NAMA Business Plan Default Rate Assumptions

NAMA’s draft business plan has many bizarre aspects. Chief among them, however, is the claim that only 20% of the loans purchased by NAMA will default, with the other 80% of loans eventually paying off in full. The plan justifies this as follows:

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.

Fianna Fail TD Frank Fahey on Morning Ireland stated that the UK bank in question was Barclays and that this comparison means that the 20% default rate assumption was “prudent” and “conservative” and “much bigger than it needs to be.”

So the argument here is that because the default rate on Barclays’s total loan book in the 1990s was less than 10%, this means that it’s ok to assume that the default rate on NAMA’s assets will only be 20%.

I think this is perhaps the most odious comparison we have heard yet in the NAMA debate. The Barclay’s loan book being referred to (its “whole book”) included all sorts of loans with low average default rates. However, the NAMA loan book is a selected class of assets—property and development loans—specifically chosen because the losses on these loans are so large they are threatening the solvency of the Irish banking system.

The reasoning underlying the default rate assumption is akin to asserting that because only 10 percent of men are taller than six foot, it’s reasonable to assume that no more than 20 percent of a basketball team will be taller than six foot.

The fact is that NAMA only exists because this particular class of assets is performing so badly that a radical state intervention is being planned to save the banks that made these loans. Perhaps I missed it, but I don’t recall such interventions being planned in relation to the total loan books of UK banks in the 1990s.

The bottom line here is that it is patently clear that far more than 20% of these loans will fail to be paid back in full.  That this claim can be released to the public in the expectation of being taken seriously is an indication that we have really moved into cloud-cuckoo territory.

As an aside, I’d note that Fahey also stated that the banks “were borrowing the money at 1.5%”. This is the famous 1.5% that is the initial interest rate that the government is paying to the banks. Yet again, we see another example of government spokesmen who don’t even understand the basic mechanics of NAMA in the sense of who is lending money to whom and at what rate.

125 thoughts on “NAMA Business Plan Default Rate Assumptions”

  1. Out of curiousity Karl why aren’t you on the radio and tv much at the moment making these points? Not that it’s your duty of course but it’s be nice to hear something other that ff trying to claim everything they say is right.

  2. Does anyone who has legal training think that there is any right to a legal judicial review based on the decisions being made by the government being irrational and hence challengable as they are contrary to the principles of public law?

  3. Depressing, depressing stuff.

    Karl and others, how does this business plan square with the minister’s assertions that only a 10% rise in property prices will be required for NAMA to break even? The idea there was that if assets with a current MV of 47 billion rise by 10%, NAMA will have recouped all the money except for the subordinate bonds. This document expects a return of 66 billion on the same assets and then says there will be a profit to the taxpayer of 5.48 billion. So now the breakeven point has suddenly shifted 10 billion to 60.52 billion. 47->60.62 is a 29% increase.

    Eoin the banker and karl deeter the mortgage broker, any comments on how 10% suddenly becomes 29% as soon as the Greens agree to the plan?

  4. @Karl Whelan

    I’m not sure what you mean by ‘bump me off’. I think assassinating you would be a bit extreme and, if Newstalk do that, I won’t listen to them again. However, if you mean that there is competition for air time, maybe they will replace you by the Goodbody economist. Goodbody have, just this very morning, torn up the forecasts they published only last week. Last week they predicted -3.7% fall in GDP in 2010 and +1.2% rise in 2011. Now, according to the RTE breaking news, just this morning, they have revised these to a -1.1% fall in GDP in 2010 and a +2.4% rise in 2011. So, over the 2-year period, they’ve gone, in the space of a week, from predicting a 2.5% fall in GDP tp predicting a 1.3% rise. The Goodbody Chief Economist says: “I am now more confident of a speedy recovery in economic growth” and “the outlook has brightened considerably”.

    Of course, this thread is about NAMA, not GDP. I have never pretended to know much, or even anything, about NAMA. But, surely, common sense says that, if “the economic outlook is brightening considerably” and “a speedy recovery in economic growth” is at hand, surely this affects the outlook for NAMA and makes it more likely that the Government forecasts for NAMA will materialise?

  5. Greg, 44% is for the expectation with a 5.48 billion profit and after excluding 4 billion in liquidation. The minister’s 10% figure was for break-even and including ALL loans. The corresponding figure is 29%. I think it is wild-eyed optimistic but even then, it shows that the Minister was either lying last week or was incompetent enough not to know that a business plan with a figure three times as high was being released the week after.

  6. @Karl

    I’m neither confident or unconfident. I haven’t the slightest idea.

    I’m merely saying that, if the decade from 2011 on is likely to be one of good economic growth (and much better than most of the EU15 at least), as more and more economists are now predicting, rather than one of untold misery, recession, depression, pestilence and plagues of locusts, as David McWilliams and Morgan Kelly predict, then this is bound to affect the outlook for NAMA. Is this not a fair point?

  7. The 10% thing never made any sense, yet is reported unquestioningly as fact. The 5.5B profit is the story today, yet instinctively cannot make sense…

    If either of these make sense to you, your must believe property hasn’t crashed, the party was only getting started and we are emerging from a temporary little credit crunch… which will be forgotten about by good Christmas retail figures. It is that simple….

    If you believe we had a property bubble, then by definition you believe people will lose money. And that NAMA by being Paddy last has to lose money.

    Theres a significant % of the population who want to be told lies…..But those peddling the lies are either criminally stupid or just criminal.

  8. @ Garo

    “Greg, 44% is for the expectation with a 5.48 billion profit and after excluding 4 billion in liquidation. The minister’s 10% figure was for break-even and including ALL loans. The corresponding figure is 29%.”

    I think you can ignore the “profit”. It is possible to stick “just” to the projected repayments on performing loans (by that I mean to 80%, even though half of those are currently under-performing).

    The current “market” value of ALL loans is €47Bn. Exclude the liquidation value of €4Bn. That’s €43B.

    €43Bn must become €62Bn. That’s 44%.

    The Minister’s 10% for all loans is irrelevant and is now proven false. It ignores the €2.6Bn of admin costs and the €4Bn of negative cash flow on interest.

    The plan requires a 44% increase in the value of underlying security of performing loans for the BP to be reasonably accurate.

  9. @ Garo

    well property prices only have to rise 10% for NAMA to “not cost the taxpayer anything” in terms of the original nominal outlay, but thats after writing off the subs (2.7bn) and doesn’t take account of the net interest flow (-4bn) and the management fees (-2.64bn), which together equal 9.34bn. But we always knew this stuff would likely come in didn’t we? Did you expect a politician to explain something in straight economic terms, or in more likely quasi-econo-political terms? If he explained it in full proper economic terms, well we wouldnt be on this site would we!?

    I certainly have never claimed that NAMA wouldn’t necessarily make a loss, and i even said that i didn’t find a figure of 10bn over a 10yr period to be all that distressing. GDP could be well north of 200bn at that stage. I’ve simply expressed an opinion that the short term stability is far more precarious right now than most people accept or understand, and that this was essentially what any NAMA losses would be paying for via a subsidy to the financial system in order to keep private capital in place here. NAMA provides stability to the banking sector, it cleans up the banking balance sheets, it works in terms of how the markets have re-priced both our sovereign and banking funding risks, and it buys an awful lot of time. These are key benefits in my opinion, and they come with a cost we will ultimately be able to pay. Talk of NAMA bankrupting the country are way way way over the top in my view. We spend 40bn a year paying 327k civil servants and offering social welfare to another half a million or so. Thats 400bn over 10 years.

