Two days ago, NAMA published its quarterly report and accounts for the three months ended 30th September 2011. This blogpost examines the accounts in some greater detail.
Before starting on any analysis, it’s worth stepping back and considering what NAMA does. It has acquired €74bn of property-related loans from certain Irish banks; it only paid some €32bn for those loans because the underlying security had collapsed in value following our property crash; NAMA has another nine years in which these loans must be reduced to zero; NAMA paid for the loans with bonds on which NAMA must pay just over 1% interest per annum; on the other hand developers pay NAMA just over 3% on their loans; the loans will drop to zero by (1) NAMA selling the loans (2) developers repaying the loans or (3) NAMA foreclosing on the loans and getting the best price it can for the property it secures. NAMA incurs expenses in managing the loans – it has its own staff but also third party suppliers. And lastly NAMA buys insurance (technically “hedging” and “derivatives”) so as to protect the Agency from the ECB increasing interest rates, or foreign exchange rates between the euro and other currencies changing.
So, treating NAMA as a business, what figures should we look at, in order to assess how the Agency is performing? Profit will be the main performance indicator. Profit represents the difference between a business’s sales and its costs. Its “costs” include not just those expenses paid out during a period, but also the change in the value of assets held by the business. In NAMA’s case, it doesn’t publish a full profit figure every quarter; only at the end of each year does NAMA re-value its assets, which in the main are loans which the Agency is owed by developers. So in 2010, the Agency saw the value of the loans owed to it by developers drop in value by €1.5bn, mostly because the underlying security, which is generally Irish property, dropped in value. This is an important point when considering NAMA’s quarterly accounts; so in the Q3,2011 accounts just published, we have a profit figure of €317m but it excludes the cost of its assets declining in value; that cost, called “an impairment charge” will only be reflected in the Q4,2011 end of year accounts. And now that we have both the commercial and residential property indices for Q4,2011, I would expect an overall impairment charge in 2011 of close to €1bn, particularly after the anaemic increase in commercial property of just 0.2% in the last quarter despite the slashing of stamp duty from 6% to 2%. If NAMA delivers a profit before impairment of €600m which I believe is its latest forecast, then we might expect the Agency to make a net loss of €400m after impairments.
It is also worth pointing out that NAMA should be making a very healthy profit every quarter. The Agency pays interest on its bonds (roughly €32bn) at 1% yet it collects interest on the face value of the loans – roughly €74bn – at 3%. So if all of NAMA’s loans were performing and paying quarterly interest, then the Agency would be taking down 3% of €74bn for 3 months (or roughly €600m) each quarter and would only be paying out 1% of €32bn for 3 months (or roughly €100m). So purely looking at interest, NAMA should be really profitable every quarter if all its loans were performing and paying quarterly interest. That’s not the case, and NAMA now says that only 21% of its loans are performing so the interest receivable each quarter falls to 3% of 21% of €74bn for 3 months or just over €100m. So NAMA should be generating a profit each quarter on interest, even if it is just a few million. NAMA says that it received interest of €255m in Q3 and paid out interest on its bonds of €109m.
NAMA also generates a profit if it gets more for its loans than it acquired them for, from the banks. For the sake of illustration only – the NAMA acquisition costs are not in the public domain – say NAMA acquired the loans in the Maybourne group for €700m. In September 2011, it was reported that these loans had been sold to the Barclay brothers for €800m. So NAMA would have booked a profit of €100m, based on the illustrative acquisition price. NAMA says it made a profit of €132m in Q3, 2011 from the sale of loans.
NAMA can also generate a profit if it forecloses on its loans, and appoints a receiver to assets and those assets are sold for more than the NAMA loan acquisition price. Again to illustrate, it is understood that the Odeon site in Leicester Square in London which was sold last week by a NAMA receiver for a price understood to be around €120m, the site was originally assembled by Limerick’s Steamboat Developments for a reported GBP 58m (€70m). It is not clear what NAMA paid for the loans used to finance the development. But on the face of it, it seems likely that NAMA will have made a profit on the transaction.
