NAMA Business Plan

NAMA has released a draft business plan. It is a truly extraordinary document. To summarise, those who thought that NAMA would largely be a property fund—closing on delinquent developers and selling on the assets—are wrong. It appears that NAMA’s game plan is to wait a few years and then the vast majority of the developers will be able to pay back their loans in full.

Among the highlights:

  1. NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.
  2. However, contrary to the million times that we have been told that NAMA will “wash its face” on an ongoing basis, it is projected that NAMA will pay out €16 billion in interest payments on its debt but will receive €12 billion in interest income on the loans acquired.
  3. In addition, fees and expenses will add up to €2.64 billion over ten years.
  4. The profit of €5.48 billion stems from NAMA recouping payments of €66.1 billion from loan repayments and asset recoveries to pay off the €54 billion in loans issued.
  5. Interestingly, from Table 5’s cash flow projections, the only year in which NAMA is not projected to lose money on an income flow basis is 2010 when an interest outflow of €1.3 billion will be offset by interest income of, em, €1.3 billion. Table 7’s “budget projections” attempts to show that NAMA will make a profit in 2010-2012. The difference between this and Table 5 is “The interest income projections in this table include the impact of contractual rolled-up interest on land and development loans in addition to interest income from cash flow-producing assets.” So any “profit” reported will be of a phantom variety.
  6. From Page 10: “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%). Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made. It is also assumed that €4 billion will be realised from the sale of underlying assets secured by the defaulting loans of €15 billion. These are conservative and prudent assumptions.” Yes you read that right. 80% of the loans will be repaid in full.
  7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.
  8. What if more than 20% of the loans can’t be paid back? The document tells us: “Stress-testing of this assumption indicates that the default rate would have to increase to 31% to erode in full NAMA’s projected Net Present Value gain of €4.8 billion.” Feel better now?
  9. NAMA will acquire €14.6 billion in derivatives positions, mainly interest rate swaps.
  10. By the turn of the year, NAMA will only have taken on 10 loans with a total value of €16 billion.
  11. NAMA’s potential new lending: “NAMA will inherit any commitments entered into by the banks as far as the drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion.” This exceeds the €5 billion limit placed on it in the legislation. The document says “the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

Anyone in the Green Party up for a revote?

98 thoughts on “NAMA Business Plan”

  1. €Bn

    “Book Value” 77.11
    Provisions as at 30th June 2009 (7.30)
    Net Book Value Carried 69.81
    Consideration by NAMA (54.00)
    Subordinate Withheld 2.70
    Write Off for Banks as of 30th June 2009 18.51

  2. “The Bill, as drafted, provides for a limit of €5 billion of the amount of funds that NAMA can borrow for purposes other than the payment of consideration for acquired bank assets A limit of this magnitude may, in certain circumstances, present a limit to the achievement of NAMA’s asset development/enhancement objectives given that it is equivalent to only 6% of the NAMA €77 billion portfolio and given that undrawn facilities on loan transfers are about €6.5 billion. However, the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

    So, the €5Bn limit on guaranteed borrowings by NAMA is gone. So much for Green Party influence.

    This may become analogous to the US deficit where Congress has to keep agreeing to an increase in the limit.

  3. 80% of loans fully paid back.

    Is there evidence on this figure of eighty percent from elsewhere in known universe and in historical time ? Or is it simply an assumption? A leap of faith? Or are the authors living in a different universe?

  4. “The Government has indicated that it expects institutions to seek private sector capital in the first place but to the extent that sufficient capital cannot be raised independently or generated internally, it remains committed to providing institutions with an appropriate level of capital to continue to meet their requirements.”

    “generated internally”? What, by swinging margins on the “common” folk?

    “it remains committed to providing institutions with an appropriate level of capital”

    €5Bn – €10Bn?

  5. @ Karl,

    On “NAMA – NET PRESENT VALUE CASH FLOW PROJECTIONS”.

    I can’t see the €5Bn+ that NAMA will borrow for “finishing out”.

    Is this an omission or am I going blind in my dotage?

  6. Some other risks not covered:
    – what if the performing loans refinance out of NAMA?
    – what if recovery rates are lower than estimated?
    – what if performing loans become non-performing?
    – no mention of FX risk?

    The average default rate (that’s average) of C&D loans historically is 20% (as I understand it). Does anyone think we had an average bubble or this is an average crash?

  7. Excluding future property prices from the scenarios is absurd it is by far the biggest risk NAMA is exposed to.

  8. @Greg

    Top of page 11.

    “The projections exclude cash flows associated with NAMA funding of project completions as any net interest income earned by NAMA is likely to be marginal.”

    In other words, they admit it’s not in there. Basically. they’re assuming that they’ll get back any additional money they put in but not any extra interest income.

  9. Anglo has €12.1Bn of “Associated Loans” out of €27.7Bn.

    Can’t see a definition of Associated Loan.

