Via RTE, we find out about the dividends to be paid to the NAMA Master SPV’s private investors
The private investors, along with NAMA, will receive an annual dividend linked to the performance of the Master SPV. According to a briefing note issued to TDs today, this will be capped at the 10-year Irish Government bond yield at the time the dividend is declared.
When the SPV is wound up, the investors will be re-paid their capital only if the Master SPV has the resources. They will receive a further bonus of 10% if the Master SPV makes a profit.
So, if NAMA loses money, the private investors will lose all of their €51 million, while if NAMA makes money, they will receive a maximum of Irish government bond yields plus 10% over ten years.
Simplifying this formula to mean that in the case of NAMA breaking even, the annual return is (r+1)%, where r is the rate of return on government bonds, the expected percentage return on this investment over ten years will be
10p(r+1) + (1-p)(-100)
where p is the probability that NAMA breaks even. The second term reflects the return of -100% that comes from losing all your money.
The excess percentage return on this investment over investing in Irish government bonds is
10p + (1-p)(-100-10r)
Whether this is positive or negative depends on the probability of NAMA breaking even and on the rate of return on government bonds.
The NAMA success probability at which this excess return equals zero is
p = (10+ r) / (11 + r)
With an r of 5%, this translates into a probability of NAMA making a profit of p = 15 / 16 = 0.9375. In other words, this investment only beats investing in Irish government bonds under the assumption that NAMA has a less than seven percent chance of making a loss.
Personally, I’m going to pass on looking to participate in this wonderful investment opportunity. As, I imagine, would anyone else investing their own money in this on a stand-alone, no-strings-attached basis.
That said, if (just for conjectural purpose) someone decided to give me non-recourse financing for this project (a proud tradition in Irish banking circles) so that the -100 in the bad scenario just became a plain old zero, then maybe I might start to think about it: Good scenario, I get a small return, bad scenario, I lose someone else’s money.
Alternatively, I might decide to get involved in this investment opportunity if I have other interests beyond just making money on this deal alone. Perhaps I take an avid interest in the Irish property sector and fancy appointing some members of the NAMA Master SPV. Or perhaps I have the nation’s interests at heart and want to do all I can to assist the Minister in getting the NAMA debt off balance sheet. Who knows what will motivate the NAMA SPV investors? Presumably, though, the process of raising the €51 million will be done in a clear and transparent manner, so that these people will be able to explain for themselves what their motivation is.
What’s that I hear you say? Commercial sensitivities?