Archive for May, 2012

“The perception of Irelandexternally is very positive. We have taken the right decisions and are moving in the right direction. We would not be in the position we are in right now if we had not gone down the NAMA road” NAMA chairman Frank Daly speaking to the Financial Times about the application of a NAMA-type solution toSpain’s banking woes

When Ray Kroc was opening his first franchised McDonald’s fast food store in 1955, how could he have imagined that it would grow to over 30,000 stores today. The simple format of basic tasty food worked worldwide and backed up by sound management, the company is one of the most successful in the world. Last night as I read NAMA chairman Frank Daly’s comments provided to the Financial Times about the prospect of Spain adopting a NAMA-type model to sort out its banks, there was a momentary flash of Ireland starting a new service industry which could be franchised and exported across the globe. And there might be something in that, but first of all Spain will need to decide if the NAMA model is suitable for its intensifying problems.

The recent background to Spain’s problems is that its general economic difficulties with deficit, economic growth and unemployment are being exacerbated by problems in its banking system, seemingly caused by losses on loans to the property sector. There is a blogpost on here which examines Spain’s property and banking sectors and concluded that the country appears to have a similar profile to Ireland, but unlike Ireland its property market hasn’t been resolving itself with price declines of just over 20% compared with 50% here, despite similar levels of over-construction and the conclusion was that its banks may be sitting on losses akin to those uncovered in Irish banks, losses which if shouldered by the Spanish people would lead to the Spanish debt:GDP equalling that of Italy, Portugal, Ireland – around 120%.

This blogpost sets out 10 questions that Spain might ask itself before adopting a NAMA-type solution to its banking problems.

(1) What banks need to be NAMAed? Spain has a highly developed banking system with international, national and regional banks. If the Spanish government is to take control of certain banks, it makes sense to have the relevant assets of all of those banks transferred to NAMA. In Ireland we have NAMA with a current portfolio value of just over €25bn competing with IBRC, a 100% state-owned bank with €17bn of loan assets which is also running down its loan book in the same time frame as NAMA. So, in addition to duplication of effort, we have competition for sales and resources between state-owned agencies, which in turn compete with banks outside the State’s control eg Ulster Bank, Bank of Scotland (Ireland)

(2) How big are the losses in the banks? In Ireland there was an initial assumption that the losses on property lending were only 30% whereas in fact, it turns out that they were more than 60% – NAMA paid 43c in the euro for loans, but a recent report by the Comptroller and Auditor General claims NAMA overpaid by 20%. If the losses are too great in any individual bank, then NAMA may not be suitable for that bank.

(3) What is the limit of losses that can be shouldered by the nation?Ireland has so far shouldered €63bn to bailout our banks which represents 40% of our GDP. In addition we found out last week that NAMA had provided €5bn of state-aid to the banks, so the true cumulative current cost of our bank bailout is €68bn and if the mortgage crisis explodes or deleveraging proves more difficult than expected, then that may well grow. So Ireland’s debt:GDP of 120% in 2012 is one third due to bank debt. Many economists believe this debt is unsustainable and will need be restructured or defaulted on. Spain has debt:GDP of  over 70% but that is forecast to rise to over 80% this year. If it takes on the same proportional amount of debt as Ireland did to rescue its banks, its debt could balloon to 120%. If Ireland had known that its 25% debt:GDP in 2007 would balloon to 120% in 2013, then it is likely that as a society, other solutions would have been pursued.

(4) What activity are the losses associated with? In the UK they had losses with banks investing in US subprime mortgages. In Ireland we had banks over-lending to various domestic property sectors. NAMA is suitable where is there is uncertainty or doubt over the value of problem assets. For example if the problem was exposure to sovereign debt, then that should be quite easy to calculate, but with property lending, the value of the loan may be a direct function of the present value of the property and that can be difficult to ascertain and unless there is a NAMA process, potential investors and lenders may be deterred from working with banks whose assets have doubtful value. Also it will be no good to deploy a NAMA scheme to a small subset of assets which are of doubtful value. NAMA needs to be part of a campaign which ensures banks are substantially relieved of doubtful assets and are recapitalised to an extent that they act to support the economy.