    Look at this another far more conservative way:

    30.8bn in performing loans gets repaid in full.

    This leaves 46.2bn in non-performing loans.

    5% repay in full = 2.31bn
    10% default with a 75% recovery rate = 3.46bn
    45% default with a 50% recovery rate = 10.4bn
    40% default with a 25% recovery rate = 4.62bn

    total repay/recovery on 46.2bn in non-performing loans = 20.79bn (total recovery on these loans = 45%)

    Total = 30.8+20.79 = 51.59bn

    NAMA ends up generating repayments (including recovery on defaults) of 51.6bn. We write off the subs. There is an interest outflow over the life of it of 4bn. We have total fees of 2.64bn, but a third of this comes back to the exchequer via taxes and jobs created (and so unemployment avoided) from this process. So lets say this net costs 1.6bn.

    So total NAMA loss of 0.1+4.0+1.6 = 5.7bn over ten years. GDP at that stage €210bn. NAMA cost = 2.71% of GDP, paid for over a decade. We give more per annum to the Third World for gods sake. I can deal with this. Is there anyone who seriously can’t?

  10. @ John

    From a less optimistic John can you elaborate as to why Ireland’s growth in the next decade should be better than the EU 15 average? Unlike the last decade, this decade should not see credit growing at 20%+ per annum. Without that type of stimulus I suspect that our growth rate will be a lot lower.

    On your main point about NAMA and general economic growth, I would agree with you that a more benign economic backdrop would help NAMA, or at least mitigate some of its consequences for the taxpayer.

  11. Lies, damned lies and NAMA statistics. What on earth has Barclays’ loan book (encompassing all categories of loans during a mild recession) got to do with the value of already ‘impaired’ assets (where banks have to write down/write off their value in their books), during a cataclysmic recession?

    This dishonesty is compounded by the nonsense of projected future profits on NAMA holdings. Banks value all assets on a net present value basis, an expectation of discounted future cash flows from the asset. If there was any reasonable expectation of a future profit on these assets, the banks would keep them; they would be worth their valuations in the books.

    Surely, the government wants to help the banks? Why are we stealing their profits? Let ’em keep the assets if they’re so valuable.

  12. @Henry
    Judicial review requires
    a) an administrative decision or action
    b)someone with sufficient standing to challenge such a decision
    To the extent that contentious decisions are contained in legislation they are not amenable to judicial review. On my reading the NAMA Business Plan it chiefly reports decisions about internal adminsitrative processes. Down the track NAMA will be in the business of making decisions about assets of banks and the banks, and possibly the debtors, would probably have sufficient standing to seek judicial review.
    On a point of philosophy where decisions are in essence political, even were it possible to challenge them by judicial means, many would not regard it as appropriate. In this instance it appears to me to be the political component of the decision making (notably as to appropriate levels of financial risk to be borne by taxpayers) rather than the more technical applications of this decision which appear to be contentious.

  13. I think your figures are way too optimistic. Of course there is no way for either of us to know for sure because 8 months on from NAMA being announced the DoF still hasn’t had a look in on the loan files so what hope is there for the ordinary tax payer.

  14. Speaking of Barclays:
    http://group.barclays.com/Investor-Relations/Financial-results-and-publications/Annual-Reports?tab=1225803122627
    In 1990 they had about 8 bn of Property and Construction loans.
    In 1994 they had about 6 bn of Property and Construction loans.

    What happened in the intervening period? Defaults and write-offs.

    So in the categories of loans that NAMA is buying (excluding ‘other’), Barclays had what looks at first glance to be a 25% loss, excluding loss of income and costs.

    My spoofometer has just blown a valve…

  15. @ Garo

    well it ‘loses’ 5.7bn + 2.7bn (subs), but the taxpayer isn’t the hook for the 2.7bn subbies. There’s obviously a difference between losses at NAMA as a stand alone operation, and losses that actually hit the taxpayer.

    I know you think my estimates might be optimistic, but i’ve factored in a fairly agressive 95% of all non-performers defaulting, representing 57% of all NAMA assets, and with a recovery rate of 42%. It’s not exactly predicting a rosy and wonderful scenario in terms of the property market.

  16. Could someone please appraise the following:

    I did a basic calculation of the interest rates used in the business plan by looking at the outflows associated with the government bonds issued to support NAMA. From 2010 to 2020 these total €12 billion. These payments are supposed to be at ECB rate +50bps. We are told that the inflows associated with the loans tranferred to NAMA are at Euribor +200bps. Assuming that ECB rate is fairly close to Euribor (I would expect Euribor to be at a very small premium), I then applied this rate (ECB/Euribor + 200bps) to the total loans outstanding at the end of each period. This would suggest that the interest income flowing into NAMA would be closer to €23 billion than the €12 billion that is actually included in the cash flow statement in the NAMA Business Plan.

    Therefore I am coming to the following conclusions

    NAMA will write off some amount of interest that accrues on loans during its period of existence.

    If there is a write off of interest why is there no indication in the cash flow statement of income that would flow from recourse to borrowers security/personal assets.

  17. @ Greg

    ill be clear. If NAMA loses money i don’t want it to honour the subs, and i want it to impose a fairly hefty levy (ie 10%, not 1%). My entire focus is on stabilising the short-to-medium term outlook. People disagree with me on this, but i think the key way to going about this is to protect much of the private capital funding in the system as it stands. If the banks are still around in 10 yrs to witness the winding up of NAMA, then 2.7bn in subs and a levy on profits will be a fairly minor issue for them.

  18. @ John

    the plan indicates that the first assets to mature or be sold off will be the performing ones, so that would be why the interest inflow would drop down relatively quickly over the life of NAMA? Also, i assume there is almost no interest rolling up on many of the weaker non-performing loans? Don’t understand why they wouldn’t want to at least ‘claim’ this asset though (even in a footnote), in case things turned out a lot better than anyone expects?

  19. The projections should be subject to independent review. I’d love to see Justice Clarke of the High Court review the plan in the light of his devastating assessment of the financial projections accompanying Zoe Group companies’ application for examinership – see his judgement.

  20. Given that a large proportion of the property underpinning the Nama loans are located in the US and UK, How will the fluctuations in the dollar and sterling against the Euro affect NAMA. Has this been factored into their calculations?

  21. So NAMA can default on its subordinate debt but the Irish banks can’t?

    Curioser and curioser.

    Truly we are in Wonderland.

  22. @Eoin

    Accept that banks may not have been rolling up interest on some non-performing loans. However should NAMA not be enforcing some roll up once the loan transfers on to its books. Otherwise NAMA is providing free credit to the borrower (developer) and this would in my opinion represent a concession to developers. Developers will I am sure complain that they could not repay. Shouldn’t at this stage NAMA have the right to enforce recourse to security on the loans.

  23. @ Martin,

    Didn’t see it factored.

    No doubt NAMA will have a special derivatives unit.

    Let’s hope it does a better job than AIG’s.

