That would be an ecumenical matter.

http://www.youtube.com/watch?v=IvvwNR3vF44&feature=PlayList&p=4F989A0A5523E8B7&playnext=1&playnext_from=PL&index=24

So not only do I lose my asset but I am also liable for the full value of the loan? No that can’t be right. The usual practice would be to liquidate the asset (which is what I understand Anglo is doing with NAMA in my case for 51.9m and I am liable for the balance of the loan to NAMA 25.1).

Fortunately whilst some of my investments tanked, I did have some better investments in Romania, Poland, India, Turkey and China where markets have performed far better and as they are part of the same company, I will need to refinance based on increased values in these other markets. Although I did have to give a personal guarantee as well, in this scenario shouldn’t have to sell the Learjet just yet.

As you can see I was a pretty naive investor because my sharper colleagues were setting up separate SPV’s (oftentimes in Luxemburg for some reason) for each transaction whose liability was ringfenced and although some of them were asked for personal guarantees, being Ireland and everything, they succeeded in only giving nominal guarantees of perhaps €100k on a €100m loan. Apparently NAMA think that only 20% of them will in the end default - they’re obviously not considering my sharper colleagues.

By the way as I understand it, I owe Anglo €77m and will continue accruing interest until the loan is repaid but the deduction would be what NAMA paid Anglo, no? Which would be €51.9m so all I need come up with is €25.1m (77-51.9) plus of course any interest until the loan is repaid.

NAMA is a distraction that will cost lives through lost payments to hospitals and ambulance services.
There are too many Gardai now but soon there will be too few and no hiring. Thanks to NAMA.

All the counting of angels will accomplish naught but to amuse the Gods! And the mad!

Thanks again for your guidance. I hope to stick another scenario on the Ronan Lyons yield thread (I borrowed for a freehold building which is leased to a retailer in central Dublin) and see how they deal with discounted cash flows and terminal values.

I think that the cap (as you have indicated) is correct and that the discount is then applied as you have indicated. i.e. wont pay more than 25% above market in this case. 51.9 on the original 77 (68 plus 9 rolled up)

This set of assumptions paints a pretty bad senario due to the assumption of what was paid per site in 2002 - it may be that the per site price was lower in 2002 (and more sites obtained for the original 88M); however, the principle still stands (if the logic of what outlined is correct).

It serves two purposes.

1. No sensible debate can take place in the Dáil or in the public media.

2. It provides cover for those involved in the case of future legal action or inquiry/tribunal.

That’s all it is. It is nothing else.

Well I think this is where the whole LTEV argument falls down.
If the LTEV is below the market value, you think every rational seller would sell now rather than wait for the market to fall. Perfectly sensible hypothesis IMO.

But by the same token it the LTEV is above the market value, you would expect that every rational buyer to buying at the market value with the expectation of getting LTEV in the future. Equally sensible hypothesis IMO.

Why do you think the only rational investors are on the selling side of the transaction?

Actual value today 46.2m (presumably arrived at by the NAMA valuers using a methodology the same or similar to what you have outlined)
LTEV in 2017 61.7m (assuming 2.5% compound growth in property value and other assumptions with respect to labour costs)
Consideration to be paid to NAMA = 61.7 divided by (1 plus 5% enforcement cost plus 0.25% due diligence cost plus 6.16% risk and funding cost over 8 years) = 55.4m

the source of the 5% and 0.25% is the SDR under s8 of the LTEV regs
the source is rge 6.16% is s2 (2) (c) of the LTEV regs

Nothing published - just an assumption. Looking at the figures published by the DEOLG stripping out inflation and outlier years - house prices increase on average by 5% yoy (since they started the data collection in 1970). 2.5% is close enough to the medium term 2% inflation target of the ECB.

I assume that they are annual discount rates and that they expect the base interest rates to rise - these are straight from the published Legislation (SI)

I pulled the post together as to get someone to say I was totally wrong in my reasoning. Its nearly a question posed as an answer!