There is a fourth activity which may generate profit for NAMA, but it has not happened to date, and that is where NAMA forecloses on a property and takes possession of it – remember that to date, NAMA has just appointed receivers and if the receivers recover more than the value of the loan due by the developer, then the developer will normally be given that excess. If NAMA truly forecloses, then it takes possession of the property and may make a profit on its disposal which doesn’t need be returned to the developer. This hasn’t happened yet.
NAMA reported a profit of €317m for Q3,2011. This comprised interest charged to developers of €255m, profit on the disposal of loans of €132m less interest payable on NAMA bonds €109m, operating costs of €30m. Movements on foreign exchange balances and derivatives comprise most of the difference. Of the €30m operating costs, €7m relate to NAMA directly, €14m was payable to the banks for administering NAMA loans, €3m was legal fees and €7m was for “portfolio management fees” which presumably refers to receivers costs. The NAMA profit excludes impairment charges which in my view are likely to be in the order of €1bn for 2011.
Beyond profit, what is worth examining in the NAMA accounts? Normally cash-flow is critical to many businesses but it is not likely to be an issue for NAMA, as interest receipts should cover interest payments and expenses, particularly in the early years – during Q3,2011, NAMA generated €1.4bn in cash, with €1.8bn received from developers – presumably €255m interest and the rest was repayment of loans – and €0.4bn paid out in interest and costs. Also NAMA has a colossal basket of loans, and, in the early years, it can cherry-pick which to offload, which again will provide a cash flow boost. NAMA’s bonds don’t need to be redeemed until 2020 though NAMA has a self-imposed target of repaying 25% by the end of 2013, and to date, NAMA has redeemed €1.25bn of bonds.
What will be interesting to analyse is how NAMA’s cost base compares with its competitors. And NAMA most certainly has many competitors, both in Ireland and internationally. It is intended to develop this analysis and comparison in coming months.
Absence of transparency.
NAMA will tell you that it is the most transparent Govt or semi-state organisation in Ireland, and to an extent it is correct but that just means most Govt organisations are opaque. I must say that with an accountant’s hat on, the quarterly management accounts and report produced by NAMA are becoming increasingly difficult to interpret.
What you might consider to be basic information such as the amount of interest received from developers, the amount of loan repayments and information on assets sold is either threadbare or absent. NAMA uses a convoluted method for calculating interest which meant that €255m was booked in Q3, yet if only 21% of the €74bn portfolio was performing then that would imply interest of only €100m at 3%.
When Minister Lenihan was leading the NAMA legislation through the Oireachtas, there was a provision that NAMA would publish every quarter “sums recovered from property sales in the relevant quarter” – section 55(6)(g) of the NAMA Act. But NAMA has not to date given any details of “property sales” and instead interprets the section of the Act to mean sales where the Agency has foreclosed, and NAMA doesn’t regard the appointment of receivers or liquidators as “foreclosure”. So although we know NAMA has approved €6.8bn of assets for sale to the end of December 2011, NAMA will presumably provide no detail of such sales, as might have been envisaged when the NAMA Act was being drafted. It would be laughable if it weren’t so serious.
Along similar lines, there is a requirement for NAMA to provide details of advances made during each quarter (pursuant to s54 (2)(c) which s55 requires to be updated quarterly). NAMA interprets this to exclude advances made to developers! So all we get are inter-company advances within the NAMA group which tells us nothing meaningful.
NAMA is also required by s54(3)(e) to provide a quarterly “list of all asset portfolios” held by the Agency which NAMA interprets to be merely a total for debtors, a total for cash, a total for other receivables etc, but again this provides no really meaningful information.
I regret to say that NAMA has now lost me in terms of its derivative and hedging activity. We can see each quarter that NAMA books profits and losses, and one assumes that is because of interest rate or foreign exchange bets that have paid off or resulted in losses. It is unclear from the accounts what exposure NAMA has to these products.
Revenue and costs summary for the 2011
I leave you with the summary of revenue and costs for the three reported quarters of 2011 for the main NAMA company, National Asset Management Limited. You can see that some of the costs are beginning to become quite meaty. Presumably NAMA has hidden the Paddy McKillen court case costs under “Legal Costs”. Presumably “Portfolio Management” includes receivers costs.