[short answer, 2017 if NAMA sticks to its internal debt repayment targets and the economy recovers gradually so that NAMA breaks even on its loans]
It’s difficult on a clammy day like today to convincingly feel the biting winds and bitterly cold days of winter. But just as winter is inevitably coming, so too is the day when NAMA will run out of cash. The original plan of course was that NAMA would in fact benignly run out of cash in 2020, when the Agency was scheduled to be wound up, and its surplus profit handed over to the Exchequer. When NAMA was conceived in 2009, that surplus was estimated in 2020 to be €5bn, and then in 2010 the Agency said its “central scenario” was that the surplus in 2020 would be €1bn. In recent weeks, the Agency has seemingly been recognising the deep hole it is in and has been preparing the ground for a break-even in 2020, meaning no surplus would be handed back to the Exchequer, and, to boot, that the Agency would renege on the €1.6bn of subordinated bonds that it has given the banks, meaning the banks – which we mainly own – will take a €1.6bn hit in 2020.
So it was always the plan that NAMA would run out of cash, but only when it was wound up. Unfortunately for the Agency, the writing is now on the wall and it seems to be written that the Agency will face operational challenges before 2020.
But NAMA is sitting on €4bn of cash today, a phenomenal sum, so how will it run out of cash?
The reason NAMA is so cash-rich today, is that it has sold one quarter of its assets but only redeemed one tenth of its bonds. If you get a loan of €30 from the bank today and buy postage stamps and sell some for €8 and repay €3 to the bank, then you too will be cash-rich to the tune of €5! There’s no magic to it, and if the stamps had a face value of €6 or €10, it doesn’t matter – you’ll be in clover because you have made more cash from sales than your loan repayments. And this is where NAMA is today.
But here is NAMA’s problem: it may be sitting atop a cash mountain today, but just as inevitably as winter will replace these clammy summer days, so too will leaner days lie ahead for NAMA as it repays more of its bonds.
NAMA’s cash position can be simply forecast by examining the timings/amounts under the following headings.
Interest on performing loans
Repayment of performing loans
Proceeds from disposing of loans/properties
Interest on NAMA bonds
Redemption of NAMA bonds
NAMA will have three phases
(1) Today, Summer 2012-2013! NAMA is in clover and why shouldn’t it be. Remember, it didn’t just acquire “bad” or “toxic” loans, it acquired some loans which are quite marketable and attractive eg the €800m loans to Paddy McKillen’s Maybourne group of hotels which NAMA reportedly sold at original par value, and David Daly’s near-€500m of loans which David 100% refinanced out of NAMA. Unsurprisingly, NAMA has some “low-lying fruit” and it has been picking them and selling them at a near-breakneck pace, with €9bn of disposals presently approved. And on the outgoings side of the equation, NAMA has only redeemed €3.25bn of its bonds, so yes today, NAMA is awash with cash. How much more “low hanging fruit” is there in NAMA? Difficult to say, but if only 19% of loans are performing and if at the end of March 2012, NAMA itself optimistically thinks its loans are worth just 35c in the euro, compared with the 43c in the euro that NAMA paid, it’s not a huge leap to suggest that NAMA is coming to the end of harvest season!
(2) Autumn 2014-2016, thanks to Minister for Finance Michael Noonan unilaterally agreeing with the Troika in May 2012, to NAMA having a debt repayment target of €7.5bn by the end of 2013, NAMA needs to make sure it redeems a further €4bn of its bonds in the next 17 months. Thankfully, Minister Noonan hasn’t (yet!) agreed with the Troika that NAMA will repay more of its bonds before their legally due date of 2020, but NAMA has produced internal targets of paying an additional €4.5bn by the end of 2015, €12bn by the end of 2017, €4.5bn by the end of 2018 and the remaining €1.5bn in 2019 and if the Agency is going to meet these targets. Contrary to the perception created on here before, the deterioration of NAMA’s loan-book with 19% of loans performing today SHOULDN’T trigger a crisis because the annual cash deficit would be in the order of €300-500m and even eight years of that would be €4bn which would simply mean NAMA couldn’t redeem €4bn of its bonds in 2018, which is quite a while away. However, from a political perspective, when NAMA’s interest receipts are insufficient to cover interest payments and operating costs, difficult questions will be asked of the Agency and its wisdom and with less than 20% of loans performing in 2012, NAMA may have reached that point already. If the economy hasn’t picked up, then NAMA might try to push out its internal debt repayment targets, or it will start to offload property at unfavourable prices, and if it does the latter it will be practically guaranteeing the next stage.
(3) Winter 2017-2020. Once NAMA has sold the low-hanging fruit and if, during its Autumn phase, it has sold secondary property at unfavourable prices, then this third phase might get very frosty indeed for the Agency, as the 2020 redemption deadline hoves into view and it becomes blindingly obvious that the remaining assets can’t be realised for prices which will allow all the bonds to be redeemed. Which means on 1st March 2020, the State ends up on the hook for any shortfall. Because NAMA has the luxury of waiting until 1st March 2020 to wind up, it might be that it truly doesn’t run out of cash until then. Of course, we can be optimistic and hope that the economy grows at a healthy pace and social and economic patterns of the past repeat themselves, or we can hope the ECB finally decides to print money to deal with the EuroZone debt crisis; should that happen, then NAMA’s underlying property assets should increase in value whilst the redeemable NAMA bonds remain fixed.
So, to conclude, NAMA could well put off the date on which it runs out of cash by deferring the redemption of its bonds to as close as possible to 2020. NAMA seemingly has the luxury of sitting on assets for the next two years, as it seems that it will easily cover its cash outgoings until then. But if NAMA sticks to its internal debt repayment targets and if the economy does not improve after 2013, then NAMA will find itself forced to sell assets at what are likely to be fire sale prices and indeed after the €12bn debt redemption in 2017, NAMA may be cash negative. Also it seems likely that today in 2012, NAMA’s cash receipts for interest income does not cover its cash expenditure for interest on its bonds and its operating costs.
Part 2 will examine NAMA’s exposure should the economy not grow so that it recovers what it paid for the loans, and the effect of its cash interest income not being sufficient to pay its operating expenses and interest expense.