Last detailed question from me I think, where did you get the 2.5% compund annual increase from - is that anything that was published? The number I generally heard bandied around was 1% per annum (wasn’t sure if that was flat rate or compound rate).

Numbers are as indicated.

1. to build a nett 70 sq unit you need to build 70/0.85 = 82.4 sq m gross. Construction costs are per gross sq m (was not clear so hope clarifies). Development is design fees, contributions, la fees etc usually around 15%

2. Construction tender prices have now gone down to c 2000 levels so a lower value used. They will be up from current levels in 2017

3. The value per sq m of €3,000 is a gut feel number of where we are today. 2.5% per annum price increase over 7 years brings us to c €3,500. 2017 is used as this is the window used in the legislation.

The implied site value is what is left to repay the loan.

Interesting. I’m totally confused about the discount rates. Are these annual or multiyear? Excluding the 1.7% risk margin, the rates for 3, 5 and 8 years are 2.84%, 3.87% and 4.46% respectively. If multiyear, then the 8-year rate is less than double the 3-year rate! Also, the rates look extraordinarily low bearing in mind all the risk. Please help!!

Just to make sure I’m not missing anything you mean the Build costs in 2002 to be €105k, not €124k (70 * 1500)? Development is what - fees to Local Authority, architect?

Why did you reduce Build and Develpment costs in 2010 per unit?

How exactly did you get from €3000 per property value per metre in 2010 to €3500 per metre in 2017? And why did you select 2017?

“So you reckon that the “standard discount rate” is added to the “NAMA discount rate” to come up with the final rate used to discount cash flows.”

You correctly note that this is not said at all in the SI. My hypothesis is that an overall discount rate is being constructed to take into account recovery of 1) funding costs, 2) risk margin, 3) enforcement costs for duration of NAMA 4) due diligence costs. And used to calculate the PV of the loan. The language is not clear at all

Considering the hypothetical “€88” million site (paid 68M Debt, 20M Equity). Assume planning for 600 units of average net size 70 sqm. Construction cost in 2002 of €1,500 per sq m. (For this analysis ignore the construction finance and consider only the initial loan) On a per unit basis:

At the time of site purchase the developer assumed a sales price of €4,743 per sq m

Site: 147K + Build: 124K + D Costs: 19K + Dev profit: 43K = Appt Sale price: 332K (€4,743 per sq m)

Current analysis indicates sales price at €3,000 per sq m in 2010 which gives:

Appt Sale Price: €210K = Site (value): 77K + Build: 115K + D Costs: 17K + Dev profit: 0K
i.e. Land value now 600 x 77K = €46.2M i.e. current market value. This would be the cash available to repay the loan now - highly distressed.

Based on the economic models produced (as indicated in the SI) it is forecast that prices in 2017 will have risen to €3,500 per sq m which gives:

Appt Sale Price: €245K = Site (value): 103K + Build: 123K + D Costs: 19K + Dev profit: 0K
i.e. Land value now 600 x 103K = €61.7M i.e. long term economic value.

This is then discounted at 6.16% (risk and funding cost over 8 years) + 5% enforcement + 0.25% due diligence = 11.41% i.e. €61.7 / (1+0.1141) = €55.4 M i.e. the transfer value of the asset to NAMA taking into account costs that NAMA will incur moving forward. (There may be guarantees etc. that will bring this value up but they are ignored in this analysis)

The developer still owes €68M + €9M interest = €77M to NAMA.

Yes, terminal values are the key variable and virtually impossible to predict with any accuracy for six months ahead, never mind six years. The use of DCF is fine for toll roads, Government bonds etc. but cannot be relied on in this case. Its use might make the methodology look respectible and give some semblance of professionalism to the projected values. Maybe, that is why it is being used. If Nama was a commercial body working in the best interests of its shareholders (us!), it would create best and worst case valuations/scenarios and aim to do better than the worst case (as per thoughts of the Commercial Court). Instead, I fear that it is pursuing best case valuations dressed up with DCFs, a classic case of fur coat and knickers.

