Archive for July 23rd, 2012

In the previous blogpost preview of this Thursday’s scheduled publication of the NAMA 2011 Annual Report, we looked at 10 areas which will be deserving of attention, and noted that “misdirection” – the distraction from something NAMA would prefer to remain unchallenged, with something else which NAMA would prefer you to focus on – was likely to feature in this Annual Report as much as in the NTMA and NPRF reports which were published last week.

Here are 10 things which NAMA might want you to focus on the good news and ignore the risks, concerns and facts.

(1) Cash
NAMA has apparently approved the sale of more than one quarter of its assets (more than €9bn) and most of that has been realised in cash. On the other hand, NAMA had repaid one tenth of its bonds (€3.25bn). So it must be obvious that NAMA should be sitting on a mountain of cash. But you can’t deduce from that alone that NAMA is doing well. If you borrow €30,000 from the bank and then buy a variety of Lots at an auction, and then sell Lots for €9,000 and repay the bank €3,000 then of course you will be cash rich, but that doesn’t tell us how well you’re doing.

(2) Approval of acquisition of loans
NAMA has received European Commission approval for the acquisition of €27bn out of €74bn of its loans. Where is the approval for the remaining 60%? The last EC approval was given in August 2010 – two years ago – so why are there delays?

(3) Approval of developer business plans
NAMA has abandoned its intention to put in place memoranda of understanding, heads of terms and full agreements, and it now seems to be the case that most developers are operating with 3-month letters of support. Why has NAMA not been able to enter agreements, and as with the approval of the acquisition of loans by the European Commission, does this reflect on poor management at NAMA?

(4) Additional security pledged by developers
NAMA will tell you that it expects to get developers to bring €500m of assets to the table as collateral against loans. What NAMA won’t tell you is how much is associated with new lending. Remember NAMA has approved more than €1bn in new advances.

(5) Developer salaries
NAMA will tell you its payments to developers and their companies to manage their assets is a fraction of what it would pay receivers. What NAMA doesn’t want to tell you is how much in overheads it is paying, nor how much developers can earn in profit shares if their assets sell for a price in excess of an agreed target.

(6) NAMA advances
NAMA wants to tell you about the €2bn that it will spend on its assets in Ireland in the next four years. What NAMA isn’t keen to talk about is the €5bn originally expected in the NAMA Act. NAMA will also prefer to talk about approved advances rather than advances handed over in cash. And NAMA really doesn’t like it when you point out that most of its advances have gone outside Ireland and have been creating jobs in the north of England for example.

(7) Demolitions
NAMA wants to tell you about how some developments may need to be bulldozed. What NAMA would prefer to avoid, is talk of its efforts to secure and maintain its property, its efforts to sell its property either by private tender or auction and the cost of demolitions.

(8) State aid
NAMA really doesn’t like it when you zero in on the €5.6bn of state aid it paid to banks when acquiring €74bn of loans, for which it paid €32bn. And NAMA reaalllly doesn’t like it if you suggest that NAMA overpaid for the loans it acquired. So the pretty lady and the left hand are right in saying that NAMA didn’t overpay in the sense that NAMA complied with the valuation methodology agreed with the European Commission, but in the left hand is the fact that the agreed methodology provided for over-payment and that the loans NAMA acquired for €32bn were in fact only worth €26bn on the open market. The long term economic value premium that NAMA paid the banks accounts for most of the €5.6bn of total state aid.

(9) Social housing
NAMA would like you to believe that it is offering about 3,000 homes for social housing in Ireland. Remember the hoopla last December 2011, when Minister for the Environment, Community and Local Government Phil Hogan trumpeted the then-2000 homes that NAMA was making available? And seven months on, NAMA has to date sold 58 homes for social housing and these are understood to be the 58 it sold last July 2011 at the Beacon South Quarter to the Cluaid Housing Association. Now the blame for this tardiness doesn’t necessarily sit with NAMA – it takes two to tango and it might be that Minister Hogan’s department is at fault – but one of the tango partners is NAMA and it should be able to describe its efforts to sell these properties for much-needed social housing.