    “Note: Land and development loans with a value of less than €5 million with AIB, Anglo
    and Bank of Ireland and their associated commercial loans will not transfer to NAMA.
    No such limit applies to EBS and INBS.”

    This seems to imply that “Associated “Loans” are “associated commercial loans”. What the hell does that mean?

  10. @ YM

    surprised there was no mention of FX risk either. Possible that all of the loans were matched against the property assets in terms of currency, but really doubt it’d be 100% we’re talking about. Different banks had different policies in this regard. From my experience, loans with FX mismatches tended to be smaller speculative plays rather than big development stuff, and banks were starting to reign in the GBP assets vs EUR loans once the ECB went in hiking territory back in 2006/07. Maybe that explains it.

  11. @Eoin

    Possibly. My concern would be that if assets are repossessed, they are sold in a depreciated currency that is not reflective of the loan value. So sterling assets sold in the current market (even if they got their purchase price) would make a loss in euro terms – I’m thinking of Quinlan and the jeweller’s shop he sold recently, for example.

  12. On the NPV Calculations:
    1. Interest income from borrowers as % debt o/s is 2.4% in 2010 and rises to 4.7% in 2018 !!!
    2. Only 40% of the loans are (fully/partly) cash generating at the moment. Surely this proportion will fall with time.
    3. 20% default looks too low.
    4. The discount rate of 5% is too low bearing in mind the risks and uncertainty.

    On management etc. the projected staffing levels are much too low. After market risk, the key variable determining the success of a venture is usually managerial risk. In Nama’s case, the former will be addressed largely by the size of the so-called haircut. To address the latter, Nama’s senior management team must have extensive direct experience of world-scale asset recovery and portfolio management. Reliance on local secondments, expensive advisers and delegation of anything but basic administrative activities back to covered institutions should be minimised. The proposed staffing of Nama is only a fraction of that used by the Swedish “bad” bank operation which dealt exclusively with nationalised banks and had a loan portfolio far smaller than Nama’s. It appears that Nama’s inhouse staff of under a hundred people people will be managing a highly fragmented, complex portfolio worth €77 billion and covering 20,500 loans linked to almost 2,000 developers’ business plans. Such an approach is penny wise and pounds foolish and is equivalent to sending a boy on a man’s errant. Accordingly, the management resources and expertise within Nama must be appropriate to managing one of the largest property portfolios in the world even if this entails much higher operating costs than envisaged to date.

  13. @Eoin

    Saw your comment elsewhere about the €2.64 billion in fees. I’m not in the business of managing multi-billion loan portfolios but €264 million a year seems like a lot of money to pay to banks to ask them to collect €1 billion in principal next year and the year after and €2.5 billion the year after that.

    I really don’t want to be overly cynical here — those who read this blog regularly know that I haven’t been doing the “developer bailout” thing — but the instructions to the banks implicit in this plan seem to be to let the developers sit tight until after 2012, i.e. after the next election. Seems like a whole lot of money for doing nothing.

  14. @Brian Flanagan
    “1. Interest income from borrowers as % debt o/s is 2.4% in 2010 and rises to 4.7% in 2018 !!!”

    That does seem odd since they have assumed that the interest paying loans will be the first to be sold off or repaid.

  15. @ Karl

    They don’t say they are confident that the €5Bn + will be recovered.

    In my opinion the €5Bn + should be in there and its future recovery should be in. The timing of the cash flows must differ.

    So, developers are to get €5Bn + for “finishing out” with no interest of risk premium?

    Is that not a gift? A bailout?

    @ an interest/risk premium of 5% (compound) over (say an average of) 5 years that is a gift of €1.4Bn.

    The Minister cannot possibly suggest that the €5Bn + is a risk free advance.

    Astounding…………

  16. @ Greg
    So the govt is taking the downside risk by betting on a bull market in property but getting no additional upside benefit if the banks manage to raise private capital. If they believe (correctly) that the state has no long term role in banking why not pay market value for the assets and reduce the downside risk.

  17. @jl
    If the assets are worth so much, why buy them at all? Just do the Anglo ones (since we’ve nationalised it, we have to sort it out if we want to refloat it) and leave private sector money to do what it does… the banks have a place to put LTEV, you know, ‘mark-to-model’, ‘hard-to-value’, ‘hold-to-maturity’, Tier 3 capital…

  18. @DE

    “That does seem odd since they have assumed that the interest paying loans will be the first to be sold off or repaid.”

    I think you’re a bit behind the curve here. The business plan says that hardly any of the loans will have to be sold off. Eighty percent will be repaid in full. Eventually — basically nothing paid off until 2013. And the only loans that will default won’t produce any money from asset recovery until 2014.

    Basically, it looks like everyone will have until 2013 to wait around. And those who can’t pay off then will be foreclosed on gradually, producing one billion a year for four years starting 2014.

    Cmon DE get with the new reality. Wait for the talking points from David Murphy on RTE tomorrow.

  19. @ Karl,

    I don’t think there’s anything to stop “performing loans” refinancing elsewhere, unless of course they are contractually tied to non-performing loans.

