Cast your mind back to Autumn 2009 when NAMA was being set up. Its then-interim managing director, later CEO, Brendan McDonagh oversaw the preparation of the draft NAMA business plan and you might recall that it estimated that 40% of the loans being acquired by NAMA would be performing – repaying principal and interest.
Fast forward to March 2012 and the actual figure is just 17% of NAMA’s loans are performing by reference to the original loan agreement and the original loan value. Some acquired loans were “restructured” and by reference to all loans including “restructured” loans, 19% are performing.
The 19% figure has been in the public domain since NAMA published its Q1,2012 accounts in July, but the 17% figure is new and was revealed in a parliamentary question this week, from the Sinn Fein finance spokesperson Pearse Doherty to the Minister for Finance Michael Noonan. The full exchange is below at the bottom of this blogpost.
The 17% figure is significant because with such a low level of performing loans, NAMA is now severely at risk of not being able to cover its costs. Because NAMA is selling “low lying fruit”, this worrying state of affairs may take some time to become obvious because NAMA’s trouble with non performing loans is being masked by profits from the sale of better quality loans and properties.
Remember if NAMA is generating interest of about 3% per annum on 17% of €74bn book value of loans and it is paying close to 1.5% including hedging costs on €32bn acquisition cost plus it has operating costs of €200m, then the only thing that will keep NAMA in the black is profit from the sale of loans/property and when those profits are exhausted, NAMA’s problems will be fully exposed. It should be said that NAMA has already had quite a number of disposals so the €74bn and €32bn figures above will have reduced but the principle stands. It should also be said that NAMA generates some income on some non-performing loans but this appears not to be significant.
The non performing loan rate at NAMA has steadily increased with the continuing deterioration of the Irish economy and with NAMA’s disposal of the better quality loans. At the end of 2011, 18% of loans were performing by reference to the original agreement, so there was a 1% deterioration in Q1,2012.
Deputy Pearse Doherty: To ask the Minister for Finance further to Parliamentary Question 213 of 12 June, 2012 and following the publication on 25 July 2012 of the National Asset Management Agency report and accounts for the three months ending 31 March 2012, the proportion of loans that are now performing by reference to the original loan agreement..
Minister for Finance, Michael Noonan: I would like to direct the Deputy to page 9 of the NAMA Section 55 Report for the first quarter of 2012 which states that, as at 31 March 2012, 19% of the loans acquired by NAMA were classified as performing by reference to the nominal loan amount (i.e the original loan agreement). These include restructured loans. NAMA estimates that the loan restructures enhance the proportion of loans classified as performing loans by 2%. It should be noted that this classification of performance is primarily by reference to legacy loan facility obligations. It should be noted that the 19% cited above, translates to 29% by reference to acquired loan value.
NAMA advises that one of its key objectives is to manage its debtors and receivers so as to capture, for debt servicing purposes, income (principally rental income) from their property assets. Such income capture was not widespread prior to NAMA’s acquisition of the loans and NAMA has launched a major drive to achieve this objective. NAMA measures its performance, in part, by the extent to which it captures such income on an on-going basis and not wholly on the extent to which a debtor is in compliance with the terms of legacy loan facility arrangements which predate NAMA loan acquisition.
Please also refer to Section 22.5 of the Annual Report for further information regarding the credit quality of loans and receivables.
NAMA Wine Lake 
@NWL, “Fast forward to March 2012 and the actual figure is just 17% of NAMA’s loans are performing by reference to the original loan agreement and the original loan value.”
I wonder what exactly NAMA means by that. Presumably, it does not mean that there is no income whatsoever from the rest of its loans – it just means that those loans are not producing the returns that they agreed to pay. The real question must be “What income is NAMA generating on its loan portfolio?”
Subsequent questions would relate to whether that income was sufficient to sustain the organisation and based on a graph of the rate of deterioration of the income and plans for the disposal of income producing property – when will it be in negative territory? Factor in repayments to the ECB and we will have a timeline for trouble.
@WSTT, you’re absolutely right that it is the total income being generated by NAMA on the loans even if the loans aren’t “fully” performing, that is important. I hoped to escape that scrutiny by merely saying in the above blogpost
“It should also be said that NAMA generates some income on some non-performing loans but this appears not to be significant.”
because I wanted the blogpost to focus on the performing loans statistic.
But now that you do correctly refer to it, remember we found out earlier this year that the interest on the non-performing loans amounted to 0.38%.
https://namawinelake.wordpress.com/2012/02/17/namas-interest-income-comes-under-the-spotlight/
It still means that NAMA is probably now at the stage where its costs are not covered by current income, but that the profit and cashflow on the sale of the “low lying fruit” is masking that situation.
We previously established here that NAMA is probably okay on cash until 2017 when it has to repay 40% of its bonds in one year.
Still better than Llyods which in now in the 90’s,estimating 10 cents on current loan pool for sale,yikes!
http://www.costar.co.uk//en/assets/news/2012/September/Lloyds-assembles-2bn-Project-Pittlane-Irish-loan-portfolio/?dm_i=UQT,Y5VN,4KQZWH,2UMRF,1
does this mean that the breakeven for performing loans would be ~31%?
or that the ‘haircut’ should have been more like 85% for NAMA’s model to function correctly?
seems a very expensive model…
It will be interesting to see the next quarter. I’d expect NAMA’s disposal of non-irish assets would increase the non-performing rates.
From a lay perspective, this is a bit like distressed gentry, living off the sale of the antiques, while allowing the estate to go to rack and ruin. NAMA provides a terrific living for quite a few professionals, as the resource flow is still pretty rich. All terribly confidential, serious and responsible stuff.
When the offshore assets have been piped off, it will become ‘unavoidable’ to dispose of the least bad domestic assets. Lesser priviliges will prevail in that phase, and we’ll have repeated downgrading of the ‘strategy’ until we get to the firesale. Something might turn up of course….