(5) How competitive is your legal, accounting, insolvency and property professional services? NAMA is spending a fortune on Irish professional services which are amongst the most expensive in Europe. NAMA’s costs are expected to be €1.4bn over its lifetime which represents less than 5% of the assets it initially acquired.

(6) Are prices still falling, when will the bottom be reached and what will the declines have been at that stage? In Ireland’s case it was hoped that late 2009 would have been the bottom of the property cycles and that NAMA could easily nurse distressed lending and the underlying property for a short period before disposing of these assets at prices above what had been paid. Yield analysis was notoriously deployed to demonstrate that the Irish property markets were at, or were close to, the bottom. As it happened, yield analysis was inappropriate to an economy in extreme distress, and since late 2009, both residential and commercial property has declined by 20%-plus. The consensus is that we are a year off the bottom for residential property and possibly less for commercial property. But this means that 2.5 years into NAMA’s life, the Agency is nursing huge losses and the Comptroller and Auditor General said last week that it would be a challenge for NAMA to break-even by 2020. NAMA’s ultimate loss will be shouldered by the nation, so that has to be taken into account when deciding how much is too much debt.

(7) Will the valuation process be credible? Here’s where there might be a franchising opportunity for NAMA. Its valuation process was approved by the European Commission which has also approved the detail of one third of NAMA’s acquisitions. Without intending any disrespect to the Greek people generally, I don’t think there would be a lot of trust in a Greek NAMA because of the perception of political corruption. What about a Spanish NAMA?

(8) Will the political structures allow NAMA to operate independently? If NAMA can’t place trustworthy values on the assets it acquires or is prevented from acting naturally to manage its assets, then you risk exacerbating distortions which can have unhealthy economic effects eg undermining property transactions. Of politicians get to own or control substantial amounts of assets, then experience tells us that we don’t always get corruption-free outcomes.

(9) Will the assets acquired by NAMA lead to unhealthy distortion in the marketplace? In Ireland, NAMA has acquired €6-7bn of commercial property lending in a market which was only worth €0.5bn in 2011. So NAMA has a dominant position in that market. The Agency has seemingly decided to generally hold its Irish commercial assets, which means the market is awaiting an artificially-removed-from-the-market loanbook to come back onto the market, and that anticipation encourages a stagnation of the market with expectations of price drops when supply increases.

(10) How robust is your legal system? In Irelandthere have been three challenges to the NAMA legislation, the first taken by developer Paddy McKillen was partly successful in Ireland’s Supreme Court and practically meant that NAMA did not acquire Paddy’s loans. The second was taken by David Daly but that seems to have been settled when David refinanced his loans out of NAMA and the legal matters at issue never got an airing or judgment. The third was taken by Treasury Holdings which has been given permission to pursue a judicial review of NAMA’s dealings with its loans and that hearing has yet to take place. If your legal system has holes in it, then wealthy developers and others will line up to take pot-shots at NAMA.

There are alternatives to NAMA. If the losses are too great, then all NAMA will do is crystallise colossal losses and unless there is a plan to provide adequate funding to replenish the capital lost through the NAMA process, then other options such as winding up insolvent banks need to be considered. The British solution was to throw extra cash at the banks to tide them over what was considered a temporary crisis, but if the crisis persists then the banks are still left with assets of doubtful quality which will act to deter investment and lending to banks, which in turn will lead to credit restrictions and the spancelling of economic growth. The perspective on here is that a NAMA-type solution has its place in the Spanish example, but it should sit alongside winding-up banks and temporary extraordinary assistance.

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Contrary to common perception, NAMA doesn’t have the overweening dominant position in Ireland’s residential property market that is commonly ascribed to the Agency. Sure, it is associated with 9,200 rented homes which makes it a very significant player in the residential rented market, but has only 4,000 partly completed homes in addition, so in a market with 2m dwellings, with 290,000 vacant dwellings of which 60,000 are holiday homes and where it is estimated there is a national overhang of 80-100,000 dwellings, that is, an excess over long term average vacancies, NAMA’s presence in the residential market is significant but it is not dominant.