  24. @ Greg

    NAMA is an SPV with a very limited life span (compared to a bank). It’s not that it ‘might’ be wound up 10 years or so down the line, it WILL be wound up once its disposed of the assets. As i have always always said, you can only enforce (rather than the potential for tenders or negotiations) losses on subordinated debt holders in a liquidiation process, which i think most people don’t want to see happening to AIB or BOI. Moreover, NAMA sub debt will not be covered by the Irish bank guarantee!

  25. @ John

    i’d have no problem liquidating the developers, the only problem being what do we do with the property assets then, if we all agree that there is no market for them at the moment. That was one of the key reasons for NAMA. We could hire in new development/project managers to develop the assets to completion, but not sure how well we would expect the govt to do this process given previous cost overruns etc. Not against it though if done correctly. Completely different issues between liquidating banks and liquidating developers.

  26. Per the BP the 47Bn MV is irequired to produce 12Bn interest, 62.1bn of repayments, and 4bn of asset recoveries. I did an IRR calc on Table 5 and get this to be 8.3% p.a. Thus market values need to grow by 8.3% p.a. over the next 10 years to underpin the BP. Not impossible, but scarcely conservative.

    If Brian Lucey is right and the MV is 30Bn the required IRR for the BP is 17% p.a.

  27. Since the meltdown of subprime and related derivatives, it has become increasing apparent that, regardless of how fancy your cashflow model is, you need to make sure that your basic assumptions are reasonable. I’ll focus on one element in this post – the default rate.

    I’ve skipped through the latest accounts of the 5 banks:

    Anglo 31/3/2009
    AIB 30/6/2009
    BOI 31/3/2009
    INBS 2008 Annual Report
    EBS 30/6/2009 (unaudited report)

    I’ve selected the following loan categories to identify NAMA-able loans

    Anglo Commercial & Residential: 59,568m
    AIB Construction and property: 49,931m
    BOI Construction and property: 33,955m
    INBS Commercial: 8,182.5m
    EBS Commercial assets and development finance: 2,217m
    (interestingly these total 153bn, a good deal more than the 77bn NAMA-bound)

    The following amouts are defined as Impaired
    Anglo 8,937m
    AIB 8,027m
    BOI 3,538m
    INBS 1,098m
    EBS 445m
    Total 22,045m (14% of 153bn, 29% of 77bn)

    The following amouts are defined as Past Due but Not Impaired

    Anglo 10,750m
    AIB 6,278m
    BOI 1,892m
    INBS 1,521m
    EBS 151m
    Total 20,592m (13% of 153bn, 27% of 77bn)

    Notes on AIB and BOI – Renegotiated where loans had been nonperforming but were reclassified as Not Impaired
    AIB: 180m
    BOI: 5,950m
    Total: 6,130m (4% of 153bn, 8% of 77bn)

    I would suggest the following benign ultimate default rates:
    Impaired: 90% go to default
    Past due…: 70% go to default
    Renegotiated: 60% go to default
    Performing: 15% go to default (IMO quite low as roll-up loans may be described as performing)

    This would result in a 35% default rate on the 153bn.

    If we assume that NAMA will take an adverse selection. Say they take 80% of impaired/past due and renegotiated, this results in a 48% default rate. It would take too much tinkering to get default rates at 75+% (note that this isn’t loss rate)..

    If given a choice, I won’t invest in NAMA.

  28. OK, at this stage reality has crept in we are stuck with NAMA. The comments are valid, as previously, re valuations, risk, default, thresholds….but now we are closer to the wire ( at the cliff’s edge).

    The big issue is that there is no Strategy to fix+ secure the Native Retail/Business/Clearing system. No strategy to manage Taxpayers Burden (TB) and/or Taxpayers Risk Burden (TRB). No strategy to ensure Affordable and Stable credit lines to oil the Irish Economic Engine.

    My proposal to FixNama has been in circulation since 16th Sept.
    see http://www.fixnama.ie …downloadable proposal/pdf.

    comments /criticisms welcome. contact@fixnama.ie
    Tommy Ruane

    By the way I know what it’s like to be “bumpted off” …I have been bumpted off this site twice already…3rd time due ?

  29. @Greg
    I agree. It has to be debt for equity for Anglo & Nationwide. We waited for the Nama proposal while arguing with many of Lenihan’s assertions. It’s here, it’s worse than we could ever possibly have imagined. The projected profit is the final straw. This is supposed to be an independent agency taking a realistic view – it has done the opposite. Nama should not be engaging in politics. And if Lenihan’s serial misleading is politics then it is political fraud. It’s Nama with political fraud versus stiglitzing Anglo & Nationwide. Let’s stiglitz them. And if we have to produce a Nama produce an honest one for AIB and BOI.

  30. @Colin
    Many thanks. I was hoping that this would not be the case. I hoped that some of the assumptions these political decisions are based on (political as in with regard to how much risk the taxpayer should inherit) could be challenged by experts who might be able to debunk some of these assumptions. But I can see how this is not the case and thank you for clearing it up for me.

  31. 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.

  32. @Greg

    Indeed. Another thing this 35 page document with its simplistic assumptions and projections looks like the sort of thing you might produce for your bank manager when looking for a couple of hundred grand. We’re talking a 50,000 million balance sheet here, yikes!!

  33. I have an idea

    It would be interesting for someone to open a book on NAMA, where people could take a punt on final losses/outcomes.

    I think betfair allows people to bet on pretty much what they want but im not sure.

    I wonder what the “market” spread would be.

    DofF says profits of 5 billion – id give people 50 – 1 odds that it will preform worse than that.

    In general, without a stock listing or mechanism for pricing its hard for a market view to form about the likley outcome. But odds at the bookie would be a way, that the general public understands, of explaining to people how likely NAMA is to not meet the governments projections.

  34. 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.

  35. @Eoin
    “There’s obviously a difference between losses at NAMA as a stand alone operation, and losses that actually hit the taxpayer.”
    Is there? Tell us what that is so ??

  36. Eoin’s example above assumes that the 40% of NAMA loans described by the Minister as currently “income-bearing” perform at 100%:

    “Look at this another far more conservative way:

    30.8bn in performing loans gets repaid in full.

    This leaves 46.2bn in non-performing loans.”

    The 30.8bn is 40% of 77bn. But do we know whether this 40% includes all loans that are bearing any income at all? If so, it seems very optimistic to assume zero default on these loans (as Ahura also points out).

  37. @ Brian

    “Is there? Tell us what that is so ??”

    Does the double question mark at the end mean i have to answer the question twice, or were they both rhetorical? In answer to you first question, Yes.

  38. @ Brian

    fully expecting you to have already pre-written your retort, but never let it be said that i’m not up for some sparring on a Thursday afternoon.

    Lets say NAMA receives capital repayments/recoveries of 51.3bn. NAMA owes 54bn to the banks. NAMA, as an independent entity has lost 2.7bn. However, there is a subordinated element to the NAMA debt of 2.7bn. This will not be repaid to the banks.

    So, the State (and so the taxpayer) via NAMA has exchanged 54bn in bonds for loans with an LTEV of 54bn. It has recovered 51.3bn. It has thus made a loss of 2.7bn. The taxpayer is not exposed to this loss of 2.7bn.

