow NAMA to value loans in the same optimistic way that banks here have been valuing loans in recent years. Although the IFRS is going through some changes, organisations like NAMA can, until 2013, choose a method of valuing loans which can be divorced from the underlying value of the security.

But if you were to revalue the loans by reference to their underlying value, I believe the loss booked at the end of 2010 should be closer to €3bn. Here’s why:

(1) We don’t have a precise breakdown of the location of NAMA assets but the latest we have from NAMA is that 67% of NAMA loans will be in the State, 6% inNorthern Ireland, 21% in the rest of theUKand 6% in the Rest of World.

(2) NAMA is valuing loans by reference to the 30th November, 2009

(3) Although NAMA has valued the current market values of loans by reference to 30th November, 2009 it had applied an uplift – a long term economic value premium – to help out the banks on the assumption that November 2009 was the bottom of the market. The average uplift applied appears to be 10%.

(4) NAMA is paying for loans with NAMA Bonds (making up 95% of the payment) and NAMA subordinated debt (making up the remaining 5%). The subordinated debt will only be honoured if NAMA makes a profit. So if NAMA makes a loss then these subordinated debt instruments won’t be honoured. NAMA paid roughly €29bn for the loans of which €1.5bn approximately was in subordinated debt.

(5) The breakdown of tranches 1 and 2 shows that 13% of the loans relate to completed residences. In addition 26% relates to development and presumably some will be residential. I assume that residential makes up 20% of all loans acquired in all territories. And commercial makes up the remaining 80%. NAMA has not issued any detailed breakdown of the loans since 23rd August 2010 when it provided details on tranche 2.

(6) Irelandand the UKcomprise the majority of NAMA assets. We keep track on here of the commercial and residential indices for bothIrelandand theUK. See the top of this page for the most up-to-date price movements. As you can seeIrelandhasn’t done so well whereas theUK’s commercial index has performed quite well.

(7) Taking into account the assumed split of NAMA’s loans between Ireland and the UK and the assumed split between residential and commercial and using the indices shown at the top of this page as at 31st December, 2010 and assuming that NAMA on average paid a 10% long term economic value premium but will not need honour its subordinated bonds if the agency makes a loss would point to the €29bn of loans being worth €25bn. NAMA won’t need honour €1.5bn of the €29bn consideration paid, if the agency makes a loss so taking €1.5bn from €29bn gives us NAMA’s consideration in a loss-making scenario, that is €27.5bn and yet the underlying security of the loans is only worth €25bn today. So NAMA should recognize a loss of €2.5bn.

What’s potentially wrong with the above?

(1) It uses a lot of assumptions – based on the best published information, I would argue, but assumptions nonetheless

(2) NAMA says that it found the value of residential property in Irelandt o be an average of 50% off peak in November 2009 whereas the official index, the Permanent TSB/ESRI, indicated it was 30% off peak at that point. An implication is that NAMA’s losses on Irish residential property won’t be as great as the official index implies.

(3) NAMA claims, it is reported, that the “majority” of its UK assets are inLondon. And it seems to be accepted that London has recovered from the 2007/8 financial crisis quicker than other parts of theUK(Northern Irelandstill seems to be suffering most).

(4) NAMA can claim that the relevant IFRS allows the agency not to value on the basis of underlying security.

And what about the future for NAMA?

NAMA was conceived on the principle that we were close to the bottom in terms of property prices in 2009. Minister Lenihan pointed to record high property yields at the time as indicative of the state of the market. He was wrong, or wrongly advised. The outlook for the residential market is still shaky forIrelandwith the Central Bank ofIrelandindicating in March 2011 that prices were still some 30% off the bottom. The CBI was more upbeat on commercial prices but it acknowledged if the government were to abolish Upward Only Rent Reviews that prices might fall another 20% plus. The outlook for the UK is more positive but there doesn’t appear to be a boom in prospect there – residential seems to be bouncing along more or less flat and commercial generally seems to be modestly increasing (less than 5% per annum). However NAMA is a 10-year project and part of the skill of managing assets will be in optimizing the timing of disposals. It’s a long way of saying that NAMA might see some recovery in prices though it needs also consider the ongoing interest charges on unredeemed NAMA bonds as well as its operating costs.