Unlike in the Irish commercial market, where NAMA has acquired €9.25bn of loans secured by commercial property – the €9.25bn is the NAMA acquisition price as at November 2009 and it is estimated on here that the underlying commercial property is worth €6-7bn today. In a country which saw less than €0.5bn of commercial property transactions last year, NAMA’s latent influence on the commercial property market is indeed dominant.

And these loans need to be managed and ultimately resolved by 2020 when NAMA has to pay back its bonds and wind down. That’s eight and a half years away but already there is anxiety about the timing of disposals in the Irish market. And unfortunately for NAMA, it is not alone in the market, and other players may pre-emptively pull the rug from underneath NAMA. The latest mega-block of loans to come on the market is the AIB so-called “Project Kildare” reported by the Financial Times yesterday. Seemingly worth €675m at par value, the loans might only be worth less than half that today in Ireland, a market where commercial property has already fallen 65% from the peak in 2007, and despite the stimulus package in the last Budget announced in December 2011, prices still seem to be sliding according to the two commercial property indices from Jones Lang LaSalle and SCSI/IPD..

The sale process for Project Kildare is being run by Morgan Stanley, according to the FT.Elsewhere Lloyds Bank is offloading €360m of commercial property loans under its “Project Prince” scheme and Ulster Bank is making slow progress in the sale of a €1bn portfolio first announced on here in March 2012. Meanwhile IBRC has a €17bn portfolio of loans including commercial real estate loans it needs dispose of within the next six years. Bank of Ireland and AIB have both substantial 2014 deleveraging targets which will see even more commercial property loans come onto the market. So we’re all set on the supply side of the market, the question is who will buy all of these assets? NAMA announced last week that it expects to make €2bn of staple finance available on its commercial assets, and the view on here is that all of this will be offered in Ireland.

NAMA is understandably upbeat about the prospects for a stabilisation or recovery in Irish commercial prices, but with €6bn-plus of commercial property loans under their belt, they would say that wouldn’t they. NAMA has prioritised the disposal of non-Irish property/loans, but sooner or later, it will need confront this elephant on its books.

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If Carlsberg did property collapses…then you would expect the collapse in the value of residential property prices in the Republicof Irelandbetween 2007 and today to be close to tops. After all, that is what the league table of Reinhart and Rogoff’s global property busts tells us. Adjusting the figures below which are from 2009 to 2011, theRepublic ofIreland would be in second place after Hong Kong 1997-2003.

The Republic’s bust has seen property decline 49.9% from peak in nominal terms, that is taking the actual settled price in 2007 and the actual settled price today. In real terms, taking into account the fact that inflation should have pushed up the price of our property by 1.9%, our residential property has declined 50.8%. Which is a colossal decline, and the betting is that nationally we have further falls in prospect.

But over the Border in Northern Ireland, there’s an underappreciated phenomenon unfolding with prices there having declined by 54% in real terms. This morning the quarterly University of Ulster/Bank of Ireland house price series has been released and it shows that the average settled selling price of a home in Northern Ireland in Q1, 2012 was GBP 134,560 (€168,347) which represents a decline of 1.9% from the previous quarter and a decline of 46.3% from the peak of GBP 250,400 (€313,274) in 2007.

On this side of the Border, the publication last week of the Central Statistics Office monthly residential property price index showed that prices here have decline 49.9% from peak and given our peak price of €313, 998 according to the PTSB/ESRI index, that indicates national prices here today of €157,360. So the nominal decline in the Republic is greater than inNorthern Ireland, which might be expected.

But if you consider inflation in the Republic is a mere 1.9% since the peak whilst in the UK it is a staggering 16.7%, the real decline in the Republic is 50.8% and in Northern Ireland, it’s 54% which would appear to be world record, at least according to the Reinhart and Rogoff league table.

Given that Northern Ireland doesn’t have a major problem with vacant property unlike the Republic – its vacancy rate is 7% which is pretty much in line with international norms whilst ours is 14%; given that Northern Ireland has an unemployment rate of 6.8% which is one half of ours and given their banks are no worse and are probably in better condition than ours, isn’t it truly remarkable that their property crash is worse than ours?

