NAMA’s report and accounts for Q4,2011

Last Thursday, NAMA published its quarterly report and accounts for the three months ended 31st December 2011 and the 12 months ended 31st December 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 now. 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, sometimes from the sale of property 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 and overall NAMA made a profit of €200m in 2011. 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 particular the decline in value of its loans as a result of declines in underlying property securing the loans, this is called the “impairment charge”. In 2010, the Agency booked an impairment charge of €810m and this is the single biggest item in the Agency’s annual accounts. What do we know about the composition of the impairment charge? Next to nothing, unfortunately and the full note to the accounts states the following

“In the case of debtor cashflows with a net discounted deficit (comparing the discounted cashflows to the NAMA carrying value of the loans, including any accrued interest income under the EIR method) any deficits are provided for in full as loan impairments.A collective loss assessment has also been performed on the unassessed element of the loanbook, taking into account the loss levels evident in the assessed cashflows. The total impairment provision recognized based on the cashflow assessment at 31 December 2011, for both the individually significant and the collectively assessed loans, was€2.3bn.This results in a net charge tothe Q4 2011 income statement of €810m, as a related provision of €1.48bn had already been recognised in 2010.”

So no analysis by property sector, geographical market, age/size of loan, nothing, nada, nichevo. And this is the biggest figure on the accounts. Also based on a general analysis of the markets in which NAMA is active, it looks too low unless NAMA is making assumptions about the terminal disposal value of assets in years to come, being far higher than pertains today.

Unfortunately the lack of transparency on the biggest number in the NAMA accounts is replicated throughout. NAMA made a profit of €170m in Q4,2011 from the repayment of loans. Was this down to sales of loan portfolios eg the Maybourne loans for €800m, refinancing of loans eg David Daly’s, normal repayments by borrowers, sales of property by receivers/developers? Again, we have next to no idea.

NAMA is a little more forthcoming on its interest income and, following pressure from politicians including Sean Fleming and Pearse Doherty, NAMA is now telling us that of the €1.2bn booked as interest in 2011, €900m was received in cash and a further €0.1bn was later deducted as NAMA didn’t think it would eventually receive it. That still means that nearly 20% of the interest booked by NAMA in 2011 was an estimate of proceeds from the eventual sale of assets and wasn’t received in solid cash.

The above are the big numbers, and it is almost farcical to concentrate a blogpost on the smaller numbers, the salaries, the legal fees, the payment to Capita etc when so little information is available on the important numbers which go to the heart of what NAMA does.

Profit
NAMA made an unaudited profit of €200m in 2011, that’s a major turnaround from the €1.1bn loss in 2010 but remember that in 2010, the impairment charge increased by €0.5bn from €1bn to €1.5bn when the audit annual report was published, so it may yet be the case that NAMA ends up with a loss for 2011. We will find out mid-July 2012 when the annual report is published.

It is also worth pointing out that NAMA should be making a very healthy profit. The Agency pays interest on its bonds (roughly €32bn) at the so-called “6 month Euribor rate” of 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 20% of its loans are performing so the interest receivable each quarter falls to 3% of 20% 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 €365m in Q4 and paid out interest on its bonds of €129m.

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 €170m in Q4, 2011 from the disposal of loans, and from inception to Q4 has made a profit of €300m from the disposal of loans. Given that these are likely to be the most attractive, most liquid and best performing loans, this is not exactly auguring well for NAMA’s future.

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.

Cash flow
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. Cash flow will become an issue for NAMA as it progresses towards 2020 when its bonds are due for repayment. NAMA overpaid for the loans it purchased by €5bn according to the Comptroller and Auditor General and unless NAMA sees a recovery in property prices or manages its assets so as to generate more than was paid for them, then NAMA is looking at a healthy shortfall in 2020 which will then be picked up by the taxpayer. On cash flow, NAMA has healthy receipts from loan repayments including loan interest and has paid out less than €0.5bn in advances to developers.

Dividend
The one detailed small-value item extracted from the accounts this quarter is the dividend paid. In 2011, NAMA paid a dividend amounting to €5.093m to its SPV investors “from its retained earnings”. In fact NAMA made a loss of €1.1bn in 2010, but the three investors from AIB, Bank of Ireland and Irish Life and Permanent were paid regardless. There is no indication of a dividend paid to these investors in 2012 but last year’s management accounts didn’t indicate any dividend either, and it was an unpleasant surprise on the last page of the annual report to find that a dividend had been paid, despite the €1bn-plus loss.

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.

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 four 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 “Portfolio Management” includes receivers costs.