The regular audience on here will be familiar with the debate over the eventual financial out-turn at NAMA in 2020. Will the Agency break even? Will it make a €10bn loss? Might it even turn a profit? Truth be told, all we have is the current financial position at the Agency, plus informed views about the next couple of years and finally, our own bespoke crystal balls to tell us what will happen to NAMA’s various property markets as this decade progresses. But confronted with this great ignorance of the future, it might be foolhardy to bank on NAMA making a profit or breaking-even, especially if we have an opportunity to protect ourselves against potential losses now. But that, seemingly, is the position of the Irish government which has this week confirmed that NAMA is not forming part of currently-ongoing negotiations with the EU/ECB/IMF over the burden of debt generated by the national bailout of our banks.
The current financial position in NAMA is not totally clear. We know that NAMA overpaid for the €74bn of loans it acquired to the tune of €5.6bn – in other words, NAMA paid €32bn for €74bn of loans that would only have been worth €26bn on the open market. The €5.6bn overpayment is characterised as state-aid and it was always the plan that NAMA would overpay for the loans it was acquiring because it was supposed to be acquiring these loans at the bottom of the market. There is no suggestion that NAMA erroneously overpaid for the loans it acquired or that it deviated from the valuation methodology agreed with the European Commission (mind you, it would be nice if the European Commission would approve the remaining 60% of NAMA’s loan valuations).
NAMA incurred an accounting loss in 2010 of €1.2bn though it is seemingly about to declare next Thursday when it publishes its annual report, an audited profit of €0.2bn for 2011. The immediate outlook for NAMA’s main market, Ireland, is challenging with commercial property prices still falling – and NAMA acquired €9bn of Irish commercial property loans – though there seems to be signs of residential property stabilising in some areas – NAMA acquired €3.5bn of Irish residential property loans. So NAMA is sitting on a loss of €1-5bn+ today depending on how you value its loans and the immediate outlook is challenging. And remember that NAMA is running up substantial running costs – about €200m per annum plus the interest it must pay on its bonds of about €500m. Only 18% of NAMA’s loans are performing and this is set to decline further as quality performing assets are disposed of. So NAMA can’t just hope for inflation as a one-way bet, it needs to see price rises in excess of its own costs.
In 2020 when NAMA is scheduled to be wound down, the Agency is required to have repaid all its bonds or IOUs it used to purchase the €32bn of loans from the banks. If NAMA hasn’t generated enough cash, then it will be the NAMA banks – AIB/EBS, IBRC and Bank of Ireland – that will absorb any loss in the first instance. But since we own 100% of IBRC and 99.8% of AIB/EBS and 15.1% of Bank of Ireland, it is the nation that will be on the hook for any loss. And just in case you think the minority shareholding in Bank of Ireland means we can escape these costs, remember NAMA’s losses will be allocated to the banks on the basis of the value of loans acquired, and Bank of Ireland represented 1/6th of NAMA’s loans. In other words, the State will bear almost all of any loss at NAMA.
So given our exposure to NAMA, the potential for large losses and the fact that the losses will have been incurred in addressing our banking crisis, mightn’t you have thought that these potential losses would form part of the current bank debt negotiations? In the Dail this week, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan about this very issue. This is the full response.
“Deputy Pearse Doherty: To ask the Minister for Finance in view of his recent statements regarding ongoing negotiations of the State’s bank debt with the EU; the consideration that has been given to seeking to limit the cost of any potential overall loss at the National Asset Management Agency; if he will confirm that the State’s exposure to NAMA forms part of the ongoing negotiations.
Minister for Finance Michael Noonan: NAMA has been tasked with maximising its return on behalf of the Irish taxpayer. NAMA recently reaffirmed its expectation that the Agency will recoup for the taxpayer the Senior Bonds in issue as well as recovery of its carrying costs and the working and development capital advanced to debtors in the course of its business.
NAMA’s Annual Report for 2011, which will be published this month, will make extensive information available on the Agency’s operations and will chart the substantial progress that NAMA has made towards achieving its core financial objective. NAMA has also, as the Deputy is aware, announced a significant programme of asset development and enhancement in Ireland over the period to 2016 and the availability of €2 billion in vendor finance for prospective purchasers of commercial properties controlled by its debtors and receivers. A number of other initiatives are being progressed by the Agency. These activities provide strong evidence of the measures being adopted by NAMA to ensure that it will meet its objectives under section 10 of the NAMA Act.
NAMA’s position is not under discussion in the context of the State’s current discussions on bank debt.”
So in other words, we hope NAMA will break even. But if it doesn’t we will have missed the window of opportunity apparently presented by the EU summit in June 2012. The senior figures in this current government might be long-retired by 2020, but the new generation will reap the consequences then, if not before, if we find that we are bearing billions of euros of losses related to the bank bailout which might have been avoided in 2012.
NAMA Wine Lake 