Of course in the Republic we have oversupply but there is suspicion that it is being withheld from the market by banks and developers who don’t wish to crystallise losses on loans. Although our mortgage arrears problem has become a crisis with 15% of mortgages in arrears or restructured, and with one in 13 mortgages in arrears for more than six months, there is massive forbearance on this side of the Border with repossession rates on defaulting mortgages running at a level of less than a quarter that of Northern Ireland. It is likely our draconian bankruptcy regime and forbearance is preventing repossession and sale of homes whose mortgages are unsustainable. Our banks aren’t lending for new mortgages as revealed a fortnight ago with just 2,200 new mortgages for home purchase approved in Q1, 2012.

Elsewhere theNorthern Ireland survey shows that transactions in the quarter remained at a low level of 925, down from 960 in the previous quarter. The authors of the report – Professor Alastair Adair, Professor Stanley McGreal and Dr David McIlhatton – said: “We consider the generally weaker market in the first quarter of 2012 reflects a lack of confidence arising from the poor performance of theUK economy, with buyers still deferring decisions because of economic uncertainty, rising bills and concerns about job security.” Hmmm, what’s the outlook on this side of the Border.

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Ahead of the Fiscal Compact referendum on Thursday  this week, there is an argument thatIrelandis on the road back from the abyss and that a “no” vote might stamp out the fragile green shoots of recovery. This blogpost examines the latest economic statistics and concludes that we are not yet in recovery mode.

We’re in recession. The top-level measure of a country’s economic performance is its Gross Domestic Product (GDP) which tries to measure the total value of goods and services produced by a country and Gross National Produce (GNP) which measures what we produce but excludes profits made by foreign companies – those are simplifications. Economists define a “recession” as GDP declines in two successive quarters. Unfortunately there is no widely accepted definition of a “depression” though some have suggested you’re in a depression when you have a GDP decline of over 10%. So what do the latest numbers which relate to 2011 tell us? We’re back in recession with GDP contracting in the last two quarters of 2011 and with GDP down 9.5% from €178bn in 2007,Ireland might be said to be in a depression. The results for the first quarter of 2012 will be available at the end of June 2012.

Bond yields are rising: our notional borrowing costs are stable to rising at present. We say “notional” becauseIreland is not actively issuing debt at present, we get all our funding from the Troika bailout, but we can see the interest rates that apply on the secondary markets where holders of our bonds sell to one another. In November 2010 when we sought our first bailout, our notional cost of borrowing was 7% and it increased to 10% in March 2011 when the bank stress tests gave some confidence and there was a temporary decline to 9% but when Portugal sought its bailout in April 2011 and Greece started lurching from crisis to crisis our yields rose to a high of 14% in July 2011 when the EU decided to cut our interest rate along with Greece’s and Portugal and it reached a low of 7.5% a the start of October 2011 before increasing again to 10% as concerns grew for Italy in particular and then at the end of November 2011, the ECB announced it was practically printing money by offering 3-year loans to banks at 1% which banks could use to buy bonds, and that lead to a gradual reduction in our yield to 6.7% thought it steadied at 6.9% before the latest bout of jitters about Greece and Spain and this morning it stands at 7.5% again. Sustainable long term borrowing is perceived to be about 5-6% or lower. 7.5% is seen as unsustainable and indeed so also was 6.7% our low in the past six months.


Retail sales are falling: A good indicator of the domestic economy is the value of retail sales, what we are spending in the shops, and the latest monthly figures were published by the CSO this morning which show the value of retail sales was down 1.1% on a monthly basis in the month of April 2012 and down 1.8% on an annual basis and is down 26% from the peak in 2007.

Construction activity is falling: the latest index from Ulster Bank published at the start of May 2012 stated “activity in the Irish construction sector decreased markedly in April as fragile client confidence led to a drop in new business.”

Residential and commercial property prices are falling: the latest monthly indices from the CSO show that nationally property prices continue to decline, by over 16% in the past year and 1.1% in the month of April 2012. There have been two consecutive months of increases in Dublin, the first time that has happened since the peak in 2007 though we did have Dublin apartment prices increasing in two months last year before seeing substantial decreases this year. The latest commercial price indices from Jones Lang LaSalle and the SCSI/IPD both show commercial property continues to decline despite Budget 2013 being one of the most pro-property budgets for more than a decade.

