Are One Third of NAMA’s Loans Producing Cash? No.
This post was written by Karl Whelan
You might remember that a few months ago, NAMA CEO Brendan McDonagh appeared before the Oireachtas Finance Committee and told them that one third of NAMA’s assets are cashflow producing. I noted at the time (based on the information in bank annual reports) that this didn’t seem to me to be correct, with the likely figure being a good bit lower. Now, the media are leaking details of NAMA’s new and improved business plan and we are being told that “only about 20 per cent of the loans are generating any income, that is repayments or interest payments.”
This raises an interesting question: Was Mister McDonagh misinformed in April when he said that one-third of the loans were cashflow producing or have 13 percent of the loans stopped producing income between April and July? Neither answer is particularly palatable.
As for “In a worst-case scenario, Nama could end up losing several hundred million euro” one really has to wonder do the people who put this plan together know what a worst-case scenario means. However, coming from the folks who brought us the 80% full recovery scenario, I suppose we shouldn’t be surprised.
Tags: NAMA, NAMA Business Plan
July 5th, 2010 at 12:38 pm
on twitter this AM Dan Boyle, GP spokesperson on finance, stated that the 49% discount paid was more appropriate than the 30% I (and others) had suggested. So, with <30% paying cash, Dan still thinks that paying 50% is good value. Time to leave….
July 5th, 2010 at 12:42 pm
“I’m shocked, shocked to find that only 20% of loans are cash-flow producing in here!”
July 5th, 2010 at 12:45 pm
This shows once again the value of forcing the banks into a loan by loan analysis. Alan Ahearne was right when he said we could not leave them to sort themselves out as was the case in Japan.
Hopefully, the poor cashflow figures will be reflected in lower values paid for the loans.
In the meantime, it is welcome that NAMA appears to be revising legal and other costs downwards. This is particularly good as the discount applied to loan values for enforcement should remain constant giving a net gain.
July 5th, 2010 at 12:48 pm
I read recently that NAMA may invest in Battersea Power Station in support of Treasury Holdings efforts to complete the project and float it off. NAMA seems to be swinging between a debt collection agency and a property speculation company. Let’s increase the risks all round?
The lack of transparency in the decision making at least as far as the average taxpayer can see, is truly worrying. SMEs up and down the country cannot get extensions on overdrafts in many cases and while NAMA is pondering spending billions and losing the same. At the moment Ireland Inc has two tiers of property assets. Those in NAMA that cannot be sold and whose value is artificially maintained. Those outside NAMA which can be sold and at prices that the market will bear. Anyone taking stroll around will see commercial units boarded up due to lack of tenants. In the midst of an unprecedented recession, how could NAMA have been so optimistic in the first place?
July 5th, 2010 at 12:49 pm
@zhou: This is for loans for which 50% has already been paid. So sorry but nothing is being reflected in lower value paid. They must have known about this 20% cashflow when they bought the loans. If they didn’t, they didn’t do their job right and need to be fired.
July 5th, 2010 at 12:51 pm
@Zhou
“Hopefully, the poor cashflow figures will be reflected in lower values paid for the loans.”
errrr….they already (over)paid. But, good try.
@TA
“I read recently that NAMA may invest in Battersea Power Station in support of Treasury Holdings efforts to complete the project and float it off. ” yes. the investors chronicle had a “run for the hills” on this a couple weeks ago
“how could NAMA have been so optimistic in the first place?”
because it was told to be?
July 5th, 2010 at 12:54 pm
@BL / Garo
I have not seen any suggestion that the valuation process didn’t reveal that loans weren’t cash-flow generating. Indeed, cash-flow is a critical variable in the valuation process as discussed on previous threads.
Therefore, there appears to be no basis that the 50% discount represents an overpayment which does not take account of cashflow.
July 5th, 2010 at 12:55 pm
correction…
Therefore, there appears to be no basis for saying that the 50% discount represents an overpayment which does not take account of cashflow.
July 5th, 2010 at 1:00 pm
Zhou
that assersion can only make sense if they took account but didnt give a good goddam.
July 5th, 2010 at 1:03 pm
Not surprised but very concerned about the whole Nama thing and the directions that it is taking.
Back in October I expressed concern about Nama’s treatment of rolled up interest. The recent leaks suggest that even more interest will be rolled up and never collected. See
http://www.planware.org/briansblog/2009/10/nama—the-real-default-rate.html
Concerns that Nama’s loan write offs will amount to a bale out for developers prompted the following open letter to Nama’s board to clarify matters. No response received yet.
http://www.planware.org/briansblog/2010/06/open-letter-to-namas-board.html
July 5th, 2010 at 1:05 pm
@BL
Why do you base that statement on?
The valuations were substantially lower than the predictions of the “analysts” (Davys et al) and also substantially lower than the expectations of Anglo executives.