  20. @Greg
    Sort of. Since they don’t say they are spending it in the P&L, they don’t need to say they will recover it. This is a Business Plan not Nietzsche!

    However, it is also a political document, as everything to do with NAMA is. So omissions are there for a reason.

    @Karl
    “The business plan says that hardly any of the loans will have to be sold off. Eighty percent will be repaid in full.”
    You’re making a bit too much of this. A disposal (sold off) is the same as a repayment.

    It’s the ‘in full’ bit that makes me laugh. Particularly the 7.5bn from 2013 onwards. Don’t panic Mr. Mainwaring, when we was fighting the fuzzy-wuzzies, they didn’t like a bit of recovery time to return to market equilibrium and a strong upward trend…

  21. @ jl

    Yeah, the Minister is saying that the €5Bn is risk free. If it’s risk free what’s the problem? Why NAMA?

    No bank would lend €5Bn + to property developers without a risk premium.

    This is astounding.

  22. @yoganmahew

    “You’re making a bit too much of this. A disposal (sold off) is the same as a repayment.”

    The plan says “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers”

    Is there another way to interpret this?

  23. @ yoganmahew

    “Sort of. Since they don’t say they are spending it in the P&L, they don’t need to say they will recover it. This is a Business Plan not Nietzsche!”

    But it’s not a P&L it’s a Cash Flow Projection.

  24. Anyone have any view the amount the banks will have to raise in Tier 1?

    I’m thinking close to €20Bn. Could be wrong.

  25. @Karl Whelan
    I’ll have to find by trusty DoF calculator 😆

    I think the point on the interest payments is still valid.

    Presumably it is going to be the interest paying loans that will be repaid first leaving the non-paying stuff behind.
    I don’t see how a decreasing proportion of interest paying loans in the portfolio is consistent with an increasing interest payment from the remaining loans.

  26. @Karl
    Yeah, that does sort of imply there will be no sales. It makes the cash flow projections from 2013 onwards look a little rich. Particularly given the fundamentals (the lack of need for new dwellings…).

    It sort of gives the lie to the whole ‘where land has no value other than agricultural the loan will be valued as such and the zoning returned to agricultural thing’. What’s NAMA going to do, start keeping a few cows?

    @Greg
    Well, it’s going to be spun as a P&L…

    If this is the sort of business plan that was presented to the courts, it’s no wonder Messrs. Justice Kelly & Clarke were knocking the powder off their wigs in indignation as they thumped their shoes on the table… trespass on the fanciful? It set’s up an encampment, digs tunnels and starts to live in trees…

  27. @Greg
    “Anyone have any view the amount the banks will have to raise in Tier 1?”

    Depends what the Tier 1 ratio needs to look like. Presumably the loan reserves the banks have are not all for the NAMA loans, so they can’t exhaust them all with the NAMA loans transferred. Maybe 15 bn t get to where they are today and another unknown quantity to get to the new reality of adequately capitalised.

  28. @Karl Whelan

    According to the assumptions on page 10, a net €11 billion (15-4) will be written off. That’s equivalent to 14% of the nominal value of the loans. Means one euro in seven will not be repaid at all.

  29. Can we ask Lenny to pitch this investment to a “Dragons Den”?

    It should be pitched to the Dail Comittee on public spending….

    but failing that… I’d settle for the TV version of the Den. or a panel of Judges from the commercial court.

  30. If the €54Bn is pro rata the “net of provision” book value Anglo will have a €5.5Bn hole.

    A big assumption I know, but the State may have to put in €5Bn for the Anglo write-down.

  31. http://www.irishtimes.com/newspaper/breaking/2009/1014/breaking66.htm

    Irish Times reports “Nama passed its first legislative hurdle tonight and work on valuing risky commercial property loans to be taken from banks is set to begin as early as next month.”

    Isn’t it really comforting to know that NAMA will begin valuing the loans its buying next month after the bill has been passed? Sure what would have been the point spending, say, the last few months valuing these properties?

  32. @yogan “Yeah, that does sort of imply there will be no sales. ”

    NAMA – ACCOUNTABILITY AND REPORTING REQUIREMENTS
    Each quarter, NAMA will report to the Minister giving detailed information in relation to the following;
    o Loans outstanding, categorised as between performing and non-performing (including level of impairment)
    o A schedule of finance raised by NAMA
    o Income, including amounts recovered from property sales
    o A schedule of income and expenditure in the period.
    • The Minister will lay copies of this statement before the Houses of the Oire…

    It looks like there will be sales?

  33. @Garry

    The property sales will start to happen in 2014, according to the document. As I’ve said, the plan is

    Phase 1, 2009-2012: Do nothing. Leave developers alone.
    Phase 2, 2013-onwards: Collect money from now-solvent developers

    Note that Phase 2 will, one would expect, coincide with someone else being in government.

