6th July, 2010. The Plan has been published at 5pm. There is an immediate reaction entry here. A more considered reaction will appear here shortly.
1st July, 2010. The Independent reports that Business Plan information was provided by NAMA to the Department of Finance yesterday. It is to be hoped that publication of the Business Plan by NAMA/Department of Finance takes place promptly. Extensive coverage will appear here when the Business Plan is published. Meanwhile let’s refresh ourselves with the main headings from the draft Business Plan published last October 2009.
25th June, 2010. The Irish Examiner reports “Mr Lenihan said the state agency’s first quarterly report was due to be submitted to him next week. An updated business plan from the board of NAMA is due to be submitted to the minister by June 30. Mr Lenihan committed to publishing both documents.”
This tab replaces the NAMA financial overview tab which was intended to be a very simple description for newcomers of NAMA’s business. You can still find that overview here, but the tab is being replaced with a related subject that is attracting widespread interest and growing concern : the NAMA Business Plan.
NAMA doesn’t have a business plan. A so-called draft business plan was produced and debated in September and October 2009. The NAMA CEO referred to it at the Oireachtas Joint Committee on Finance and the Public Service on 13th April, 2010 as being for “illustrative purposes”. The NAMA CEO states that a business plan should be published by June 2010 and that its path before then would include a review by the NAMA board and by the Minister of Finance.
There is nothing of note so far to suggest that NAMA won’t do the best job it can within its remit and the law. However the citizenry should know the prospects for NAMA to break even (or preferably deliver a profit) with their money and the extent to which key NAMA assumptions have been stress-tested. “Trust me”, even if it’s coming from Brendan McDonagh is not good enough when the sums involved are so significant. In the first instance this is a matter for politicians and the government.
So today, using the information from the draft business plan and in particular the summary shown on page 10 of that document which is extracted here:
a NAMA profit and loss, balance sheet and cash flow will be presented here shortly. Future drafts will have more interactive elements where key assumptions can be changed more easily and also will use information that has arisen since the draft plan was produced.
The spreadsheet was prepared using a dormant accounting qualification. The basic principles of the P&L, Balance Sheet and Cash Flow should be sound but I have obviously departed from any accounting standards when naming the different rows – this is so that a wide audience can see what the various components of each statement are and can relate them in a common sense way to how NAMA has been publicly described. I have also recognised the profit on the loans upfront (€77bn – €54bn) for illustration – in practice any profit would normally be recognised as a loan was repaid. The 5% subordinated debt is not dealt with – the assumption is that consideration paid to the banks is 100% NAMA bonds. And strictly speaking the upfront income for due diligence and enforcement might be recognised as the costs are incurred.Here is the link to the spreadsheet:
Secondly, two major issues leap out from the draft NAMA business plan and frankly they didn’t need a P&L or balance sheet to highlight them – interest payable and receivable look wrong given the assumption that NAMA will pay less on its bonds than it receives from 80% of its loans AND the sums to be realised from the disposal of assets look wrong if property increases by 10% evenly over 10 years.
(a) With respect to the interest payable by NAMA on its bonds, you would expect that to be substantially lower than the interest receivable by NAMA from borrowers because the payable is at 6-month Euribor (currently 1%) and the receivable is at 6-month Euribor plus an average of 2% – of course only 80% of the borrowers loans are expected to be repaid but is obvious that (80% of 77 @ 6-month euribor plus 2%) IS GREATER THAN (54 @ 6-month euribor).
(b) With respect to asset disposals the NAMA assumption was that it was buying at the bottom and that property would recover by 10% over 10 years. That being the case and assuming the recovery is at a flat 1% per annum, then the disposals of assets earmarked for 2014, 2015, 2016 and 2017 should be at a premium over the asset values in 2010. However the NAMA draft business plan expects only €4bn total to be realised from loans of €15bn and where the underlying assets were worth an average of €10bn when acquired by NAMA (20% of 77 = 15; 15/0.77 LTV = 19; 19*0.47 = 9; 19 – 9 =10)
NAMA Wine Lake 
FYI, I have done analyses of the cashflow and income projections in the draft Nama BP and identified issues relating to interest rates used for bonds and loans and to post-2010 rolled up interest. See http://www.planware.org/briansblog/2009/10/nama—the-real-default-rate.html#more
and related spreadsheet.
I am awaiting a response from Nama to queries raised about interest rates and treatment of rolled interest. In the absence of insights into these matters it might be difficult to prepare reliable proformas. I’ll let you know when I hear back from Nama.
Thanks Brian, I will look at your calculations – I have in the past pointed people to your projections of the recapitalisation costs which looked credible.
I will be refining the spreadsheet but the basics are there – I didn’t think it would be so difficult to get to grips with google docs!
In my day job, I develop and sell software tools for producing fully-integrated, pro-forma financial projections for businesses. I started to use the data in tables 5 and 7 of the Nama daft business plan to configure pro-formas for the ten years to 2020. The problem is the huge differences between the interests in the two tables which made it impossible to produce integrated proformas with balanced balance sheets. By my estimates the “divergence” would exceed €10 billion and this led to my quest to confirm that this is accounted for by rolled up interest (post 2010) which would appear to me to be written off at some stage. It means that the business plan failed to disclose a massive loss and is either an extremely amateur document or a fraud.