July 5th, 2010 at 1:09 pm
And they are substantially above the observed reality (c25% are cashproducing a la the indo/Karl) which closely matches the predictions that I, Karl, Matthews, Constantin, Morgan etc gave last year.
So, tell me - if a bundle of assets are paying on 25%, and nobody expects them to get much better, why pay 50% face value? Do tell…
July 5th, 2010 at 1:21 pm
I guess because non-cashflow producing assets have long term economic value too.
http://www.irisheconomy.ie/index.php/2010/04/13/mcdonagh-at-the-oireachtas-committee/#comment-45655
LEV is approximately =
(Property LEV *(1 - Due Diligence and Enforcement))
+
( estimated cashflow(no. of years) - cost of funds discount(rate, no. of years))
- Legal Haircut.
July 5th, 2010 at 1:23 pm
I wonder how ‘the markets’ would value loans were neither the interest nor any capital were being repaid? I think we should be told!
July 5th, 2010 at 1:26 pm
Dont think there should be a surprise that the “cash flow” has significantly slowed down ! Being Ireland , the urgency or onus to make repayments would lessen once dealing with Government run (Nationalised) entity as distict to private business.
July 5th, 2010 at 1:28 pm
zhou. Your comments on Davys valuation report are misleading.
Davy’s reports on valuations were not from the perspective of what the assets were worth but from the perspective of what ‘haircut’ the banks could afford to take.
July 5th, 2010 at 1:31 pm
Depending on the definition of performing (which as Karl and Brian L say is reported at between 20-25% depending on whether you believe the leaks in the Times or the Indie), it may be the case that NAMA can no longer fund the interest payments on its bonds from interest receivable. If performing is defined as repaying interest as it accrues then these are the calcs
Nominal Value of loan 100
NAMA paid after haircut 50
NAMA receives interest on say 20% of the loan at ECB(1%) + 2% = 0.6 per year (100 * 0.2 * 0.03).
NAMA pays interest of ECB (1%) on the NAMA bonds (95% of pyt for the loans) and 5% on the subs (5% of pyt for the loans) = 0.475 (50 * 0.95 * 0.01) plus 0.1375 (50 * 0.05 * 0.055) for the subs = 0.6125
In other words if the “performing” loans are 20% then NAMA can’t even cover the interest payable.
July 5th, 2010 at 1:34 pm
If NAMA is planning for a worse case €0.2bn loss then remember that will be after NOT PAYING the 5% subordinated debt bonds to the banks.
Say NAMA is paying €50bn for the loans - €47.5bn will be through bonds and €2.5bn through subordinated debt. If NAMA doesn’t make a profit then the subordinated debt is not in fact paid. So a €0.2bn net loss might equal a €2.7bn gross loss but because NAMA will then not in fact pay over the funds for the 5% subordinated debt the net loss would be €0.2bn.
July 5th, 2010 at 1:50 pm
@ Garry,
Davy’s reports on valuations were not from the perspective of what the assets were worth but from the perspective of what ‘haircut’ the banks could afford to take.
Well pointed out. BOH.
July 5th, 2010 at 1:55 pm
Performing can mean many things
a) capable of repaying the interest (inc any temproraily rolled up) and principle (why then would they be in NAMA - other than to prp up the sick puppies)
b) capable of repaying this, but with some restructuring and so on, normal commercial terms and conditions under asset distress
c) capable of repaying interest from operations but not much if any of the original loan
d) can generate some money via being leased to allow goats or sheep to graze on t.
July 5th, 2010 at 2:00 pm
@Js
“If NAMA is planning for a worse case €0.2bn loss then remember that will be after NOT PAYING the 5% subordinated debt bonds to the banks.”
look out for the “we have to pay the subbies, as otherwise that would be a sov default” argument.
July 5th, 2010 at 2:01 pm
@ Brian L
Agreed though you might add an e) based on today’s leaks.
e) Tenants of the assets which backed the NAMA loans paying rent to NAMA
Until we see a full plan with the usual P&L, Balance Sheet and Cash Flow we won’t know (and a nod to Brian Flanagan who has tirelessly called for same for some time)
July 5th, 2010 at 2:02 pm
@Brian L
“look out for the “we have to pay the subbies, as otherwise that would be a sov default” argument.”
Maybe but I thought that the terms of the subordinated debt were pretty clear.
http://www.nama.ie/Publications/2010/SubordinatedBondsTermsheet.pdf
July 5th, 2010 at 2:34 pm
Jagdip,
That termsheet is incredibly vague. I really wonder if there is a more detailed one not suitable for public viewing. The criteria (metrics) for paying interest or redeeming bonds aren’t defined. Because we’re dealing with a pool of assets to run off, it seems to make more sense to treat NAMA’s assets as if it were an NPL/CMBS. That way losses would be assigned to the subbies progressively (reducing the interest payments) and redeem notes as collections are made.
Re your calc on the interest receipts versus payments: it wouldn’t look pretty when you stress the base rates. Also this “only about 20 per cent of the loans are generating any income, that is repayments or interest payments” does not necessarily mean the full amounts on 20% of loan balances are being paid.
