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Archive for May 5th, 2011

Quarter Covering period to Delivered to DoF Published
1 31st March, 2010 30th June, 2010 13th July, 2010
2 30th June, 2010 30th Sept, 2010 2nd November, 2010
3 30th Sept, 2010 31st Dec, 2010 2nd March, 2011
4 31st Dec, 2010 31st March, 2011 4th May, 2011

First off, congratulations to the new Minister for Finance Michael Noonan for not breaking the record 70-day delay between delivery and publication of the NAMA Q3, 2010 report and accounts (the accounts were delivered on 21st December, 2010 according to the NAMA accompanying letter). But you would still have to question why it takes 34 days to approve accounts given that NAMA is an independent agency and its accounts are more or less prepared on a conventional basis with minimal additional reporting.

As for report and accounts themselves, there was an entry yesterday which gave an overview of the figures, this entry will examine the information in more detail. But before delving into the figures themselves, it is worth reminding ourselves what NAMA does and how it makes its money. In simple terms, NAMA bought property loans from banks and hopes to make money because the interest charged to developers is more than the interest NAMA pays on its source of funds and NAMA hopes to make a further profit by receiving more for the loans themselves than it paid, either through developers repaying the loans or the loans/underlying property security being sold. So far so simple, right? So you would expect any accounts to show you the difference between the interest received from developers and the interest NAMA must pay on its source of funds, which the accounts do show though you have to do some digging. You would also expect to see the profit or loss made by NAMA when the loans/underlying security was sold, wouldn’t you? Well these accounts do not show that information despite the claim that in 2010, NAMA approved the sale of €2bn of assets. Now you mighn’t expect to see detail like “Developer A’s property at Address A was sold to Investor A for the sum of A, and NAMA was repaid B which meant that NAMA made a profit on the loan of C though a loss of D was made by reference to the nominal value of the loan and D has now been written off” but you would expect to see detail like “Loans with a total nominal value of A and bought by NAMA for B were disposed of for C, which meant that NAMA made a profit of D on the disposals and E has been written off and C was geographically split between Ireland E, the UK F and Rest of World G”. Alas, you will not find any such details in NAMA’s accounts which to be fair are quarterly, almost akin to management accounts and unaudited though on the other hand, NAMA is paying some meaty financial fees so you would expect some high-level detail on disposals of €2-3bn. I hope this glaring omission in the accounts is remedied in the annual report which is due in June 2011 – after all, it is the bread-and-butter of what NAMA does.

And so to the detail of the accounts (as with yesterday’s entry the “Year” is actually from 27th February 2010 which was NAMA’s trading inception to 31st March 2010):

(1) Let’s start with a small but significant expense – director fees. Director fees in the NAMA accounts are significant for two reasons. NAMA reports that €166k was paid during the quarter to the NAMA board excluding the CEO of the NTMA (John Corrigan) and the CEO of NAMA (Brendan McDonagh). So the €166k includes the NAMA chairman, Frank Daly reportedly paid €170,000 per year and six other directors, all of whom were appointed before the start of the last quarter. So you’d hope that if you excluded 1/4 of Frank’s chairman’s fees from the €166,000 the remaining €123,500 would represent the fees of the remaining six directors which would indicate their annual fees were €494,000 in total or an average of €82,000 apiece. Which is well north of the €40,000 that they’re supposed to be earning, right? But NAMA manage to muddy the waters by including fees paid to Committee members and this is the second reason that Director fees are significant and it is because NAMA don’t clearly declare them. NAMA do say that fees paid to Committee members total €18,000 for the year but don’t provide the quarterly total. If all €18,000 was incurred in Q4, 2010 then the quarterly director fees for would be €148,000 and exclude Frank’s 1/4 of €170,000 and you get €105,500 or €422,000 per annum which would be €70,000 apiece for the other six. To summarise, these fees are significant because they are almost double what was generally understood to be the directors’ fees and secondly NAMA has extraordinarily confused what the directors’ fees are by including Committee fees.

(2) Okay to the meat of the accounts – interest received versus interest paid. NAMA booked €445m in interest from developers for the Year and booked €99m in interest payable. So on the face of it NAMA made an operating profit at this level of €346m. NAMA muddy the waters by splitting out interest income and expense on derivatives which resulted in net income of €3m for the Year. But at this level, NAMA is doing very well. Remember it pays 1% on its NAMA bonds and receives what is thought to be an average 3% from developers on those loans that are performing. Also NAMA didn’t pay any interest on its subordinated bonds which comprised 5% of its consideration for loans in 2010 because the agency didn’t meet its objectives NAMA should continue to see a net interest profit because [€72bn loans at nominal value] * [23% that are performing] * [average of 3% per annum interest charge] will be greater than [€30bn consideration paid] – [5% subordinated bonds on which interest is not payable if NAMA doesn’t meet its objectives] * [~1% interest rate on NAMA bonds]

(3) And for the remainder of the meat – the disposal and redemption of loans. The accounts tell is that NAMA received €1.01bn in cash from developers in the Year. Presumably €445m (see (2) above) represented interest, which would imply that €550m-odd was in the form of the redemption of loans. Was this ordinary contractual repayment of capital, does it include the proceeds of sales, who can say – NAMA doesn’t provide any information on the subject. Nor does NAMA indicate if it has written off debt – after all the agency shows the carrying value of loans at the price paid by NAMA, not the nominal value of the loans. So if debt has been forgiven or written off, these accounts will not reveal that information.

(4) Fees and expenses: NAMA paid out €15m to banks and Capita last year to manage loans and the €7m incurred for secondment fees is pretty meaty as well, It is apparently for the Comptroller and Auditor General to determine the value-for-money aspects of these expenses but what is concerning is that the €7m on secondment fees presumably won’t have been subject to open tender.

(5) NAMA paid rent for the first time during the quarter – €192,000. However as we don’t know when NAMA entered into a lease agreement in its own right, we can’t yet estimate what rent it is paying per square foot. You’d expect somewhere below €30 psf – perhaps next quarter we’ll be able to do the calculation. NAMA’s landlord is understood to be a company owned jointly by Paddy McKillen and Treasury. The lease is for 10 years and there is a six-month rent holiday.

(6) NAMA now employs 122 staff but does not disclose the total paid in salaries – it is all mixed in with the payment to the NTMA of €15m last year which will also include IT, HR, rent and facilities. This morning, Paul Clarke (he being the chap that broke the news last year about AIB’s secret bonuses) published a story that managers at NAMA were being paid €120k per annum, compared with a market rate of €100k and this could mean NAMA is paying slightly over the odds. However you will not find any information in the NAMA accounts to verify this. Brendan McDonagh told an Oireachtas committee last year than NAMA expected to have annual costs of €25m and that 70% of these would be staff related and that was based on a headcount of 100, implying that the average staff cost in NAMA was €175k inclusive of PRSI/pension and other salary-related costs.

(7) It is becoming increasingly difficult to tell what is happening with derivatives. NAMA made a profit on derivatives of €49m in the quarter, halving the losses for the Year to €39m. This heading will be particularly closely examined in the year end accounts.

(8) NAMA made a €21m foreign exchange gain for the Year, thanks to a €39m gain in the last quarter which more than offset previous foreign exchange losses. It is unclear what NAMA’s currency hedging policy is.

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)

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