I commented on the Nama plan here http://www.planware.org/briansblog/2009/10/nama—a-flawed-business-plan.html
and here
http://www.planware.org/briansblog/2009/10/namas-business-plan.html
Brian, by my calculations NAMA will still have €4bn of loans at the end of the 10-year period and that it will have made a far greater profit than advised. The root to all of this is the interest rates payable and receivable and the 80% estimate of loans that will repay 100%. I am assuming that rolled-up interest is charged compound interest and that is from practical experience, so the split between original principal and rolled-up interest in the initial €77bn in the draft business plan is not a consideration for me.
On the face of it, something is at its root wrong with the NAMA draft business plan. When politicians whose job it is to hold the department of finance and government to account (and I’m not talking about opposition only, NAMA should be a matter of deep concern for all politicians) are fobbed off by the NAMA CEO when they seek overall plan numbers I wonder if the public will be forgiving in June if the numbers change totally. My view is that defaults will go from 20% to something far higher (I have studied the origins of the 10% default rate and you will see links to the Barclays annual reports in the early 1990s in the blog entries on the default rate), that the interest receivable on the remainder will be far more than anticipated because the interest rate charged is ECB + 2-3% on average and that a recovery in the property market of well above 10% will be needed for NAMA to break even. The overall numbers may still show a profit but I am expecting the components to have changed substantially and whilst a nominal 10% growth in property prices in 10 years might have appeared modest, a 30% growth (for example) may attract cries of “not feasible”.
BTW, this was my first attempt at a google spreadsheet which I found a nightmare in some respects, any comments on the spreadsheet itself are appreciated.
Where is the spreadsheet? Personally, I’m much happier using Excel.
FYI, I sent the message below to Nama on 14th April and a reminder requesting acknowledgement of receipt on 16th. I’ll send one further request for acknowledgement and then I’ll seek a reply by a more public route.
“In the light of Brendan McDonagh’s comments at the Oireachtas committee yesterday about non-performing loans, I wish to raise some basic questions relating to Nama’s draft business plan. While I appreciate that this plan will be updated later this year I am also cognisant that it was sufficiently “final” to secure approval from Eurostat on the treatment of Nama’s borrowings and for consideration by the Dail and Seanad.
My concerns centre on differences between interest projections in the cashflow projections (table 5) and much higher values in the budget projections (table 7) within Nama’s draft business plan. The only way I can explain these differences is that the latter includes rolled up interest arising from 2010 onwards. However, the ten-year cashflow projections do not appear to make any provision from any eventual payment of this interest. If this is correct then the “real” default rate on the Nama loans could be 34% rather than the expected 20% rate. By my reckoning about €10.9 bn appears to be unaccounted for !!! Maybe, it is written off in unpublished budget projections for 2013-20 but this is highly material and should have been disclosed. Please refer to the attached Word document and accompanying spreadsheet. Given Brendan’s recent comments, the write off could be even higher than this estimate.
Also, by looking at projected year-end balances (table 5) and interest payable/receivable (table 7), it a simple matter to calculate projected interest rates as per columns M and O. Please comment on these rates which are much higher than one might have expected.
Having already raised these matters on the economy.ie blog, in the Sunday Business Post (22nd November 2009) and my own blog, I would propose to publish Nama’s response to the foregoing queries. My phone number is xxxxx if you need clarification.
Thank you – I appreciate that Nama has a lot on its plate and has limited resources ! Please confirm receipt of this request.”
Good luck with your efforts, you might also consider copying a few Deputies (Richard Bruton, Kieran O’Donnell, Joan Burton and Michael McGrath in particular seemed to be on the ball during the Joint Committee hearing last week). Senator Eugene Regan was a trenchant critic of NAMA, to the extent that he represented his party’s complaint to the EU Competition Commission. As always the concern is that those opposed to NAMA will use information simply to further their individual aims but it is to be hoped that NAMA is so important to the State that in the first instance, information is used to ensure the implementation of NAMA maximises its value to the State.
The google docs spreadsheet accessible with the hyperlink “Here is the link to the spreadsheet” above. I’m using the wordpress blogging software which seems to limit file uploads to jpg, jpeg, png, gif, pdf, doc, ppt, odt, pptx, docx (ie it excludes xls) so the only way I saw of sharing a spreadsheet was via google docs. If you know differently, be glad of any advice.
Found the link but I did not have permission to access the spreadsheet !!! Maybe you could display the spreadsheet in a PDF or find somewhere elese to host it as an Excel file.
Yes, I have already been in touch with the pols. I’m awaiting a reply to a PQ which (I hope) has been raised with the MforF.
Brian
Thanks, it should now be viewable. Google docs appears to be the simplest way of sharing a spreadsheet on wordpress though there appears to be a plugin which I will investigate. Again good luck with your efforts – in the end I suspect the bottom line in the June 2010 plan will be similar to the draft with increased interest receivable offset by higher defaults and perhaps a more ambitious recovery in property which will be needed for the greater repossessions and disposals.
” I suspect the bottom line in the June 2010 plan will be similar to the draft with increased interest receivable offset by higher defaults ..”
Not sure on this as higher defaults would point to higher interest rollups leading leading to less interest received.
Will have a look at your spreadsheet once (if?) I hear back from Nama on all the interest queries. I had started (months ago) to build a simple model but the interest issues stopped me in my tracks.
Brian, in terms of interest receivable I was comparing the NAMA draft business plan which I think significantly underestimates interest receivable given the assumption that 80% of borrowers would repay their debts 100% – that is, I think, a similar point made by you on numerous occasions. If interest receivable were to be conventionally calculated and even using a 50% default rate it would still be similar to the interest receivable in the draft plan (eg 2011 €81bn @ 50% @ 3.75% = €1.6bn approx = the draft business plan which assumed 80% non-default) – that’s what I meant. Congratulations on your letter to the SBP.
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