  34. Alan Ahearne in the Irish Times, September 5th:

    http://www.irishtimes.com/newspaper/opinion/2009/0905/1224253890855.html

    “it should be clear that Nama will pay its own way in the sense that the interest received on performing loans will exceed the interest paid on the bonds used to buy the loans. Initial estimates suggest that half of the loans are paying interest at an average (variable) rate of 3.5 per cent. This would generate €1.6 billion in annual income for Nama. The €60 billion in bonds that Nama would issue in this illustration would require €0.9 billion in outlays at a (variable) interest rate of 1.5 per cent as indicated by the Minister for Finance. This means that Nama would generate a cash surplus of €700 million annually. Of course interest rates are expected to rise, but that will increase both Nama’s income and outlays.”

    So we were told it should be clear that interest on performing loans exceeds interest paid out on NAMA’s bonds. Now of course, with the legislation sure to be passed, we are told that what should have been clear is in fact not going to happen.

  35. Put all this together with Morgan Kelly’s article:
    “The EU simply forbade Lenihan to pay any more”.
    Given the optimism of Nama’s repayment assumptions it is hard to see how Lenihan could have justified paying any more. So he is paying the absolute maximum.

    “ECB is making no secret of its dismay at being turned into a credit union for feckless Micks, and is anxious to end such emergency lending facilities within the next year. Once the ECB slams the window on its fingers, the Government will be forced to borrow at market rates of 5 per cent or more”.
    I remember being told that in the first year Nama’s interest income would cover interestpayments. As KW says they just happen to be exactly equal. Put aside this piece of unlikely serendipity. Obviously this was a highly qualified reassurance. Once the first year is up we will be crucified.

    “Property speculation was a mania that swept every level of Irish society..”
    Morgan Kelly is just stating it as it is. One would expect that if Nama were a truly commercial outfit it would take a similarly sceptical approach. But instead Nama says:
    “Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book”.
    That is just pure propaganda and indicative of a sales pitch not a plan. I imagine the original draft of the plan said: “Insert positive loan statistic here”.
    I am in two minds about Nama’s running costs: the yardstick shoud be the possible losses not the projected profits.

    One thing should now be clear to all. Lenihan should be honest enough to state clearly the enormous risks of this project.

  36. @Karl

    Given what Alan Aherne said in September and what we are told now, and the vast (and ongoing) changes in their number documented by James Nix, the Nama loans appear to be one of the world’s last large undiscovered areas. I think Arctic explorer Ranulph Fiennes is the man for the job. But we may yet need Nasa. We’ve been told about the number of foreign loans – can extra-terrestrial ones be ruled out?

  37. At €77Bn – €15Bn the loans will deliver €62Bn to the Minister, and in addition €4Bn of asset disposals on the €15Bn defaulting.

    So, @ €62Bn – €54Bn the banks are handing over loans (assets) to NAMA which the Minister believes will make him a “profit” of €8Bn.

    But the current “market value” of the underlying security is €47Bn. If you take the €4Bn off that the current market value of the security underlying “performing” loans is €43Bn.

    So, across the portfolio the value of the underlying security must rise from €43Bn to €62Bn. That’s €19Bn. If it doesn’t the €62Bn cannot be achieved.

    That’s a rise of 44% in the value of the underlying security.

    I must be wrong here. Somebody please bit my head off.

    And every cent of the €5Bn + in “finishing out” must be returned without loss. That’s a brave assumption. It assumes that if you spend €5Bn + the “market” will recognise the full value of that – regardless of market conditions.

  38. If interest income is €12Bn and interest expense is €16Bn is the Minister not “gifting” €4Bn to the developers? Add (say) €1.5Bn given by way of NOT applying a risk premium (or ANY margin) to the €5Bn + of finishing out money and the developers “get” €5.5Bn.

    Did someone say this was not a bailout?

  39. The Green Party? A revote? that would be tantamount to an admission that they did something that was not the best, most perfect, most wondrous thing possible. And that’s not going to happen.

  40. Could the NAMA numbers be redone using seventeen (17%) interest?

    Why 17%?
    Seventeen percent is the rate Davy Clients charged McNamara for his share of the “€450 million” Irish Glass Bottle factory site in Ringsend – to “reflect the perceived level of risk in the project”.

    Hopefully the Finance Dept professionals do not do Business Scenario Planning on the backs of borrowed brown envelopes.

    _____________

    http://www.gavinsblog.com/2008/12/23/the-ddda-cabal/

    Bernard McNamara put in €57.5m for a 41% stake but only €5m in cash. The balance came from Davy clients who subscribed for loan stock. In return they are to get a hefty 17% per annum return – which reflects the perceived level of risk in the project.

    This is not surprising given that the original purchase was backed by a €288m loan from Anglo Irish Bank, which also promised to provide a further €900m in development finance.

    The DDDA itself has put up over €32m cash – presumably borrowed – while the latest annual report for the Authority also reveals loans to joint venture undertakings of €37.6m, €32.8m of which is accounted for by “unsecured interest-free” loans to Becbay. The notes to the accounts state “the executive board is satisfied that Becbay Ltd will not be required to repay this debt in the short-term and therefore these loans have been classified as financial assets”.