    Would i prefer if the risk-sharing element of NAMA as more like 10bn? Yes. Why is it not? Don’t know. Could be due to this resulting in a decrease in liqudiity via ECB repo. Either way, in many of the more conservative forecastings of NAMA, the total repayments will likely come in somewhere either just North or just South of 50bn. As such, the risk sharing, much scoffed at, is actually somewhat likely to be in play at the end of NAMA’s lifespan. Whether we actually enforce the subbie losses on the banks in 10 years time will be down to whatever government we decide to put in place at that time.

  39. Eoin
    Well, it may come as a surprise, but I dont “pre write” retorts.
    As for the taxpayer not being on the hook for NAMA losses
    S6(2) (2) The expenses incurred by the NTMA under this Act shall be paid out of the Central Fund and the growing produce of that Fund.
    S44(5) (5) For the purposes of this Act and to enable the Minister to provide consideration for the acquisition of bank assets and the operations of NAMA or a NAMA group entity, the
    Minister may, whenever and so often as he or she thinks fit, create and issue debt securities charged on the Central Fund or the growing produce thereof and ranking pari passu with debt
    securities issued by the Minister under section 54 of the Finance Act 1970—
    S52(4) (4) The assets of NAMA and of any NAMA wholly owned subsidiary at its eventual dissolution will be transferred to the Minister or paid into the Exchequer as the Minister directs

    So, yes, we are on the hook . Or do you think that somehow NAMA is a “real” private company?

  40. @ Brian

    You’re only telling half the story there. Or rather one third.

    S46
    46.—(1) NAMA or a NAMA group entity may, whenever and so
    often as it thinks fit, create and issue debt securities—
    (a) bearing interest at such rate as it thinks fit, or no interest,
    (b) for such cash or non-cash consideration or deferred consideration
    as it thinks fit, and
    (c) subject to such terms and conditions as to repayment,
    repurchase, cancellation and redemption or any other
    matter as it thinks fit.
    (2) When NAMA or a NAMA group entity issues debt securities
    under this section NAMA or the NAMA group entity shall specify
    which of the following is the purpose of the issue:
    (a) the financing of the general operations of NAMA or the
    NAMA group entity, as the case may be;
    (b) the providing of consideration for the acquisition of bank
    assets.
    (3) The Minister may guarantee debt securities issued by NAMA
    or a NAMA group entity under this section.
    (4) Securities issued under this section

    S47
    1) NAMA or a NAMA group entity may, whenever and so
    often as it thinks fit, create and issue subordinated debt securities of such class or type as it specifies—
    (a) bearing interest at such rate as it thinks fit, or no interest,
    (b) for such cash or non-cash consideration or deferred consideration
    as it thinks fit, and
    (c) subject to such terms and conditions as to repayment, sub-
    ordination, repurchase, cancellation or redemption or
    any other matter as it thinks fit.
    (2) Subordinated debt securities issued under this section shall be
    used only for the purpose of providing part of the consideration
    (3) To the extent that the terms and conditions of the subordinated
    debt securities (including the terms of subordination) are referenced
    to or based on a measure of financial performance, the
    measure shall be the financial performance of NAMA in totality and
    not any part or parts of the acquired portfolio.
    (4) Subordinated debt securities may be subject to different terms
    and conditions for different classes or types of those securities.

    Yes, the Minister can issue debt ranking pari passu with general govt debt. Or NAMA can issue debt which is subject to “terms and conditions of subordination, referenced to or based on a measure of financial performance”. These subordinated debts are “subject to such terms and conditions as to repayment, sub-ordination, repurchase, cancellation or redemption or any other matter as it thinks fit.”

    You’re playing by the rules there Brian. NAMA can quite clearly issue debt in its own name, and these can be subject to subordination and the T&C’s going with that subordination. As such, it would not have to be repaid subject to some financial performance reference in NAMA not being met. Whether i or anyone else considers NAMA to be a “real company” is completely irrelevant in this situation.

  41. Your right Eoin. I recant. Clearly NAMA will work, will be great, will in fact hearald a new dawn of prosperity. It will not cost us a penny as the ECB are giving us Free Money From Brussels. No developers will make a penny, sure from day one they will be pursued to the gates of Hell. It will wash its face on a cashflow basis and will not require a new credit bubble.

    Your optimisim is grating, im afraid.

  42. @Eoin

    And how would defaulting on NAMA issued debt be any different to, say, defaulting on HFA debt? Or NTMA commercial paper?

    Realistically, the government can’t default on anything without it being seen as sovereign default. NAMA is part of the government, ergo…, er go on, go on, go on… it’s just not going to happen.

  43. @Eoin

    One final point. Such debt will count under GGD calculations, I believe, as NAMA is a state body, not an arms-length one. No?

  44. @ YM

    Eurostat has still to decide whether it will be under GGD or as a semi state off balance sheet entity. The French and German plans have been declared off balance sheet. The govt here obviously hopes for the same ruling. Its its off balance sheets, it will be NAMA debt that is issued, if it is on balance sheet, it’ll be GGD thats issued. I heard this from the NTMA themselves.

    If the subordinated debt is specifically declared to be reliant on a particular financial metric of NAMA, i dont see how anyone could argue with the state holding the debt holder to these terms. We’ve never issued a debt like this before (has any govt?), but that doesn’t make it any less feasible.

  45. @ Brian

    (a) your post suggested that all debt issued by NAMA will be pari passu with general government debt. This is incorrect.

    (b) i have never said that NAMA will be some sort of manna from heaven. I have never even said it will be odds on to break even or turn a profit. What i have said is that the biblical losses being suggested by some seem unlikely, and that the true p/l is more likely to be +/- €10bn, and more probably closer to zero after the subordinated debt has been factored in. Anything even remotely in this ballpark is a very low amount when factored against a GDP of 200bn+ and taken over a 10 year period. We’ll spend 400bn or so at the current rate on social welfare and the public service, and we’ll donate more to foreign aid than we’ll likely lose on NAMA. Of far more importance than what NAMA nominally makes or loses will be what effect it has on the overall economy. Any return to growth that is facilitated by NAMA will far outweigh any of the more realistic negative outcomes of the program.

  46. Eoin
    I actually have better things to do than search through draft daft bills. However, do explain how
    “(5) For the purposes of this Act and to enable the Minister to provide consideration for the acquisition of bank assets and the operations of NAMA or a NAMA group entity, the
    Minister may, whenever and so often as he or she thinks fit, create and issue debt securities charged on the Central Fund or the growing produce thereof and ranking pari passu with debt
    securities issued by the Minister under section 54 of the Finance Act 1970—”
    can read
    “ah sure the NAMA bonds arent really governmtn bonds at all”. Pari Passu legally and financially means equal, without differentiation, of the same seniority.
    FYI the 1970 Act S54 is
    “54.—(1) For the purpose of raising money for the Exchequer, the Minister for Finance may, whenever and so often as he thinks fit, create and issue securities bearing interest at such rate as he thinks fit or no interest and subject to such conditions as to repayment, redemption or any other matter as he thinks fit.
    [GA]

    (2) The principal of, the interest (if any) and the premium on redemption (if any) on securities issued under this section and the expenses incurred in connection with the issue thereof shall be charged on the Central Fund or the growing produce thereof.
    [GA]

    (3) Moneys borrowed under this section shall be placed to the credit of the account of the Exchequer and shall form part of the Central Fund and be available in any manner in which that Fund is available.”