Mortgage lending is falling: We saw with the latest quarterly lending figures from the Irish Banking Federation a fortnight ago that mortgage lending is practically flat-lining and for Q1, 2012 a total of €450m in new lending was approved, down 95%-plus from the peak, down from the previous quarter and down from the previous year’s Q1, 2011. The only bright spark is the annual pace of decline has eased but given the VERY low base of current lending that is hardly cause for optimism.

Business lending is falling by about 2% annually: anecdotally small and medium sized businesses complain about lack of access to credit. Referrals to the Credit Review Office confirm there are problems but suggest they’re not as bad as companies claim – companies counterclaim that to keep relationships with local banks, they won’t complain. The official figures however confirm that lending is declining.

Mortgage arrears are rising: We saw with the latest mortgage arrears figures that another 6,000 mortgage accounts went into arrears in Q1, 2012 though the pace of increase slowed slightly. One in 13 mortgages is more than six months in arrears, a time period after which there is generally considered to be little chance of the account becoming performing again. 15% of mortgage accounts are in arrears or have been restructured.

Our deficit: I think it is fair to say that our deficit is under control in the sense that monthly results are now in line with, or better than, projections, and that is no mean feat, even if many of the measures introduced have been mandated by the bailout programme with the IMF/EU. However, our deficit is second highest in Europe after the UK’s and although it is hoped it will be less than 8.6% in 2012 and less than 7.5% in 2013, this will rely on projections of economic growth as well as another €3.5bn of cuts and new taxes to be announced in six months time in Budget 2013. And we will need adjust our budget by €3.1bn in 2014 (on top of previous years’ adjustments) and €2.5bn in 2015 (on top of previous years’ adjustments) – in other words in 2015 we will have an adjustment of €8.6bn compared with 2012, that’s €5,000 per household in new taxes and cuts.

Our debt: our national debt is rising and next year is expected to peak at 120.3% as long as we meet deficit targets and have some economic growth. Arguably it is this debt which is unnerving bond markets and preventing our bond yields coming back below 5% where we could sustainably borrow. This is our gross government debt but it excludes any loss on NAMA and we know that NAMA paid €5bn more for its loans than they were worth in November 2009.

But is it all negative? Absolutely not, even in the figures above, there are rays of hope, there is some evidence of a slowing in the declines in residential property prices in Dublin, the number of mortgage accounts 90-180 days in arrears grew by just 300 in Q1,2012 the lowest increase on record. And in general, the forecasts this year are for modest growth.

Unemployment is stable and has been for a year and half now. It is still 14.3% which is very high compared with the UK’s 8.5% but nowhere as bad as Spain at 24% or Greece at 22%. We are creating jobs but the problem is we are still shedding jobs – we hear about large scale job announcements like Paypal’s 1,000 new jobs in Dundalk but in reality, many job announcements lead to recruitment which is spaced over a period of years and meantime there is a drip-drip of layoffs, many of which don’t make the national headlines. Our unemployment rate has stayed largely the same for 18 months fluctuating between 14.1% and 14.6%. We don’t know what effect emigration is having on the unemployment figures. It is almost criminal in Ireland, a country scourged by emigration that there is no comprehensive measurement of emigration and we must rely on estimates which tend to be out of date and wrong. The latest estimate for the year ended April 2011 was that 76,400 emigrated whilst 42,300 immigrated. Forecasts for 2012 tend to project unemployment staying at current levels.

Deposits are stable: monthly reports from the Central Bank ofIreland show that since the middle of 2011, deposits have stopped flowing out of Irish bank accounts. But since then there has been a stabilisation rather than growth. There has been growth of deposits at Irish banks outside of Ireland, eg with the Bank of Ireland/Post Office joint venture in the UK, but it is difficult to see what benefit this confers on the Irish economy.

Residential and commercial rents are showing signs of stabilisation: Residential rents have in fact been stable for well over a year and indeed until last month were beginning to increase by 2-4% annually. Last month’s 0.9% month-to-month decline might have been a blip but it might also herald reductions envisaged when social welfare rates were reduced in January 2012. Commercial rents rose by 0.7% during Q1, 2012 according to JLL, the first increase since 2008.

