Take a step back from today’s announcement of NAMA’s final results for 2010 which revealed a €1.1bn loss in its first full year’s operation. Okay, we have gotten used to billion-euro-plus losses with our banks – in fact Anglo Irish Bank’s loss for 2010 was €17bn, which made the top 15 global corporate losses in history; but in the league table of Irish corporate results, a €1bn loss is exceptional.
NAMA was created with a clean slate in December 2009 and it acquired loans using stringent valuation and due diligence standards. Perhaps it should be surprising, even shocking, therefore that the agency has racked up such a large loss in its first year of operation. Indeed were it not for NAMA’s accounting treatment of part of the consideration it pays the banks – the subordinated bonds which will only be honoured if NAMA makes a profit – then NAMA might have been forced into a position today of asking the Government for further capital of at least €1bn.
It is an astounding loss.
It mostly arises from the fact that NAMA chose the 30th November, 2009 as its “valuation date” which means that the underlying property securing the loans acquired by NAMA, was valued by reference to values pertaining at that date. And in Ireland, the country where most of the property securing NAMA’s loans is located, both commercial and residential markets have tanked since November 2009. And not just in 2010 – there is some evidence to suggest that subsequent to the NAMA year end, the decline has accelerated; for example the 5.7% decline in commercial property prices in quarter two of 2011 was the biggest quarterly decline since NAMA was created, and the property industry is saying that commercial property will decline a further 20-30% if expected changes are made in the Autumn to abolish Upward Only Rent Review leases. Of the €1.1bn losses reported today, €1.485bn comes from revaluing loans at the end of 2010 and as bad as those figures are, the 2011 losses might be considerably worse and the betting on here is that NAMA will indeed need additional capital from the State at the end of 2011 to cover what is likely to then be a substantial negative capital position.
Normally if a new company had recorded such unanticipated losses – and when I say “unanticipated”, I mean absent from the NAMA business plans or statements made prior to and during the creation of NAMA – the whole board would be given their marching orders. What’s different here? Arguably two things:
(1) NAMA accepted constraints on the way in which it valued the loans it was acquiring, and did not apparently seek changes to those constraints, even when it became clear that the Irish property market was slipping from the frying pan to the fire. NAMA didn’t seek to change its valuation date from 30th November 2009, something called for frequently on here . Former Minister for Finance, the late Brian Lenihan famously said in June 2010 that changes to property prices had a “broadly neutral” effect on NAMA’s finances. Governor of the Central Bank of Ireland, Patrick Honohan, said late last year he “wasn’t excited” at the decline in values when quizzed by Vincent Browne.
(2) If NAMA had imposed deeper discounts on the loans it acquired, then the banks, which we mostly own, would have needed additional capital. But it wasn’t all swings and roundabouts, because Bank of Ireland is relatively healthy so there might well have been room for Bank of Ireland to absorb more losses. Bank of Ireland comprises about one seventh of NAMA’s loans, and you could argue that that bank’s existing shareholders are walking away with a substantial gift from the Irish taxpayer.
So can you blame the NAMA board for what is a disgraceful loss? Difficult to say. If the agency was focussed on maximising its profit, it should at the very least have alerted the Minister for Finance to the fall in property values and made the Minister aware of the impact of not changing its valuation date. There is evidence that NAMA viewed the decline in Irish property values as incidental to rises to other markets, which seems to indicate that NAMA had not gotten a handle on its portfolio. NAMA wrote to the Minister for Finance in May 2010 drawing his attention to the effect of abolishing Upward Only Rent Review leases on the value of the NAMA portfolio, so you would have expected a similar letter on the effect of continuing to value by reference to 30th November, 2009. As for the decline in property values themselves, NAMA has been partly unlucky, though it is understood that NAMA’s Head of Portfolio Management, John Mulcahy was instrumental in Minister Lenihan believing we were close to the bottom of the cycle in terms of property prices.
NAMA is keen to emphasise that the loss reported today is a paper loss and that over the remaining nine year lifespan of the agency, there is scope to recoup that loss. That is true, though the short term outlook for Irish property markets does look challenging. The projection on here in the short term is that NAMA will continue to rack up losses for the next 1-2 years but will then start to see a rise in the value of the underlying property. The question then will be whether the annual rise in property prices is greater than the substantial costs of managing the loans. On that last point, estimates in theUKthat it costs 5% of the value of a distressed loan each year just to manage the loan might mean that NAMA needs revisit its budgets.
Finally on the issue of losses, whilst NAMA stresses the losses reported are paper losses (which is true), if NAMA had revalued the underlying property at the end of 2010 and assumed all loans would default so that all NAMA was left with was the underlying property, then the loan impairment loss reported today would be substantially more than €1.485bn, the estimate on here is €2-3bn; the reason the losses aren’t as bad as that is because NAMA does not have to assume there is 100% default.
NAMA Wine Lake 