(10) NAMA headcount and salaries
We know that NAMA now employs 214 people – remember the Good Auld Days when it was planned to have 75 employees? And NAMA would like you to believe that the average salary is less than €100,000. What NAMA doesn’t like to talk about is the full cost of employment including pension costs – and because NAMA has a finite lifetime, we understand that the pension costs are significant. The belief on here is the average full cost of a NAMA employee, and by average is meant “mean” rather than mode or median, is about €175,000 and considerably more if bonuses are paid, which we understand they haven’t been for 2011 but they might be in 2012 or future years.


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This time last year, the NAMA CEO Brendan McDonagh was filmed as he waited to go into the press conference for the launch 2010 NAMA Annual Report, and he joked to RTE’s Ian Kehoe whether the first question he would be asked would be how come NAMA was so successful in generating such a big cash mountain. The 2011 Annual Report is expected to be published this Thursday, though we are still awaiting details of any NAMA press conference to accompany the publication. It is to be hoped that NAMA faces more robust questioning than last year.

It should be said that we are also expecting this week, the judgment in the Treasury Holdings judicial review case which was heard earlier this month, and on which there was very little reporting. Remember Treasury was challenging NAMA’s dealings with its loans, and should the High Court find that NAMA acted unlawfully, then the whole NAMA project could be de-railed, and NAMA could face colossal claims for damages from developers whose loans it has foreclosed. The betting is that NAMA will win its case, but if it loses, NAMA might find itself with a busy week!

We already have the unaudited accounts for NAMA for 2011, and you might expect this Thursday’s publication to contain few surprises, but remember last year that the impairment provision (see below) increased from €1bn in the unaudited accounts to €1.485bn in the 2011 annual report. It is also expected that the 2011 Annual Report will contain a treasure trove of information not hitherto in the public domain.

So, ahead of Thursday, here is a preview of ten headings we should look out for:

(1) Overall Profit
The 2011 unaudited accounts showed NAMA made a profit of €200m, and recent rumblings from NAMA indicate the final accounts will show a similar, if not higher profit. This compares with a loss of €1.1bn in 2010. If the impairment cost – see below – has indeed risen by €400m since the publication of the unaudited accounts, then NAMA must have found extra profit someplace else, perhaps with Paddy McKillen’s defeat in London’s High Court, NAMA is able to recognise the profit on the sale of the Maybourne loans.

(2) Impairment
An “impairment” cost is an accounting estimate of the decline in value of NAMA’s loans which has come about through declines in the underlying property or from a deterioration in the prospects of a specific developer. The impairment cost in 2010 was €1.485bn and in the 2011 unaudited accounts, it was €800m. It will be by far the single biggest cost in the NAMA accounts and it is likely to be the figure that has practically no explanation. The NAMA CEO recently seemed to let slip that the audited impairment cost in 2011 would be €1.2bn, up from €800m in the unaudited accounts.

(3) Fair Value of loans
We saw in a recent blogpost that most Irish banks provide two valuations for their loans – the “carrying value” and the “fair value”. The “carrying value” is what is shown in the balance sheet and reflects what the banks believe the loans are worth over their lifetime. The “fair value” reflects what the banks think the loans are worth today if they were sold. The three main Irish banks, Bank of Ireland, AIB/EBS and Permanent TSB believe that the “fair value” of their loans is 14-27% less than the “carrying value”. NAMA seemingly thinks the “fair value” of its loans is just 2% less than the “carrying value”. No reason has been given for such disparity, and Minister Noonan recently said “I may remind the Deputy that any fair value process will be subject to both qualitative and quantitative dimensions that can differ between organisations and for differing assets”

(4) Interest received from developers
It seems that about 20% of the interest income that NAMA books is notional and not received in cash. It reflects NAMA’s estimate of what it will receive over the life of the loan, including an estimate of the sale value of the underlying asset in a few years hence. NAMA won’t tell you how it estimates the future sale value of assets, but the betting is that it is assuming a return to November 2009 values. In Ireland, residential is down 30% since November 2009, and commercial is down 24% so it would appear that there needs to be a considerable recovery in values, before NAMA can realise in cash the interest income it is showing in its accounts.