The agency has not had a good year in 2010. It lost more than €2m per day (based on an inception on 27th of February 2010, being 304 days to 31st December 2010 and a loss of €714m). However, even if prices had stayed flat, NAMA would still have potentially have reported a loss as it was paying a long term economic value premium to the banks. It remains to be seen if NAMA can turn a profit, it would be helpful to get some detail on the €3bn assets which the agency says has been approved for sale. The accounts today however do place NAMA at a disadvantage, just as Minister Noonan is considering the future operation of the agency.

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Sitting on Minister Noonan’s desk for over a month, the NAMA report and accounts for Q4, 2010 have this morning been “laid before the Oireachtas”. The accounts are not yet accessible from the NAMA website but the press release tells us that

(1) 16 Memoranda of Understanding have been “completed” and a further two are close to completion. It is not clear how close these 16 are to agreeing Heads of Terms or the final agreement, these three documents together representing “agreement”

(2) NAMA has approved a cumulative total of €3bn of asset sales to the end of April 2011.

(3) The performing loans percentage at the end of December 2010 was 23% (cf 40% in the draft business plan, 33% in April 2010, 25% in June 2010). However if the agency absorbs a remaining €3.5bn of eligible loans (thought to be Paddy McKillen and some other Northern Irish developers) then the performing loans % will increase to 25%

(4) Frank Daly says “it should be stressed again that the only motive behind decisions taken on enforcement is to maximise the return to the taxpayer and where all other viable options have been exhausted”

(5) NAMA is reporting a loss of €0.7bn for the year after taking what seems like a highly approximated provision of €1bn against its portfolio of loans.

There will be analysis of the accounts here later. There is an entry here which anticipated the release of the report and accounts for Q4, 2010 and highlighted areas of potential interest.

UPDATE (1): 4th May, 2011. The report and accounts and NAMA statement are all now available from the NAMA website.

UPDATE (2): 4th May, 2011. There will be a detailed update on the report and accounts for Q4, 2010 tomorrow but for now here are the main headlines, having reviewed the accounts. The report and accounts cover the quarter to the 31st December 2010 and also show cumulative out-turns since NAMA’s legal inception on 27th February, 2010 (referred to here as “the Year”)

(1) Loss: NAMA overall made a loss of €208m for the quarter and €436m for the Year. I’m not sure why the press statement extracted the loss for one of the operating units within the NAMA structure, particularly since the loss in that operating unit was greater than the NAMA overall loss. The NAMA SPV which we, ahem, own 49%, made a total loss of €678m in the quarter and €714m for the year.  But won’t the, ahem, independent investors be stuck with 51% of that loss?

(2) Loss on loan revaluations: NAMA has booked a €1bn loss for the year. Now I think it would go too far to suggest this was a finger in the air estimate but it really doesn’t look too realistic and not just because it’s a nice, round €1bn. By reference to official indices, property prices have continued to dive in Ireland since the NAMA valuation date of 30th November, 2009 and remember than NAMA paid about 10% more than the loans were worth via the Long Term Economic Value premium. That said NAMA will not need honour the subordinated bonds it gave to banks in part-payment for the loans if NAMA overall makes a loss and these bonds comprised 5% of the consideration for loans. Also the UK where some 27% of NAMA’s assets are located has staged a recovery in commercial prices, particularly in Londonwhere it is said NAMA has “a majority” of its assets. All of that said though, by my estimates and using the NWL index, if I had stuck my finger in the air, I would have estimated closer to €2bn or possibly €3bn. NAMA defend the €1bn estimate by saying the final audited figure in the annual report which will be available in June 2011 will be more accurate – though this is belied by the claim that final figures including a provision for loan losses were submitted to the Comptroller and Auditor General in February 2011. I do not think this is going to be pretty when final figures are unveiled in June 2011.

(3) Having re-read the accounts twice, I am at a loss as to where the effect of the €2.7bn of approved sales in 2010 is to be found. The reason these sales are particularly significant is that you would expect these sales to be of the low-lying fruit where NAMA might get back perhaps even the nominal value of the loan and be able to book a bumper profit when compared with the price paid by the agency. Now some of the sales mightn’t have completed in 2010, others will have had substantial repayments to non-NAMA banks but still I was expecting to see a few €100m of profits reported, but nada. There is a one sentence reference to the proceeds of asset sales in the management report but no detail is offered other than asset sales have contributed to the €1bn cash balance at the agency.This specific point will be progressed with NAMA.