  41. The only surprises here are the publication of this plan, I presume it was absolutely necessary?

    The lies can be teased out, but will be waved off, imperiously. The know nothings in charge do not care now that the Greens have been stitched in (and up!).

    All the dbris will come out under a new administration only. Come hell or high water “this is strong leadership, needed in a crisis” or some such will shout down all reason.

    What of “Garret the Write Off My Loans” now?

    The true leaders running the country have been the banks despite their clumsy handling of Berties cash and bungs. The MULTIPLIER!
    All bow down and repeat after me.

    But in a depression the multiplier is less than unity and money given by the taxpayer will never be returned.

    Thr lands in Nama will not be sold for many years as they will record budget breaking loss. So who will decide to incur the loss? Defer, defer, defer! New land will be found as brown envelopes circulate to a new generation of cronies. Old land will become the new Land Commission at vast expense. Repeat all history if you did not understand it the first time!

    Surely the risks are so great that the President of Ireland can see that a dail dissolution and election is a requisite? She will earn undying gratitude as the obviouys depression rolls out over the next months.

  42. My concern is in the attempt to make NAMA look like it’s working above all else we end up with a zombie economy as property prices stay at too high levels.
    Just hope that ACC, Ulster bank and a few other foreign banks continue to foreclose on their outstandings and force some downward pressure on prices.

  43. Gushingly positive coverage from the state broadcaster this morning.

    Ray Kinsella calls the plan “a very impressive start for NAMA”. He appears to be impressed that the document exists and has lots of numbers in it rather than with anything of substance. Ace RTE interviewers focus on side issues like NAMA staffing rather than on the patent lack of realism of the whole plan. In two ten minute pieces, I’m not sure I heard the prediction that only 20% of the loans will be defaulted on while the fact that barely a cent comes in until 2013 was quickly alluded to and then forgotten.

    Par for the course from RTE I’m afraid.

  44. A basic question folks…. When NAMA pay LTEV and then at the end of that year, how do they publish their accounts?

    Do they list the assets at LTEV or current market value?

    Which sets of books are being published?

  45. So in summary the plan is

    Buy it all, bury it for a few years, give the developers another 4 billion cash, this will employ some people for a year or 2 to finish up some sites…… don’t sell anything……..hope by 2012 the yanks are booming again or if blame the work drying up in 2013 on the new government…

    But the money for finishing up is an opportunity for those who haven’t been bailed out……… subcontractors, banks outside NAMA.. Start suing or occupying sites. This is your one and only chance to get paid before 2013…..

  46. I have to say that it looks like every other business plan I’ve seen in the private sector. Spoof and bluster. Business plans are written to make a project look worthwhile. The are ex-ergo-hoc-procter (or whatever it is) justification for a project that has already been agreed on. It is an axiom of successful project management that a successful project has a business plan. Therefore having a business plan means that you’ve done all you can to make the project successful.

    And, at the end of the day, all involved with be able to throw their hand in the air and say “losses? Hoocudanode? Sure didn’t we have a business plan and all?”

  47. And, in the private sector, that’s fine — because those who invest have signed up to invest, and believe the sales pitch at their peril.

    What NAMA is is the entire country being forced to buy magic beans they don’t want.

  48. This is a stunning document. To my mind the most startling issue is the timing. In effect, the only cashflow from NAMA in the remaining constitutional lifespan of the government is “pipeline” stuff. The real repayments etc come next government. Its what Doglas Adams called a SEP – Someone Elses Problem. Perhaps if the opposition simply had the guts to walk from the oireachtas, sayign they will not take part until a plan that is designed to torpedo the next government is withdrawn, that might get some international traction. Of course, that might “scare the markets”….

  49. @ Brian,

    A rise of 44% in the value of underlying security for performing loans?

    €47Bn becomes €62Bn?

  50. @Greg
    Performing loans can’t rise above 100%. So if the transfer price on the performing is at a lower discount, what you’re saying is that the security on non-performing loans increases by way more than 44% to get to 62bn. You’re looking at an improvement of about 125%…

  51. “Ace RTE interviewers focus on side issues like NAMA staffing rather than on the patent lack of realism of the whole plan. In two ten minute pieces, I’m not sure I heard the prediction that only 20% of the loans will be defaulted on while the fact that barely a cent comes in until 2013 was quickly alluded to and then forgotten.
    Par for the course from RTE I’m afraid.”

    c’mon now karl! you’ve had your fair share of air time to make your points too! just because somebody doesn’t agree with you doesn’t mean the whole station is biased.

    @everybody

    on the staffing front – there are also bank staff who will remain as bank staff but who are seconded as required to work on NAMA, the banks will come back, world isn’t over, barclays faced 10% during the end of the world in the UK in the early 90’s, and now that the world is ending again we’ll have people trumping the potential falls, its like the Mr. Hyde version of Dow 36,000.

    btw: the nama bonds won’t necessarily all be monetized so for the sake of clarity – it isn’t 54bn until every last bond is lodged in the ecb.