(5) Profit on the disposal of loans and properties
NAMA says that it has approved the disposal of some €9bn of property – loans and real estate – and that 80% is in Britain. These disposals are widely believed to be the best quality NAMA assets in the most liquid market. Across the UK as a whole, commercial property has increased by 9% since November 2009, the date by reference to which NAMA valued the loans it acquired. And in London where half of NAMA’s assets were located the increase has been even greater. So you would expect NAMA to be showing a great big profit from the disposal of all these assets. Yet the 2011 unaudited accounts show a €306m profit from inception to date. Which doesn’t fill us with confidence about the disposal of the remainder which, is understood to be lesser quality, mostly in Ireland.

(6) Legal fees
With annual costs of €9m in 2011 according to the 2011 unaudited accounts, NAMA is certainly providing a boost to the legal sector in Ireland, and indeed there have been 18 applications made so far this year at Dublin’s High Court, plus the Agency has been in action in London, New York, Atlanta, Florida and Toronto. And these are just the cases of which we are aware. NAMA lost a major case against Paddy McKillen in Dublin’s Supreme Court last year, and we are still waiting to find out how much that defeat is to cost us – the media suggested €7m.

(7) Receivers fees
The unaudited accounts for 2011 showed “portfolio management” fees of nearly €16m. We learned last week that €10.3m of this was for receivers. We know that NAMA has a budget of €75m for receivers in 2012. These are big numbers. It would be nice to find out what the €5m non-receiver component of “portfolio management” fees relates to.

(8) Outlook for the Irish property market
A fortnight ago, Minister Noonan said he was keeping the NAMA advisory board so that he would have someone on the end of a phone to give him advice on property. Truth be told, if someone at that press conference had stuck a blindfold on Minister Noonan, spun him around a few times and had him throw a pencil, chances are that he would have hit someone in that room who knew as much, if not more, about the Irish property market than the three members of the NAMA advisory board, Michael Geoghegan, Denis Rooney and Frank Daly. But despite what experience and qualifications the NAMA board, or indeed NAMA itself might have, NAMA needs to create confidence in the Irish property market. It faces a bit of challenge with commercial property with prices and rents still declining, and NAMA holds a controlling interest in the Irish commercial property market with its loans. With residential, there have been all sorts of claims by those whose jobs depend on residential property transactions, but with average property prices down 50% and the consensus seemingly believing a 60% decline is in prospect, even promoting confidence in residential property is a challenge. Expect NAMA to zero in on parts of Dublin and types of property to claim the recovery – or at least, the bottoming out – is underway. But remember that NAMA has been claiming stabilisation, bottoming and recovery for more than two years now…

(9) Value of NAMA loans by county
Yes, from Leitrim to Offaly, from Longford to Carlow, and for all of the 32 counties, we will learn the value of NAMA’s loans. Some of this information is already in the public domain, but when Sinn Fein’s Pearse Doherty asked Minister Noonan for a comprehensive county analysis recently, the response was that the information would be available in the Annual Report – “I am advised by NAMA that the information sought is currently being collated and validated and that it is expected to be available for inclusion in the Agency’s Annual Report which is due for publication in July”

(10) Misdirection
“Misdirection” is something magicians do. They distract your attention with the pretty lady and the left hand, whilst the right hand is doing the trick. “Misdirection” is something the NTMA does as well, as was evident in last weeks annual reports for the NTMA and one of its units, the NPRF. The reports together totalled more than 200 pages and reported on every little detail in the NTMA’s operations right down to compliance with policy not to invest our pension fund in manufacturers of cluster munitions. On the other hand, there was practically no information given for the basis of valuing the €8bn stakes the State holds in AIB and Bank of Ireland. Expect oodles of misdirection from NAMA on Thursday.

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