    So, Eoin. On what planet does this mean that the NAMA bonds, however Eurostat classify them , mean that they rank non-pari passu with the general run of debt.

  47. @ Eoin,

    “Eurostat has still to decide whether it will be under GGD”

    😆 😆 😆 😆 😆 😆 😆 😆

  48. Some comments:

    It is now crystal clear that NAMA is now equating MV loans with MV of property assets:
    “This suggests that the current market value of property loans to be acquired by NAMA is €47 billion (€88 billion less 47%).” [p.7]
    “The market value of the underlying property assets (€47 billion)” [p.31]
    Is this spurious?

    The costs of NAMA appear to be constant at €240m per annum. No allowance is made for wage or costs inflation over 12 years despite the ECB aiming for 2%.

    We are told that “A discount rate of 5% was used to calculate Net Present Value.”. It is not clear how this was applied as Net Present Value is the net of what is recovered not the gross amount recovered. Should the 5% discount not be applied to the total? Can anyone clarify this calculation?

    The interest outflow in 2019 is €700m despite projections for debt to be reduced to €8.5bn by the end of the year. How does that work?

    It is not clear whether ordinary government bonds will be used in part to purchase NAMA assets. This possibility is stated explicitly: “NAMA will purchase bank assets through the issuance to participating institutions of a combination of Government securities or NAMA-guaranteed securities along with NAMA subordinated debt at a discount to the nominal value of loans being acquired.”

    The “cushion” of €4.8 bn does not include the NAMA subordinated debt so one could argue that there is a real cushion of €7.1bn on the calculations.

    However, where it says “Taking subordinated debt into account (5% or €2.7 billion of the total consideration), it is estimated that underlying asset prices would have to recover by approximately 10% over the expected 10 year lifetime of NAMA to avoid any loss to the taxpayer.” it is apparent that this scenario is weaker than the Business Plan assumptions which have NAMA more than breaking even. Accordingly, one could assume that a weakening to “only” a 10% recovery in property values will have a knock on effect on a cash flow generated. This calculation has not been shown. Indeed it is not apparent that this calculation has been carried out at all.

    As YM says, there is no provision for a lessening of cash flow despite the fact that customers with performing loans may buy their way out of NAMA.

    Provisions for loan impairments (all loans?) as a portion of commercial property loans:
    EBS – 12.5% – (102/800).
    Anglo – 13.1% – (3.719/28.4)
    AIB – 9.5% – (2.28/24.1)
    BOI – 5.4% – (0.83/15.5)
    INBS – 4.1% – (0.344/8.3)

    It is clear that EBS and Anglo have been more aggressive in their write downs. Why would EBS’s percentages not be representative? Is it becasue their loans are smaller? Does this speak of a deeper ill not being addressed by NAMA?

    Total Impairment provisions of all institutions (€7.275bn) is less than the current total rolled up interest (€9bn) in the book value of L&D and associated loans.

    The total write down will be about €25.7 bn (assuming NAMA subordinated bonds will not count towards capital). This means an additional write down of €18.425bn. Is that how dishonest the banks are?

    No asset valuations of loans associated with property values are provided.

    It is asserted that LTV assumption is 77%. However the sentences do not make sense: “The estimated aggregate average loan to value (LTV) rate for these loans is approximately 77% i.e. the value of the real estate collateral at the time the loans were originated was €88 billion. The loans were made over a number of years and not all were made at the peak of the market.” This suggests that the €88bn is not an aggregate of peak property values but rather the aggregate of property values at the different times when loans were taken out. However, the write down of 47% from €88bn is what gives us the loan/property MV of €47bn. This indicates that €88bn is the aggregate peak value. The statement that “The loans were made over a number of years and not all were made at the peak of the market” is clearly misleading as it suggest one can hope that the aggregate peak value of the security was in excess of €88bn.

    No value is provided for non-property assets which may have been used as security for associated loans. For example, what of Liam Carroll’s Aer Lingus shares? No valuation method has been mentioned for such security that I know of.

    Anglo makes up 38% of the total book value of NAMA loans and 44% of associated loans. It is not clear what proportion of the €2.7bn in NAMA subordinated bonds will go to Anglo. However, it is possible that whatever we save with subordinated bonds going to Anglo will have to be paid for with ordinary Government borrowings.

    We can also see that the following are the ratios of “associated loans” to total loans:
    AIB: 29.46%
    ANGLO: 42.61%
    BOI: 35.48%

    What we cannot see is the ratio of property values (peak/trough/LTEV) to total loans as we are not given a break down of the rolled up interest. This is surely the most crucial piece of information in assessing the haircut to each institution and it is surely available to the team producing these documents. This is very annoying as it makes it harder to assess the estimates of default.

    I am worried that the process which is designed to provide clarity and credibility might fail to the lack of clarity from the get-go.

  49. @ zhou,

    “The costs of NAMA appear to be constant at €240m per annum. No allowance is made for wage or costs inflation over 12 years despite the ECB aiming for 2%.”

    And why does it cost €240m in the last year?

    The whole thing is sloppy. AND these people are going to get paid €2.6Bn over the lifetime.

    Absolutely pathetic.

  50. @John

    Perhaps NAMA expects to have seized assets and to have bankrupted developers prior to the end! The principal recovered could include the fruits of enforcement against developers peronsonal assets. It does not count as interest because it is absorbed by the principal.

    You will note that earlier in the analysis repaid principal is applied towards interest. One presumes the converse applies later where payment of interest accrued is applied towards paying off NAMA bond principal.

  51. @ Brian

    I never said that “NAMA bonds aren’t really govt bonds”. What i have ridiculously clearly stated is that NAMA-issued subordinated debt is a very different thing, with different terms and conditons regarding “repayment, sub-ordination, repurchase, cancellation or redemption or any other matter as it thinks fit”, than the standard ‘senior’ NAMA bonds or GGD. They will be issued under a different section of the Act.

    There are three seperate sections of the Act for a reason – they are three seperate mutually exclusive options.

    S45. The minister can directly issue debt. This is pari passu to GGD.

    S46. NAMA can issue debt. This is subject to the following caveat: “The Minister may guarantee debt securities issued by NAMA or a NAMA group entity under this section.” We assume this occurs and they rank pp to GGD.

    S47. NAMA can issue seperate debt with different T&C’s relating to subordination. These carry this caveat: “Subordinated debt securities may be subject to different terms and conditions for different classes or types of those securities.” Therefore anything issued as subordinate can have a performance metric to be repaid against.

    This is totally clear and unambiguous. If we issue under S45, its GGD. If we issue under S46, it may be guaranteed by the govt and rank pp with GGD. If we issue inder S47, we can make it subordinated in nature and subject to different conditions, including non-repayment without recourse to either NAMA itself or the exchequer in the event of not meeting this metric. You are reading into this and creating a conclusion which does not fit with the wording of the Act.

  52. @Zhou
    Excellent post encapsulating most of the deficiencies of the business plan.