  52. I have not had a chance to look at this but one thing that struck me on listeing to the radio this morning was that legislative change is not down as a risk. Increased CGT or a windfall tax (as already proposed) could significantly reduce recovery from certain property unless losses have been incurred previously on other properties.

  53. @Karl Deeter
    “the nama bonds won’t necessarily all be monetized so for the sake of clarity – it isn’t 54bn until every last bond is lodged in the ecb.”
    Eh, we don’t pay interest until the bond is lodged with the ECB? Is that what you’re saying?

    The comparison with Barclays is appalling. There wasn’t a financial crisis in the UK or elsewhere at the time.

  54. @Karl D.

    “the nama bonds won’t necessarily all be monetized so for the sake of clarity – it isn’t 54bn until every last bond is lodged in the ecb.”

    I don’t understand this? At the risk of getting off the important topic at hand here (the business plan) can you explain what you mean by this?

  55. @ yoganmahew

    “Performing loans can’t rise above 100%. So if the transfer price on the performing is at a lower discount, what you’re saying is that the security on non-performing loans increases by way more than 44% to get to 62bn. You’re looking at an improvement of about 125%…”

    Not sure I follow you there.

    Contractual obligations being transferred = €77Bn. You can ignore what the banks have provided for as it is not relevant to the contractual commitments which NAMA is seeking to recover.

    Take off the €15Bn of non-performing loans, they can’t be included in the €62Bn as the €4Bn of “recoveries” is accounted for separately.

    So, the €62Bn “Principal repaid by borrowers” can only be the principal attaching to the performing loans. Agreed?

    If the “current market value” of ALL underlying securities is €47Bn and €4Bn of that relates to non-performing loans then the “current market value” of the security underlying the performing loans is €43Bn. Agreed?

    To get from €43 to €62 is €19.

    €19 as a percentage of €43 is 44%.

    How are you getting 125%?

    Sorry about the “agreeds” just trying to break it down.

  56. @Greg
    40% of the 77 bn are performing. Max recovery = 100% = 30.8 bn
    60% non performing = 46.2. Current recovery value = 25% = 11.55 bn
    The performing can’t perform better than 100%, so all the uplift in recover has to come from non-performing.

    Expectation gap = 62 bn – 30.8 bn = 31.2 bn
    So 31.2 bn has to be recovered from loans that are currently non-performing.

    Actually a 270% increase from current recovery values…

    The underlying values are only relevant on the non-performing loans, as the performing loans are assumed to recover 100%. Agree with you otherwise!

    One thing we don’t know is the transfer weighting for performing/non-performing. We only have the average discount, not the specific discounts for each category.

  57. @Zhou
    “Increased CGT or a windfall tax (as already proposed) could significantly reduce recovery from certain property unless losses have been incurred previously on other properties.”
    NAMA doesn’t pay taxes.

    This may be a risk for both the borrowers who are performing and might want to sell their assets on and certainly a risk for the exchequer which stands to lose any taxes that would otherwise be due on NAMA transactions (CGT, VAT etc.). The cost to the exchequer of this loss is not mentioned in any cost analysis, as far as I can see.

  58. @karl

    “NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.”

    Is €5.48Bn their “expected return” of NAMA with the assumed discount factor? Or is it just meant to show that they were able to cook up a scenario in which NAMA makes money?

    Either way, the pseudo-precision of the €5.48Bn number is bonkers.
    It shows that the only thing they are confident of is the innumeracy of the body politic.

  59. @ BL
    You are right the political timing is the most remarkable thing about this. I know this isn’t a politics blog, NAMA has long since left the realm of economics and gone into that of politics.
    Is there any way that politicians in this country can be held personally accountable for what are effectively criminal decisions? (More than just losing their Dail seats which they know is going to happen anyway).

  60. “7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.”

    Is there a reason given as to why developers will suddenly be able to pay back 3 times as much in 2013 as 2012?
    Have the developers signed anything agreeing to do this?
    Or is the assumption that a certain % of developers will sell their property in this year?
    Does Nama have the power to force a developer to sell?
    Would releasing an extra 5 billion worth of property into the property market not have an impact on price?
    From a laypersons point of view this really does seem like Alice in Wonderland stuff!

  61. @ yoganmahew

    Thanks.

    I need to think about this.

    40% of the 77 bn are performing. Max recovery = 100% = 30.8 bn

    From the BP.

    “Based on data supplied by the institutions, it is estimated that 40% of the loans to be acquired by NAMA will be cashflow-generating (interest and principal) and that these loans typically pay an average spread of 2% over Euribor. Assuming no major adjustment in average margins, this will produce interest income of €12 billion over ten years. Interest paid by NAMA on its outstanding debt is estimated at €16 billion over the same period: in general, cashflow-producing assets are expected to mature prior to the realisation of assets which do not currently produce cash flows. Interest inflows and outflows have been calculated by reference to the forward € swap rate curve.”