“It may be simple to you but I’m still a wee bit confused.”

You’re a better person that I am, because I am utterly confused though some of the posts on here have assisted in some of the mechanics. If someone can stick their heads above the parapet and provide a worked example of an asset valuation and the operation of the loan in NAMA’s books until repayment/liquidation then that might help dispel the notion that no-one knows how this is operating. So to begin (this is completely hypothetical by the way):

I’m a developer who bought a site in 2002 for €88m and got a loan from Anglo of €68m (a Loan to Value of 77%) and my contract was a roll-up and I now owe an additional €9m interest. NAMA are acquiring my loan now showing at €77m in Anglo’s books.

Right what are the next steps and how does the valuation and operation of the loan in NAMA work.

As for the discount rate - a higher rate will depress today’s value, but the trickiest part is still the estimation of future cash flows. If there are reasonably calculable flows then you can use DCF to give today’s PV and the rate will play a role, but the issue will still be dominated by estimates of the cash flows, particularly the terminal values. Estimating these will be akin to estimating the amount of rain to fall on the 2nd Tuesday in June 2011. Whether I use 2.75 or 5.75 will be largely beside the point.

http://thestory.ie/2010/03/10/insiders/

It may be simple to you but I’m still a wee bit confused.

So you reckon that the “standard discount rate” is added to the “NAMA discount rate” to come up with the final rate used to discount cash flows.

Fair enough but where does it say that? The first mention of the standard discount rate is on page 6 and it doesn’t describe at as an amount to be added to the existing discount rates. It seems a little bit more like something lopped off the top of all the LTEV valuations, which is how everyone else has been interpeting it.

I agree with you. Unless banks are able to lend to private sector activity in the doemstic economy then debt deflation persists.

“Will the two major banks reopen for business if they end up with i) industry leading capital levels due to state ownership & ii) smaller, less risky and more liquid balance sheets as a result of NAMA. If they do will it put a floor under asset markets?”

Judging by the latest accounts, Irish banks were open to buying bonds last year. With a special weakness for Irish gov debt. I’d expect this circular relationship to continue, though sooner or later external players will get uncomfortable with this.

Re putting a floor on (irish property) assets: personally I wouldn’t invest.

The output from this will be used to project forward price levels based on an economic forecast that is being prepared?

It then looks as though they are applying the principle of giving the most impaired assets as much time as possible to recover value? It is likely that interest rates will rise and this is reflected in the increasing discounts that they propose.

If a loan is performing as per contract it is akin to a standard loan refinancing by a new institution?

The discount rates used are to be applied in the normal discounted cash flow (DCF) calculation manner to the cashflows generated using prices generated by the economic model prepared to generate the value (V). The overall discount rate (r) that will be applied to the cashflows (C) is a combination of the 3/5/8 year rate (to cover funding and risk) plus the 5.25% standard rate (to cover enforcement and due diligence) i.e. 9.76%, 10.82% or 11.41%. Thus V = C / (1+r).

The main legislation pointed to this SI as the place where the discount rates to be used would be published.

I think that it is straightforward enough?

The 3rd secret is still a secret although I have heard rumours to the effect that if the banks are nationalised, permanent darkness decends and if senior debt is haircut a plague of locusts will arrive with frogs in tow.

So the bottom line is that the NAMA haircut may be bigger than the 19% leaked by sell side analysts at Christmas, than the 25% impled after the Sept biz plan and the 30% announce by NAMA at the start of Jan.

Therefore the capital requirements will be greater and the state probably end up with super majority stakes in the banks. These get bigger if the Regulator hints that banks will go to 8% equity T1 immediately.

Will the two major banks reopen for business if they end up with i) industry leading capital levels due to state ownership & ii) smaller, less risky and more liquid balance sheets as a result of NAMA. If they do will it put a floor under asset markets?