    I take back some of the things I said about private sector business plans being as bad as this. On mature reflection, private sector business plans contain the method they will use to fail to reach their profit targets. This contains no method. We are entirely in the dark as to what NAMA will actually do.

    Will it bust insolvent developers? Not according to the business plan.
    Will it sell loans on? Not according to the business plan.
    Will it finish and sell apartments net of tax? Not according to the business plan.
    etc.

    While we have hints and allegations that certain actions will be taken and an enabling mechanism in the legislation, it appears, according to the business plan, that NAMA will do, eh, nothing!

  53. @ YM

    could happen! We’ve been given sod all info on the T&C’s. It still doesn’t take away from my basic point that S47 bonds can, and likely will, be different to S45 and S46. This is clear as day in the wording and seperation of the Act into three parts in terms of debt issues.

  54. @zhou
    There is a need for one more pari passu provison in the Nama legislation:
    “Assurances by Minister Lenihan rank pari passu with the most worthless thing you can think of”.
    Morgan Kelly was right. When the minister states something categorically we should all assume the opposite to be true. Nama should have adverts with the closing line, “Asserted by the Minister for Finance”. It would be even more blackly comic than, “Regulated by the Financial Regulator”.

  55. @Eoin

    In your heart of heart do you really believe that the state will repudiate them after widows and orphans start buying them? When “Vegetables against the Fork” admit that they’ve put their pension fund into them and it’s a life of eating SPAM if they aren’t bailed out? When they turn out to where the public service have been investing their second pension AVCs?

  56. Sorry, meant to add – you are right in your interpretation of what is technically possibly in the wording, but wrong, I believe, in your interpretation of what is politically feasible…

  57. @Eamonn76
    “It would be even more blackly comic than, “Regulated by the Financial Regulator”.”

    I always hear “but not very much” whispered after that one…

  58. @ YM

    thank you for not accusing me of living on another planet!

    But yes, i really do think that whoever is in government at that time will have an overwhelming moral duty and public backing to cancel that debt if required. I’d go as far as to suggest that we put in some sort of legal lock on the sub debt that actually prevents the MoF at the time from paying out unless the T&C’s have been met. I really hope that this whole sorry saga will finally allow the people in power to crack down where necessary (as opposed to where the political trends are pointing at any one time) on the banks and the financial system as a whole. I’m not talking about ridiculous measures to cap pay and bonuses, but real regulation to allow far greater scrutiny of the system as a whole and bigger sanctions against those that break the rules.

    Recent regulation has focused on the consumer for the most part, and not the overall system, and has gone so far over the top that its almost impossible to sell a lot of products without fear of them coming back to bite you in the @ss at a later date. Witness the furore over the fixed rate mortgages recently – an incredibly simple product that somehow ended up with TD’s demanding people be let out of them. Banks are now a lot less willing to sell them, so we’ve ended up with a situation where regulation (or the fear of it) has actually reduced consumer choice.

  59. @ zhou

    It’s worse than that. Hope this looks like a table when posted.

    The whole thing looks like a mess.

    Year NAMA Interest Interest
    Debt Outflow Rate Outstanding

    2010 54.0 1.3 2.4
    2011 54.0 1.8 3.3
    2012 54.0 2.0 3.7
    2013 47.5 2.1 4.4
    2014 41.0 2.0 4.9
    2015 34.5 1.8 5.2
    2016 28.0 1.6 5.7
    2017 21.5 1.3 6.0
    2018 15.0 1.0 6.7
    2019 8.5 0.7 8.2

  60. @Eoin

    I don’t think you are on another planet and I think the NAMA debt may not threaten our credit rating as much as if we issues such bonds for general govt spending with no assets being required. With that said, it is clear from the documentation published to date, the ECB opinion and the draft business plan that only 5% of bonds will be subbie (NAMA 2.1) bonds which may be repudiated.

    @YM

    Cheers. I think NAMA can still bust developers by enforcing charges and by pursuing guarantees. I think interpreting the business plan as saying this won’t happen is reaching conclusions beyond what is justified by the evidence. I am not wholly impressed but I am hopeful that any problems can be addressed.

    The only thing limting the amount of the subbie bonds is that to issue too many of them will result in the negation of LTEV which will defeat the whole purpose of the exercise – i.e., to provide emergency relief to the financial system.

    @Greg – I read the table a couple of times.

    In fairness to the Govt at least they have published these papers so the debate can move on and get more detailed.

  61. @ zhou,

    First column = Year
    Second column = NAMA Debt Outstanding
    Third column = Interest Outflow
    Fourth column = Interest Rate

    Are my sums right.

    If they are this “Plan” is incompetent.

    Happy to be wrong.

  62. The projected recoveries are ridiculous.

    How are developers going to repay €62.1bn in capital plus €12bn interest, €74.1bn in total.

    From assets currently worth just €47bn

  63. @ Greg

    you’re out by one year/line.

    ie 2019 debt outstanding of 8.5bn is whats outstanding at the end of the year after the 6.5bn repayment. So 15bn is the debt outstanding during the year, with a 0.7bn interest outflow, giving 4.6% interest. I think?

    look at year 2020 – no debt outstanding but a debt repayment?

  64. @ Dreaded_Estate

    Succinct.

    This is pure fantasy. Add in €5Bn to €10Bn of “finishing out” money and we are off to see the Wizard.

    By the way the assets are only “worth” €43Bn. The €4Bn liquidation recovery has to be excluded.

    So €62.1Bn + (say) €7.5Bn + €12Bn = €86.1Bn.

    €43Bn needs to increase by €38.6Bn.

    That’s a 90% increase in the “market” value of the security of “performing” or “about to perform” loans.

  65. @Greg

    I don’t think your sums are exactly correct. I think that dividing the interest outflow by the amount outstanding does not give the interest rate bacuse that is the net amount outstanding at the end of the year rather than the average balance outstanding for the full year. The amount oustanding at the beginning of the year should be taken from the row for the previous year in table 5. The plan goes into detail about how changes in the swap rate curve over time will affect it.

  66. @ All

    This is an ECB coup.

    They want their €30Bn to €50Bn back.

    They can’t get it in cash so they want it in Irish Sovereign Debt.

    Paranoia or the absolute truth?

    Where’s Mr Bond. Eoin Bond.

  67. @Greg
    “That’s a 90% increase in the “market” value of the security of “performing” or “about to perform” loans”.

    Lenihan told us a 10% increase in market value was necessary. It looks like nearer 100%. He already, as Enda Kenny said, left out a zero from the risk sharing and now he has left one out of the increase in property values needed too.
    It does remind me of Lenihan’s valuer who mentioned that property values after other property crashes typically recovered to 87% of their peak. Some people argued he was speaking hypothetically. It looks like they have gone with his projections.

  68. @ Greg

    “This is an ECB coup.
    They want their €30Bn to €50Bn back.
    They can’t get it in cash so they want it in Irish Sovereign Debt.”

    Wouldnt accepting Irish sovereign debt in return for the cash be tantamount to QE?

  69. @ Eamonn76

    So why hasn’t the Minister of Finance done his sums?

    He’ll get a wooden spoon on the back of his leg from his mammy.