Inflation is low: we don’t have deflation in Ireland which is a mixed blessing. On one hand it would help sustain standards of living but on the other would lead to lower wages and might ignite a cycle which economists refer to as stagflation. The latest inflation  figures show annual CPI inflation running at 1.9% with energy prices being a significant contributor.

Consumer confidence is up: the KBC bank/ESRI publish a monthly consumer confidence index and it has been showing signs of improvement in the last two months having risen from 54.3 to 60.1. Mind you, this index appears to be volatile and if you examine previous figures, you will see 20% declines in two months. At 60.1 it is at its highest level since September 2010, but then again it was at 59.0 in November 2011 only to decline to 54.3 in February 2012.

So do we have the fragile green shoots of recovery? Based on current statistics, no we don’t. The main economic indicator, GDP, shows we are in a double-dip recession – that’s black and white. Lending to our economy is in decline, and in some sectors is moribund. Our notional borrowing costs are unsustainable and are levels above those that applied on the eve of our first bailout and are currently trending upwards. Our deficit is a horror story though we are meeting our monthly projections. Our debt is also a horror story and is growing. Asset prices represented by property are declining. Our unemployment rate is stable but it seems that new jobs generated are being offset by job losses. Our inflation is low but above zero which is a positive and some surveys indicate a growth in consumer confidence from a low base.

Overall, based on the most recent statistics, you would have to say that we are not yet recovering.

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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.

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.

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.

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The mainstream media in Ireland hasn’t exactly covered itself in glory this week. RTE kept on reporting on Thursday a claim by An Taoiseach Enda Kenny that the text of the Fiscal Compact would not change following talks at the EU summit. Yet in France, there was no such admission from the French president Francois Hollande. Did RTE bother to check An Taoiseach’s claim, a claim which is very important indeed to our country about to go to the polls on Thursday next, and a claim you might have expected to therefore have featured in the EU summit communiqué but it didn’t? No, RTE seemingly got un-named sources at the EU to say the text would not be changed, but it seems it was beyond RTE to pick up the phone to the Elysee Palace to check the French position. The meme has since died away in the media. Reminds me of RTE’s “Georgia moment” when it illustrated the Russian incursion into south Ossetia and Georgiain 2008 with a map of Georgia,USA!

And today, Ireland’s main broadsheet newspaper the Sunday Independent exposes its own failings and hypocrisy. We have a well-written article in favour of the Treaty from Labour’s Minister for Social Protection Joan Burton, but because the Independent has a particular stance towards the party leading the “no” vote, we have no real political response in balance. The hypocrisy is that the Independent claims to have complete editorial independence but apparently that stops when it comes to one political party, a party which seems to be consistently securing high teens and low twenties in the opinion polls. Instead we have the Sunday Independent’s current editor Anne Harris rambling on about some “underbubble” in an opinion poll. If anyone knows what an “underbubble” is, please share, but for the time being it looks as if the Sunday Independent is illiterate as well as hypocritical, and instead of pursuing exclusives it is pursuing exclusions. Rival newspaper, the Sunday Business Post has a contribution from Sinn Fein’s finance spokesperson Pearse Doherty here, which is balanced with contributions from the chairman of Enterprise Ireland, Hugh Cooney and Antoin Murphy of Trinity College Dublin.

There has been precious little reporting or analysis of the European Stability Mechanism (ESM) in the mainstream media and remember a “yes” vote on Thursday allows the Government to sign Ireland up to the full provisions of the ESM – a €700bn fund which you and I are funding to the initial tune of €1.27bn but that may grow to €11.1bn and beyond – these are big numbers, €11bn is about one third of the State’s annual income. The ESM brings potential costs and benefits to Ireland. Although one TD has taken legal action against the Government to force a referendum on the ESM Treaty itself in addition to the Fiscal Compact, it will be later in the year when Deputy Thomas Pringle has his day in court. And meantime in July 2012, that is to say, five weeks away this country will hand over €254m to the ESM and the betting is that Spain will have first dibs on this money and the borrowing it secures in a matter of months. Deputy Pringle says these commitments should be put to the people in a vote, the Government disagrees, the matter is set to have an initial hearing in June 2012 and the understanding is that the Government has given an undertaking not to ratify the ESM Treaty until the court case has been disposed of, though that undertaking might need be enforced with an injunction.

