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)