  70. @ Bond. Eoin Bond…

    Your euphemistic adoption of MI5 credentials is evidence of deluded thinking on your part. It is clear your spirited defence of NAMA is purely motivated by personal gain through its implementation, be that political advancement, monetary or most likely both.

    The reality is that NAMA is one gigantic financial swindle being railroaded through by a government against its people. Ill conceived and destined for fiscal disaster, its perpetrators, media propagandists, and beneficiaries need to be held fully accountable for their treasonous actions.

  71. @ Taggart

    first time caller, long time listener? Everyone on here has been calling me Eoin Bond. Wasn’t my idea. Figured we could at least have a bit of fun with it if nothing else. Cheer up, its Friday for God’s sake, no need to actually act like your namesake.

    For the record (again): i don’t work for a NAMA-ised bank (though i do work for a bank), i dont own any bank shares affected by NAMA, i won’t gain monetarily from the introduction of NAMA, and i have absolutely no affiliation, now or previously, with any political party. I’d be more than willing to vote for FG if Richard Bruton was at the helm, but there’s something at the back of mind that cries “Stop!” when i think of Enda in the hot seat. If anyone is worried about my bono-fides, i will gladly provide them in private to one of the more senior contributors on this site. I will not however provide them to someone like you who throws about spurious and ill conceived notions about my motives or mental state. In short, you’re an idiot, and an incorrect one at that.

  72. @ Taggart

    by the by, Bond is part of MI6, not MI5. 6 are external, 5 are internal. If he was MI5 we’d only be treated to him running round the exotic backdrop of Stoke-on-Trent and whatnot…

  73. Using the default rate I’d estimated above, I’ve used the distributions from Table 5 to get a rough idea of the outcome. Note that this isn’t exact – by way of test, my calculations estimate the breakeven default rate at 28.2% versus NAMA at 31%.

    At a 48% default rate (my slightly benign scenario), the loss is 15.6bn (pv 10.3bn). At a 60% default rate, the loss is 24.3bn (pv 16.5bn). At a 75% default rate, the loss is 35.2bn (pv 24.3bn). Taxpayer losses would be these values minus 2.7bn (pv 1.54).

  74. @Ahura
    15-35 bn.
    That puts you firmly in the camp of the begrudgers. (Or “those that can do sums” as I like to call them). Oh well, watch out for a tax exile criticising cowardly anonymous commentators next.

  75. Taggart Says:
    October 16th, 2009 at 1:28 am

    Naughty. Naughty.

    You seem to have upset Mr Bond.

    :mrgreen:

    Have to say I tend to agree with you on this.

    “The reality is that NAMA is one gigantic financial swindle being railroaded through by a government against its people.”

    As you probably saw on Prime Time Joe Stiglitz called it “criminal” and “ a fraud on the taxpayer”

  76. yoganmahew Says:
    October 16th, 2009 at 7:52 pm

    “Oh well, watch out for a tax exile criticising cowardly anonymous commentators next.”

    Scary. 😯

    Does your crystal ball work on the property market as well?

  77. Henry Withinshaw

    No right to review legislation in the courts: A45 of Bunreacht na hEireann.

    The main issue is who could sue? Locus standi. Who has been injured? It might be possible to sue Ireland ala Ryan 1965. But by the time it is done so are we! What would the remedy be? Damages of 40,000,000,000? Against whom? Even if judges wanted to impugn the legislation say that it was passed by those who have secret liabilities via joint venture agreements with banks or developers or are extensive borrowers of money for land, hence biased parties, the point would be moot as the damage is so huge and already done?

    At best we would have bankrupt pollies and a huge debt to ECB.

    We need faster action than that!

    However, the President can

    dissolve

    refer

    as set out in my earlier posts!

  78. Eoin

    HMG prefer the Secret Intelligence Service and the Security Service. SIS and SS. Bond was a Commander of the Senior Service ie RN, and was M.I. 6. There were Military Intelligence departments numbers 1 to 19, at least, in WWII, or the Big One, as we still call it here.

    But they take their orders from those who own the UK, not just the managers pro tem. As Harold Wilson nearly found out!

  79. Taggart

    It is not that I did not find it amusing, but the first para was wrong and your second para is still, sadly, correct.

    Eoin Bond is a supporter of some bondholders rights. He is deluded, but we will give him soft pencils and crayons and he will get better. If we can stop Nama. If not he’ll be on the streets with the rest of the loonies as the hospitals will all be closed due to lack of funds and strikes.

  80. @yoganmahew,

    As far as I can tell, a large amount of loans will need to undefault to get a 20% default rate. Although the numbers in my first post are limited to the data contained in the bank reports, my approach is reasonable. The DoF cashflow table is odd. The principal repayment in particular. Any loan pool model I’ve used, applies the principal repayments of the loan schedule. For bullet loans, you apply the loan’s maturity date. You do not make up an unfounded repayment date. The only times you tend to see a series of flat numbers is for recoveries from defaults.

  81. @ Pat D

    “He is deluded, but we will give him soft pencils and crayons and he will get better. If we can stop Nama. If not he’ll be on the streets with the rest of the loonies as the hospitals will all be closed due to lack of funds and strikes.”

    Having read your blog, we’re both agreed on the dangers of loonies running around in the open…

  82. @ Eoin,

    How can you not like somebody who’s favourite movie is Dr Strangelove?

    “Or How I Learned To Stop Worrying And Love The Bomb”

    http://www.youtube.com/watch?v=G4_qEbuNBls&NR=1

    Maybe the Government can offer a special Film Tax Credit for a rushed version of Dr Propaganda.

    “Or How I Learned To Stop Worrying And Love NAMA”

    Mind you if it’s anything like the original I have to tell you it doesn’t end well.

    I’m sure there would be a cameo role for a bond expert who doesn’t work for one of the banks covered by the guarantee.

    @ 2:40

    http://www.youtube.com/watch?v=A9ihKq34Ozc

    “Mr President we must not allow a NAMA gap”

  83. @Ahura

    I think your figures are entirely reasonably too. Whatever amateurish method I use to estimate the losses I come up with figures in that range – loan performane, underlying asset performance, historical parallels, especially historical parallels.

    I assume that the loan repayment schedule is predicated on refinancing before capital comes due. As I understand the structure of C&D and Commercial of the loans, they are I/O or roll-up for 4-5 years then they either pay off or refinance before a capital element comes due. In the case of commercial, it appears particularly pyramidal in that all that can have happened in the 4-5 years is capital appreciation…

  84. @ Ahura Mazda & yoganmahew
    @ Karl

    I’ve been thinking. I know, I know I’m not supposed to.

    Help me out here. I want to take a step back to the “finishing out” funding.

    Karl rightly pointed out that the €5Bn was not included because of the note which stated that the interest margin would be negligible in the grand scheme of things.

    As you say most construction & development loans are by their nature bullet, can you reconsider the €10Bn (and I’m going to call it that because the Minister has already started the campaign to breach the €5Bn) finishing out funding.

    If the ultimate principle repayments are €62Bn per the cash flow projection surely that includes the effect of the €10Bn. No?

    How could it not do?

    Which means that the €10Bn (finishing out funding) should be added to the €54Bn (acquisition funding).

    Or does the Minister expect to “recover” the €10Bn in addition to the €62Bn?

    If so why is it not explicitly stated?