A member of this blog’s audience has gone through both the Fiscal Compact and the ESM treaties in some detail and produced a 30-minute guide to both. Now there are guides to the Fiscal Compact available from the Referendum Commission and others, but I have yet to see an official guide to the ESM treaty, so this guide tries to fill a void.

The regular audience on here will be familiar with the balance observed in most debates, and this guide has balance though it is ultimately cautioning about the new treaties, and that might be interpreted as advocacy of a “no” vote. Regardless, it is a well-presented guide to both treaties with plenty of references and facts. If you get a spare 30 minutes, I recommend it – you can download it here.

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This time next week, it will be all over bar the shouting. The referendum is set to take place on Thursday and we should know by Saturday at latest how we have voted. The position on here is to advocate a “no” vote and if the referendum is rejected, it is hoped that next weekend the Department of Finance can contact the ECB, explain that the country faces a sovereign default in 2014 without access to the ESM, and accordingly the country is in no position to sanction the payment of €640m to senior unsecured unguaranteed bondholders at what was Michael Fingleton’s Irish Nationwide Building Society on 26th June 2012. “We’d like to help, but it would be lunacy to pay a bank debt when a sovereign default may loom” – see how long it takes the ECB to start meaningful negotiations on the extant bank debt, promissory notes and bonds, after that exchange.

This is the last weekly review before polls open on Thursday and this

The Economics
Minister for Finance Michael Noonan transmitted a message from the National Treasury Management Agency to the Dail and said it was the professional view of the NTMA that if Ireland rejected the Fiscal Compact and consequently did not have access to the ESM, then the NTMA believed that the traditional bond markets would not be available as sustainable alternative sources of funding.

The Politics
Having kept us waiting for weeks, Dublin North-Central Independent TD, Finian McGrath announced on Friday that he would be voting “no”. I believe we still wait to hear how Deputy Shane Ross will vote – Deputy Ross was angling for a deferral of the vote at this stage, but given it is going ahead, perhaps he might let us all know his voting intentions. Deputy Eamon O’Cuiv has kept his word and not publicly campaigned for a “yes” vote though you can still read his position in some detail here. In the Dail 80%-plus of TDs support a “yes” vote and beyond Deputy O’Cuiv, if there is dissent, we haven’t heard it – has anyone heard from Fine Gael TD, Peter Mathews in recent weeks?!

The Opinions Polls and Betting
We’ve had a four opinion polls this week which seem to show the “yes” side in the lead, but with less than 50% and surprisingly a large number of voters who are still “undecideds” An Ipsos MORI poll for the Irish Times shows “yes” with 39%, “no” with 30% and “undecideds” at 22%. A Red C poll for the Sunday Business Post puts “yes” at 49% and “no” at 35% and “undecideds” at 16%.  There is also a Millward Browne Lansdowne and a Sunday Times polls which project 42-45% for “yes”, 28-30% for “no” and 25-31% for “undecided” You’d have to say the “yes” side has the edge but with four days remaining, with younger voters comprising most of the “undecideds”, it’s all to play for.

Paddy Power is betting the farm on a “yes” vote and its odds show a solid view that “yes” will prevail.

The Endorsements
The country’s most prominent economist, David McWilliams hasn’t seemingly entered into the advocacy game for this referendum, but he states on his website that he will “of course” be voting “no”.


The View from outside the Pressure Cooker
In what seems like another failure at our national broadcaster, it appears that the claim reported by RTE from An Taoiseach Enda Kenny that the text of the Fiscal Compact would not change following the EU summit in Brussels during the week, may not have been absolutely accurate. The main voice of dissent, France’s new president, Francois Hollande said after the summit that he COULD renounce his demand for a new text IF he got satisfaction on a growth agreement, which seems highly conditional. And indeed, despite RTE claiming to have un-named EU sources saying the text would not change, it would seem to be political suicide for Mr Hollande to throw in the towel on a key French election demand, without having any solid concession on growth.

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