It may seem like pulling teeth with getting NAMA to explain how it accounts for interest income in its financial statements. A Fianna Fail deputy, Sean Fleming was warning of a showdown with NAMA for its alleged stone-walling of the public accounts committee. Sinn Fein’s finance spokesperson Pearse Doherty wrung from NAMA a schedule of its interest shown in its accounts together with a note of actual interest received, which showed there is a significant difference between the two – €249m in the first nine months of 2011 between what NAMA showed in its accounts, €786m and what it actually received in cash, €537m. But now, the NAMA CEO Brendan McDonagh has written to the Committee of Public Accounts – copy of letter here – in response to Deputy Fleming and explains its accounting and provides a worked example. Looks like we’re finally getting clarity!
NAMA uses a convoluted accounting method to account for the interest it receives from developers whose loans the Agency has absorbed. The method called the “Effective Interest Rate” (EIR) and it isn’t some hocus-pocus dreamt up by NAMA, it is an accepted international accounting practice enshrined in the International Financial Reporting Standards. But despite all the impressive sounding terminology, what EIR ultimately boils down to is someone’s estimate of how much a loan will be worth over its lifetime. And since most of NAMA’s loans are not performing and are secured on property in Ireland, that means that someone has to estimate what the value of the underlying property will be in a number of years. No seriously, this is really how it works!
Here’s NAMA’s worked example
So, NAMA spent €9.25bn on Irish commercial property as part of its €32bn of acquisitions (the face value of Irish commercial property loans isn’t public but in overall terms NAMA’s loans have a face value of €74bn). Irish commercial property has fallen by more than 20% since November 2009, the date used by NAMA for valuation purposes. But what will an individual commercial building be worth in say seven years time, the typical length of a supported NAMA business plan? Where would you even start to estimate future values? Will we be in the euro, will we be in the EU, what will inflation look like between now and 2019, how will our economy perform, what type of businesses will be expanding and where, will our banks be restored to stable health?
What will trouble many people is that NAMA’s record over its short lifetime in respect of forecasting hasn’t been spectacular. Its draft business plan was a bit of a joke for such a large undertaking, its second business plan wasn’t much better but the figures changed substantially – it’s profitability dropping by 80% and operating costs dropping 40%, in the space of 10 months; NAMA blamed the perfidious banks for the former jump but stayed schtum on the latter. NAMA was behind the former Minister for Finance’s assertion in the Dail in mid-2010 that Ireland’s declines in property prices were broadly offset by increases elsewhere, when at the time any eejit could see that domestic prices were plummeting whilst UK prices overall were growing modestly and in the event, NAMA booked a €1.5bn impairment loss in 2010. In September 2011, NAMA thought its 2012 operating costs would be €242m but four months later the projection is €194m – now if this 20% decline was down to NAMA’s ability with negotiating prices or figuring better ways of doing things, we should be impressed but past performance tells us that NAMA just got its assessment wrong again. Doubtless in part informed by its desire to generate a profit, NAMA keeps on talking about price stabilisation in Ireland, the latest that Irish commercial property prices should stabilise this year. On one hand, let’s hope the Agency is right but on the other, the National Competitiveness Council points out that commercial property prices are still overpriced by reference to economic value and even rents.
So how comfortable do you feel with NAMA’s estimating? And how comfortable are you that NAMA is receiving far less in cash than it is showing in its accounts? Of course not all EIR calculations will involve looking seven years or even five years ahead. But would you be confident in NAMA’s ability to project 12 months ahead?
@NWL, So the interest rate is not an interest rate at all? It is even unified? Is it an IRR on each individual loan depending on the forecast value of that particular loan over a given period – or is it a “blanket” forecast over a section (say Irish commercial or residential) of the portfolio? Either way, to me, it looks like it is designed to obfuscate.
@WSTT, well the EIR isn’t an interest rate in a banking sense. And I think in a banking sense, NAMA is saying the average interest rate at September 2011 was 3.4% which I guess would be about 2.9% now after the ECB cut rates twice by an overall total of 0.5%.
“The weighted average contractual interest rate being paid in cash by those performing loans is estimated at 3.40% of the par / nominal debt at 30 September 2011” http://debates.oireachtas.ie/dail/2012/02/15/00090.asp
The EIR rate presumably applies to performing and non-performing loans. So NAMA booked €255m on about €71bn of loans for Q3, 2011 which works out at an EIR of 1.4%.