  85. @Greg

    Can’t fault your logic, except perhaps that the 10 bn is not included in the cash flow as an outlay either.

    What it does mean is that the already steep curve to get two thirds of the non-performing back to performing is even steeper than imagined.

    So we have 40% currently performing and 40% that we want to get performing. 30.8 bn in original loan value each. The liquidation value of the non-performing is currently 7.7 bn. Assume the 10 bn is divided between the performing and the non-performing. That 7.7 bn has to rise to 35.8 bn for NAMA to break even…

  86. @ yoganmahew

    “Can’t fault your logic, except perhaps that the 10 bn is not included in the cash flow as an outlay either.”

    That, yoganmahew, is exactly my point.

    Please don’t be offended but I think the penny is about to drop.

    It’s not the outlay we know it will be spent. We agree this.

    So it is only sensible to add it to the €54. OK, in the early years of the project.

    Then we get to the end of the project.

    Now either the developers are going to pay back a principal amount of €62 (give or take, I’m not saying the Minister has to be penny perfect in a forecast) or they are going to pay back €72Bn.

    The Minister cannot say that his best estimate of principal repayments is €62 if in fact he believes it is €72.

    The €62 must have been based on some (yes estimate) of the value of completed projects over the course.

    What I’m saying is, the estimate of the €62 must have been independent of the fact that the €10 was being advanced.

    The €62 must be a crude estimate of market value. Otherwise it is a number simply plucked from the air to make the forecast look good.

  87. @Greg

    I think you’re forgetting this is a business plan. The figures in and of themselves are not significant, except where they are clearly wrong (for example if the interest costs of the NAMA bonds had been grossly underestimated).

    The 62 bn is the minimum that will make NAMA work and turn the promised profit. That is why it has been chosen. The 20% default rate is also the minimum that is, at face value, acceptable since it is the average default rate on C&D loans during a property bust.

    Business plans contain two sorts of numbers – those that can’t be challenged because they are true and those that can’t be challenged because there is no evidence to either back them up or dismiss them – semi-random numbers. The semi-random numbers are important only in the fact that they make all the rest of the numbers add up. They can be attacked as to their incredibility, but not proven to be wrong. The more and bigger the semi-random numbers are, the dodgier the business plan.

    One thing I am surprised we do not see is “savings from synergies and efficiencies”. This is a favourite of the LBO/M&A crowd. An unassessable number that makes a business plan work. Ms Harney provided a classic example of this with her efficiencies of 25 mn a year on merging the current three children’s hospitals into a new 750 mn hospital… er, a 30 year payback… made up of, eh, catering, HR, and transport… short burgers, hair straighteners and taxis, quick. But will anyone actually be made redundant by the combination? What about redundancy costs? What about relocation costs? etc. etc. “It is not anticipated at this time…”

  88. @ yoganmahew

    “Please don’t be offended but I think the penny is about to drop.”

    That should have read,

    “Please don’t be offended but I think the penny is about to drop, I think it just dropped for me.”

  89. @ yoganmahew

    Do you remember when the Pension Levy was introduced?

    The question arose “Was this levy tax deductible”.

    The entire Cabinet contradicted each other for a week.

    I think they just don’t get it.

  90. PS Sorry, went on a bit of a rant, my length reply was to indicate that there has been no estimate made of the end income for NAMA. A number that satisfies the criteria has been used – it is a target, not a prediction.

    That is why I have been banging on about the lack of method in the business plan. No attempt is made to explain how the target will be achieved. It is like the cartoon of the two ants in front of the blackboard with a complicated flow chart between input and output. The last box before the output is a magical black box…

  91. @Greg
    “I think they just don’t get it.”

    Exactly. The levy was pitched at a level it was because they said “we need x”, okay, start from there and work backwards. But they forgot, rather bizarrely, about tax relief. It’s a little bit childish really.

  92. @ yoganmahew

    Thanks for the reply.

    “The 62 bn is the minimum that will make NAMA work and turn the promised profit.”

    Which, in my book means that the NAMA business plan is a complete fiction.

    They did pluck the €62 from thin air.

    However, I believe I have given a logical argument to prove that they plucked it from thin air.

    “The figures in and of themselves are not significant, except where they are clearly wrong (for example if the interest costs of the NAMA bonds had been grossly underestimated).”

    Can I get back to you on that, zhou replied to a query but I didn’t have time to deconstruct it. I think the interest calculations are equally bogus.

    Your & Azhura’s point about the apparent smoothing of principle repayments has also got me thinking. I know, I’ll have to stop that. It’s not good for Ireland Inc.

    “The more and bigger the semi-random numbers are, the dodgier the business plan.”

    Would it be fair to apply that observation to the €62?

    “Ms Harney provided a classic example of this with her efficiencies of 25 mn a year on merging the current three children’s hospitals into a new 750 mn hospital… er, a 30 year payback… made up of, eh, catering, HR, and transport… short burgers, hair straighteners and taxis, quick.”

    😆

  93. Hey, you wanna know how bad it is? Look at this:
    http://www.zerohedge.com/article/how-harvard-nearly-went-bankrupt-after-rogue-interest-rate-swap-went-very-sour

    Now, in the second round of Masteroftheuniversemind, your specialised chosen subject is the rise and fall of the Irish state:
    What Irish bank has masses of interest rate swaps?
    Who’s now on the hook for those losses?

    You passed out on both questions – the first is: all of them (well Anglo, BoAIB), the second: we are!

  94. Yeah, I follow fight club. I like the rules. Though it seems to go on and off the boil.

    Irish politicians don’t know they’re born.

    Thanks for the link.

    You’ve probably seen this. However.

  95. “What Irish bank has masses of interest rate swaps?
    Who’s now on the hook for those losses?”

    I keep telling people. Well actually my cat, that $1.4 Quadrillion of derivatives might be a bit of a problem.

  96. “The school that epitomizes the dangers of groupthink (especially by very intelligent people)”

    And I was just trying to explain that on the Denis O’Brien thread.

    “Yet most notable in the entire report is an interesting story for all those who claim that representing the $200 or so trillion in interest rate swaps on the books of the Big 5 banks is completely irrelevant as the net exposure is just a couple trill here and there. Yeah, that’s what Harvard thought too until it had to eat a 45% loss on $1.1 billion in IR swaps. And nearly go tits up in the process.”

    Yeah,

    We’re definitely phooocked.

    😥

  97. As Fritz says

    “In fiscal 2009, the University terminated interest rate exchange agreements with a notional value of $1,138.0 million, for which it realized a loss of $497.6 million.”

    Any guess as to who the counter party was?

    I’ll just throw it out there that it may have been another squid attack.

  98. @ Bond. Eoin Bond

    ““This is an ECB coup.
    They want their €30Bn to €50Bn back.
    They can’t get it in cash so they want it in Irish Sovereign Debt.”

    Wouldnt accepting Irish sovereign debt in return for the cash be tantamount to QE?”

    @ Bond,

    In the name of whatever God you believe in have I not destroyed your QE argument?

    Don’t be a complete ……

  99. @ yoganmahew

    I think I like Fritz

    “No sweat.

    The squid showed them a powerpoint about how to borrow taxpayer money at no cost.

    Lever up a few T-Bonds and its green grass and high tides baby.”

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