    On the one hand 40% of the loans to be acquired are “cash-flow generating (interest and principal”).

    On the other only €15Bn of the €77Bn (say 20%) are described as “defaulting”. That leaves 80% “not defaulting”

    “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%).”

    So while, according to the BP, 40% are “performing”, 80% are “not-defaulting”.

    If I understand you correctly that means that 40% are “under-performing”.

    Do I understand you correctly?

  62. @Greg
    Yup, that’s about it. Nicely put.

    20% written off.
    40% performing
    40% eh, um, gee, let’s roll up the interest and hope for the best…

    That 40% is expected to do magical things. There won’t be a tooth in the head of any developer by the time the tooth-fairy has finished…

  63. @BG
    I note to my corporate finance students that its better to be approximatly right than precisely wrong…

  64. @ yoganmahew:

    Let me put it another way.

    The BP is self contradictory. It cannot say on the one that only 40% are performing (after all, as you say, they can only pay back 100% of there obligations, they cannot subsidise the “underperforming”).

    So the 40% “underperforming”, when all is said and done, are actually “performing”. It’s just that they’re “underperforming” now but will perform in the future. Agreed?

    Interest can be excluded as it is accounted for separately.

    So for the BP to work €30.8Bn of the €77Bn currently known to be “not-performing” must become performing. And within that €30.8Bn of currently “not-performing” there can be no cross subsidy. Agreed?

  65. @Greg
    Yup. 30.8 bn worth of loans has to magically become brilliant, magic, super!

    What could possibly go wrong?

  66. @Brian
    I’ve been involved in many business plans before (usually 5 year strategic plans but one went out 10 years for the bank). They’re usually all fantastic documents the further out you get. I suspect the ones done in 2003,04,05 have gone a bit awry!

    Incredible how precise they got given we were making all sorts of assumptions about the future.

    For this plan to work demand for the current bank of undeveloped and empty properties (including tiny apartment blocks in silly places) must return over the next 3/4 years. It’s a big ask.

    If I was doing the Nama business plan it would have lost a little money ( a few billion) to make it look sort of realistic. To predict a €5.5b profit really is off the scale and holding yourself hostage to fortune.

  67. Another observation. If 40% of the €77Bn is performing it must be safe to assume that they will not require any of the €5Bn + “finishing out” money. With €15Bn written off (ignore recoveries) that leaves €5Bn + of “finishing out” money applied to €30.8Bn.

    So NAMA will provide €5Bn + to loans which are currently known to be “not-performing”. That amounts to increasing these “known to be not-performing loans” by a minimum of 16%.

  68. The plan projects a profit of €5.5 billion by 2020 even after overpaying €7 billion for loans and incurring expenses of €2.6 billion. Surely, these glowing projections undermine the need for Nama and beg the question as to why the banks’ shareholders are not lining up to get a share of the action. In truth, the plan’s projections are probably “best case” and, as a specialist in business planning, I’d advocate a much more conservative set of numbers with lower repayments and interest income, higher defaults, higher debt interest and expenses and a higher discount rate. IMHO, this scenario is more realistic and explains why the banks are so enthusiastic about Nama.

  69. @ Brian Flanagan

    Yes not only can NAMA afford to spend €2.6Bn on “fees & admin” it is also projecting a 44% increase in the value of underlying security. The banks don’t believe this. They know the business plan is a load of hokum.

  70. The “Cash-Flow Projections” are “global”.

    What proportion of the Anglo book is “performing”?

    Surely the Anglo book would look decidedly poor if analysed separately.

    Will AIB & BOI be “levied” for losses on the Anglo book?

    I doubt it. There will be no “cross-levy”.

    So one segment could produce an uncovered loss.

    Presenting the cash-flow projection as a global picture is misleading if not worse.

  71. @BrianLucey

    This is a hospital pass to the next government, if ever there was one…and totally at the expense of the country.

    FF know they won’t get in and are basically booby trapping the country so that nobody else has a chance. If we can’t be in power, then nobody can.

    This is psychopathic behaviour.

    @KarlWhelan

    Morning Ireland was hilarious and chilling at the same time. Richard Bruton tried to talk about the low discount rate but it was clear neither Aine Lalor or Frank Fahy had a clue what he was talking about. Frank Fahy’s uber confidence in a property market recovery was also a highlight.

  72. “A discount rate of 5% was used to calculate Net Present Value.”

    “it is projected that NAMA will return a positive Net Present Value of €4.8 billion over its expected lifespan (the 10 year Irish
    Government bond yield of 5% was used as the discount rate).”

    Those two quotes are the sum total of what the business plan has to say about the choice of discount rate.

    Anyone with any understanding of maths knows that by choosing a sufficiently low discount rate you can make a silk purse out of a sow’s ear.

    This business plan seeks to justify the politicial decision to create the biggest property company in the world. They don’t even try to justify the choice of 5% – they simply observe that it is the yield on 10 year government bonds. Have they no understanding of the scale of the risks inherent in NAMA.

