As the regular audience on here knows, NAMA initially funded itself by issuing €32bn of bonds to buy €74bn of loans from the banks. In addition, NAMA received investment of €51m from three “independent” institutions and it received a loan of €49m from the Department of Finance which it has since repaid. In NAMA’s case, its initial funding from all sources was €32.1bn.
A question often asked in certain circles is “what is NAMA’s cost of capital”. The “cost of capital” is what NAMA has to generate on its funding to cover its costs. The initial €30bn of NAMA’s funding carries an annual interest rate tied to ECB rates, specifically the 6-month Euribor rate which is presently about 0.3% per annum. NAMA has this week confirmed that its overall cost of funding is 1.5% which includes the cost of insuring against ECB interest rate increases.
What is the relevance of NAMA’s cost of capital?
In principle, if any developer comes to NAMA with a plan which will yield more than 1.5%, then it would enhance NAMA’s profit if that plan were pursued.
It says something about how thick Irish developers must be, that they cannot come up with plans for their properties subject to NAMA loans that would yield more than 1.5% per annum. It is widely believed that US, UK and German investors are coming into Ireland chasing 20% annual returns, and yet our own lot can’t develop plans which would allow them go to NAMA and convince the Agency that it will get 1.5% per annum.
So, what is NAMA doing? It is using its mountain of cash to redeem its bonds which cost it 1.5% per annum.
Some people have antipathy towards developers for obtaining colossal loans during the boom, living the Life of Reilly during the good times and then presenting the bill to the State which took over the banks. I don’t, that’s business and it was a stupid decision by the State to take over the banks.
But what I do resent is these geniuses can’t now devise plans which would generate wealth and jobs in the economy as well as give a return to us via NAMA over 1.5% per annum. Greed, pride, lack of foresight are one thing, not having the business smarts to deliver minimal returns is quite another.
The parliamentary question and response which revealed NAMA’s rate of return are here.
Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the approximate cost of capital at the National Asset Management Agency.
Minister for Finance, Michael Noonan: I am advised by NAMA that its cost of capital is currently less than 1.5% per annum. NAMA has entered into interest rate hedging which acts as an insurance mechanism to hedge its interest expense against interest rates increases over its lifetime. NAMA’s cost of funds derives from both the interest cost on its debt securities and its hedging cost. NAMA’s cost of funds will vary over the lifetime of NAMA, depending on the mix of its liability base, the associated costs of these liabilities and its hedging strategy.