I think the focus now will be on NAMA’s estimate of realisable value, and how the Agency goes about projecting that against a background of uncertainty, deep economic distress and not a great record of forecasting at the Agency itself. I can feel another public accounts committee hearing in my waters!
NWL – what happened to the good old fashioned accounting concept of recognising gains when they have either occured or are contractually certain? It would be useful to see a “cash” accounting of nama’s activities – what have they paid out and what have they received both in terms of loan interest and principal.
Nama’s approach completely ignores the contracted interest on the loan acquired and as I have suggested elsewhere represents a purely arbitrary allocation between interest and capital.
If we take the above example and gross it up to take account of the portfolio-wide discount, the face value of the loan would be €231. If the interest rate on the original loan was 3%, then the five years interest due (ignoring compounding) would be about €34. Arguably, we could deduct this from the €120 realised after five years to get €86 as the capital repayment. This is a loss of 63% on the face value of the loan and a loss of 14% on the acquired cost (i.e. €100). It also suggests that Nama is writing off (or ignoring) about €14 of interest which is technically due on the loan but not repaid.
What would the Nama example look like if its sample loan related to a ghost estate whose value could decline over the five years. Do they use “negative interest recognised”?
Sounds like the “Mark to Market” stuff that brought Enron down(Not to mention Anglo). I’m not surprised. You can’t teach old dogs new tricks.
In the org. chart on another posting,very little prominence to AC.Would this fall under Ronnie or NTMA.Seriously,Frank can not be doing everything,can we have some “accountability ‘ please,after all the salaries reflect that.
@ NWL,
“€249m in the first nine months of 2011 between what NAMA showed in its accounts, €786m and what it actually received in cash, €537m.”
Is it absolutely clear that the €537m cash relates to interest income? and not cash received from other activities (asset disposals, etc).
It would be useful if NAMA could show the effect the Google sale had on it’s accounts as an example. Was a portion described as ‘cash interest income’.
@Ahura, it’s as absolutely clear as the content of the response from Minister Noonan to Deputy Doherty’s question, and which was examined on here.
https://namawinelake.wordpress.com/2012/02/17/namas-interest-income-comes-under-the-spotlight/
NAMA separately shows the profit on asset disposals in its profit and loss account, so I would say in response to you that the €537m is interest only.
Thanks NWL,
Looking at Noonan’s speech on the oireachtas.ie it seems the amount is ‘cash’ interest received.
However, if you look at the “EIR example loan”, in year 5 nama would expect ‘cash’ interest of 20m. In a way, it could be hived off from an asset disposal. So I think it’s possible that some ‘cash interest’ is coming from asset dispoals. I freely admit that I’m guessing a bit at this. Consider the sale to Google. NAMA owned the underlying loan. Assuming this loan was in arrears, the owed interest would have accrued up to the point of sale. At this point NAMA would be entitled to be paid back the principle and accrued interest. There would be no ‘profit’ per se, just interest owed. This would then be included in cash interest income, yeah?
Hayseed School of Accountancy
NAMA Balance Sheet
Income
1. Interest on acquired loans ?
2. Rents from property acquired ?
3. Profit or loss from sales of property ?
Expenses
1. Big fat salaries ?
2. General Overhead ?
3. Upkeep on acquired property and other related costs ?
4. Interest on notes to purchase property ?
Profit or Loss ?
Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted.
The more that I think about this, the more it strikes me as the sham that it undoubtably is. But surely it is reasonable to ask “Why?’ What is actually gained by this subterfuge, other than to keep the public in the dark?
It is indicative of the contempt that NAMA has for those outside agency.
Living in a cocoon, it cares little about jobs unless it receives a phone call from a Minister.
It fudges its interest charges.
It can’t deal in a straightforward manner with its debtors (Treasury claim).
It concentrates more on the collection agenda of Frank “WAG’s knickers” Daly, than its brief of managing and selling its acquired assets.
It sits on its laurels now that it feels that it has secured the €7.5 billion for end 2013 and has no idea how it will achieve the next phase of its sales.
It has more portfolio managers than I have had hot dinners, but has no idea how to manage its relationship with its debtors or its potential purchasers – who have given up on ever being able to negotiate successfully with it.
When will the government take over these parasites, instill some commerciality into them and take us out of this domestic economic stagnation that NAMA is perpetuating and has no idea how to rectify?