    Clearly a product of the Frank Fahy Business School.

  73. € 2.68 billion for fees etc.

    As I wrote some months ago – a very expensive Fas course for real estate agents.

  74. Page 30:
    “Of the €77 billion to be acquired by NAMA, it is estimated that €31 billion is cashflow-generating (€28 billion in commercial loans and €3 billion in land and
    development loans). This means that loans totalling €46 billion will not be producing cash flows but may be regarded as performing as they are on interest rollup (as
    per their contractual terms).”

    The cashflow generating loans are stated as being expected to continue to perform. If it is possible to assume that the cashflow is generated from rents then any downward movement in rent might have a negative effect on this certain loans. I’m not totally convinced that the 40% performing is a certainty. High rents have bankrupted companies this year. More of the same could happen.

    46bn of loans with 9bn of rolled up interest? What is the interest rate here? Is it about 5% with about three years of unpaid interest? That would assume build start in 2005-2006 with projected sales prices of probably higher than the bubble prices of 2007.

    I do not see this coming close to breaking even. Caveat emptor.

  75. I always wondered what the developers were going to get out of Nama. I thought they would just get a friendly bank manager, a friendly Nama manger, €5 Billion minimum to finish their projects and the opportunity to buy sites from Nama at giant discounts (when it’s clear the property market is not going to recover) with money provided by our taxpayer-liberated banks. Obviously that was not enough. When Brian Lenihan told us Nama would go after developers he was being gigantically misleading, as usual. He omitted to say not for 3 years when I am safely out of office. The good FF did on the peace process will now be rapidly forgotten as they will leave a stagnant, embittered, distrustful country to their successors.
    I suggest that the next Government legally compel them to change their official title to something more appropriate:
    Fianna Fail – The Weimar Republican Party.

  76. In the first three years of NAMA operation the “Budget” (Table 7) allows for Interest Income (Accruals Basis) in €Bn.

    2010 €2.9
    2011 €3.3
    2012 €3.7

    And Interest Cash Flow (Table 5) of

    2010 €1.3
    2011 €1.6
    2012 €1.6

    NAMA intends “rolling-up” interest of €4.9 billion in its first three years of operation.

  77. Page 13

    “Under the provisions of the draft Bill, the Minister and the Comptroller and Auditor General will conduct reviews at the end of 2012 to assess the extent to which NAMA has made progress toward achieving its overall objectives.”

    So the Comptroller and Auditor General will not make his first report until after the next general election.

    Nice.

  78. I always assumed that the “bail-out for developers” was plain wrong.

    I assumed that Nama would buy the loans and call them Therefore the developers were bust but the crucial difference was that Nama did not act like a liquidator and could hold the assets to drip them into the market.

    Therefore the developers would be bust with crystallised debts. Nama would have its massive landbanks that did not get dumped on the market simultaneously.

    Is the BP saying that the developers sit there with no events of default, rolling up interest etc and if the market recovers they get to refinance (repay) and if it doesn’t they will be bust.

    A one way bet for developers? If so it IS a bail-out for developers with the downside being carried by the taxpayer/state.

    This is appalling – a bail-out for banks and developers.

  79. @Pa Bandit

    The idea that NAMA was going to become primarily a massive land owner is misplaced. There is a huge cost in managing and maintaning property. Who are NAMA to employ to do it and what kind of asymmetries of information would exist?

    NAMA will foreclose where the developer is unlikely to be able to pay off his debts. If the developer can make the assets pay off then it is in the taxpayer’s interest to let him do so.

  80. 2. A second category of projects, however, will remain commercially viable and, in order to bring them to completion and thereby generate income, it may be
    necessary for NAMA to invest funds in them on a partnership or joint venture basis. NAMA will inherit any commitments entered into by the banks as far as the
    drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion. However, where a
    borrower is in breach of covenants, NAMA will not be obliged to honour further funding commitments. Where a borrower’s loans continue to perform and
    where the underlying project remains viable, NAMA will be in a position, if required, to make funding available for appropriate risk-adjusted remuneration to
    complete the project if that enables returns to be optimised.

    Have they got this money I don’t see it anywhere

  81. @ Mike

    Apart from the fact that that was difficult to read I think you are correct.

    “Have they got this money I don’t see it anywhere”

    Yup,

    Ireland does not have this or that money. It never did (just like Iceland – destroyed by selfish banker/political scum)

    There just isn’t enterprise enough in Ireland to overcome the continual vampire that is the nature of our leaders.

    Maybe it’s a post colonial thing?

    So what the hell?

    Let’s just give €70Bn to our new masters and let the children want.

    It’s just a rumour that was spread around town by the women and children soon we will be house building.

    NAMA. Is it worth it?

    http://www.youtube.com/watch?v=6LNB6M7yTBo

    You tell me.

  82. @ Mike

    Having now read your post (difficult as it was) if there is any body on this thread who thinks that NAMA is not treason let me know your mind.

    Here’s a little music for you while you think about it.

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