(4) Derivatives and hedging profits and losses. Well here there is some positive news and true to Frank Daly’s words, some of the losses booked in the previous quarters have reversed. A €49m profit on derivatives was booked in the quarter reducing the losses for the year under this heading to €39m. In addition to derivate gains in the quarter, the agency also recorded meaty foreign exchange gains of €39m for the quarter and €21m for the Year.

(5) Legal activities: other than the fact that NAMA spent some €1.8m in the quarter on “legal and tax” services, we have no hint whatsoever about the ramifications of NAMA’s performance at the High Court and Supreme Court against Paddy McKillen. The costs hearing is expected in May 2011 but I would have thought €1.8m was a light estimate given that NAMA had quite a number of legal activities in the quarter (the Bernard McNamara receivership, for one of many examples)

(6) Developer business plans : the press release this morning stated that of the first 30 business plans from presumably the Top 30 developers, 16 had signed Memoranda of Understanding (MoU), two were close to signing, enforcement action had been taken against seven and five were presently unresolved and might face foreclosure action. Whilst being all for taking NAMA statements at face value, I would still wonder if the 16 MoUs had been signed by each of (a) NAMA (b) the developer and (c) the developer’s wife. It should also be remembered that the NAMA CEO told the public accounts Oireachtas Committee that there are in fact three documents which comprise an agrmeement – the MoU is the first, Heads of Terms is the second and then there is a final comprehensive agreement. Almost one year after NAMA completing the absorption of the first tranche of loans, it seems that not one single agreement has been signed all parties. Whilst these business plans are complicated and may represent a plan to repay €2bn of loans (average of €900m), it is still concerning that NAMA appears to be behind expectations in this regard.

(7) To the end of December, 2010 NAMA had absorbed €71.4bn of loans at nominal value and had paid €29.6bn in consideration. This represented haircuts as follows: Anglo (63%) AIB (54%) Bank ofIreland(42%) INBS (65%) EBS (80%). This means that NAMA was paying more than was expected last September. Although EBS looks horrendous, it represents less than €1bn of loans at nominal value but the other four look better than last September 2010. It should be said that due diligence has yet to be completed for loans acquired under the accelerated programme in the final quarter of 2010.

(8) NAMA has approved the advance of €750m to developers to the end of the Year and of that, €240m appears to have been actually advanced.

(9) 23% of loans were estimated to be performing according to NAMA’s definition of the term at 31st December 2010 but if Paddy McKillen’s loans and others are absorbed that will rise to 25% according to NAMA which would be equal to the estimate in the NAMA business plan in June 2010. The vast majority of non-performing loans are 120 days+ delinquent. At the end of the Year, NAMA had appointed receivers to 13 loans worth €579m at nominal value and €205m at NAMA value. NAMA seems to have abandoned its short and medium term financing programmes.

(10) NAMA has recruited 122 staff.

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The Nationwide Building Society has this morning published its UK House Price data for April 2011. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £165,609 (compared with GBP £164,751 in March 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 11.0% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of April 2011 being GBP £165,609 (or €183,121  at GBP 1 = EUR 1.1115) is 4.5% below the €191,776 which the Permanent TSB/ESRI said was the average nationally here at the end of December 2010 (we are still waiting for Q1, 2011 from PTSB/ESRI).

With the latest release from Nationwide, UK house prices have risen by 1.75% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index stays flat at 888 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK) meaning that average prices of NAMA property must increase by a weighted average of 12.6% for NAMA to breakeven on a gross basis.

The short-term outlook for UK residential remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold –  4% in January 2011, 4.4% in February 2011 and 4% in March 2011 – all on an annual basis. The UK target is 2% so the base rate which has been at 0.5% since February, 2009 may need be raised. The UK March 2011 Budget estimated growth in GDP of 1.7% and 2.5% in 2011 and 2012 and inflation of 4-5% this year falling to 2.5% in 2012.  Net debt will be 60% of GDP this year rising to 71% in 2012. Scary for the UK but paradise compared to the 100%+ in Ireland. The UK is also struggling with a deficit that was 11% last year (compared with 12% in basket-caseIreland) but there are swingeing cuts to public services in prospect to bring the deficit down to 4% by 2014/5. What all of this means for property prices is uncertain of course but the betting is that prices will come under modest pressure and may fall by less than 5% in 2011 – the Office for Budgetary Responsibility was saying 2.7% late last year but finances have deteriorated since then. TheUK has plenty of micro-markets and the betting would be thatLondon and the south-East will fare better than the North of England and elsewhere,Northern Ireland in particular.

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