July 5th, 2010 at 2:50 pm
@ Karl Whelan,
Off topic - Details of the bank guarantee extension were announced last week. This article (http://www.independent.ie/business/irish/bank-guarantee-reduced-as-certain-debts-excluded-2239505.html) indicates some very substantial exclusions.
It seems to me that the EU have hollowed out the benefits of the extension. Though the only counter argument I’ve seen is largely DoF spin. Do you think the banks will need a ‘new guarantee’ in place before the end of september to cover the exclusions?
July 5th, 2010 at 2:57 pm
“As for “In a worst-case scenario, Nama could end up losing several hundred million euro” one really has to wonder do the people who put this plan together know what a worst-case scenario means.”
No no Karl, you just don’t know what “several” can mean.
July 5th, 2010 at 3:01 pm
@Ahura, That is an interesting link, becuase on the arguments I have heard against closing down Anglo is that bonds rank pari passu with deposits because of the guarantee.
But now deposits are only guaranteed up to €100,000. So if I have €200,000 on deposit with an Irish bank I now only have a 50% guarantee, while if I held senior bonds valued at €200,000 has a 100% guarantee.
Does this mean that (to follow the logic used re Anglo) that bond-holders now rank senior to depositors?
And should I now request my bank payes me a premium over the interst rates it pays it bond-holders to compensate me for the extra risk I am carrying?
July 5th, 2010 at 3:16 pm
@Ahura,
Actually “upon mature reflection” given that the INBS and Anglo basket cases account for more than half the loans and therefore half the NAMA subordinated debt, if they don’t get full value for the subordinated debt I guess they’ll be back for further bailouts from the State. So NAMA as a ringfenced entity may well be able to reduce a €2.7bn gross loss to a €0.2bn net loss but then the poor taxpayer will need (presumably) make an even bigger contribution to the Anglo/INBS black-hole.
Heads they win, tails we lose.
July 5th, 2010 at 3:16 pm
Alan Ahearne, Sept 2009:
“It is important to note that Nama is buying good loans as well as bad ones. Continuing with the illustration above, 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.
By making prudent and realistic projections for future property prices, the proceeds on loan repayments and property sales can be expected to pay off the bonds in full. Of course nobody can foretell the future, so risk-sharing mechanisms and equity stakes in the banks can help to minimise the risks to taxpayers.”
http://www.irishtimes.com/newspaper/opinion/2009/0905/1224253890855.html
July 5th, 2010 at 3:24 pm
@Michael H
AA has been very quiet of late.
Mind you, Dan Boyle continues to twit that it will cover its costs.
July 5th, 2010 at 3:34 pm
@Brian Lucey
The fact that you follow Dan Boyle’s twits or whatever you call them is just as bad!
There is nothing shocking in this announcement apart from the fact that it shows that it was right to take the loans off the banks because they obviously hadn’t a clue about what was on their books.
Be interesting to see how the market reacts to Irish Banks if they start to believe that this contingent liability that a NAMA shortfall is going to be is going to keep rising.
As for covering interest payments on the bonds, I don’t think there is any suggestion that even with only 20% of loans making payments, that NAMA is entering negative cash flow territory. Guess we will see when the business plan is published.
July 5th, 2010 at 3:37 pm
@Gavin
m on me hols this/next/following week. Boyle twitting is a country sport, so it will be outlawed ere long…
I did point out to Dan that prompting a massive billion euro contingent liability was not a great plan if we wanted private capital.
July 5th, 2010 at 3:42 pm
@Gavin s
“As for covering interest payments on the bonds, I don’t think there is any suggestion that even with only 20% of loans making payments, that NAMA is entering negative cash flow territory. Guess we will see when the business plan is published.”
well, we wont if its as shabby as the last one. We will (you ere will….) spend days parsing it to see whats really meant.
July 5th, 2010 at 3:54 pm
@LorkanRK,
“Does this mean that (to follow the logic used re Anglo) that bond-holders now rank senior to depositors?”
1. IMO (&assuming banks don’t default during this 3 month period) it only benefits any senior bonds whose maturity date is in the 3 month extension period. I’d be surprised if this was a large number. (note these benefits would also apply to jnr bondholders)
2. Regardless of ranking, a key advantage depositors have over senior bondholders is that they can demand their money back. A bondholder has to either sell their bonds or wait til maturity. This is one difficulty I’ve had with those arguing the ‘pari passu’ line. I do like the idea of snr bondholders saying we ranked equally with them until they buggered off with their deposits.
July 5th, 2010 at 3:56 pm
@ All,
I never had much expectations of the ability of Irish borrowers to service their debt mountain - at commercial, residential mortgage or consumer levels. The lender was as much at fault, as the borrowers were. At the moment, we are purchasing only the loans, and not the underlying property attached to those loans. If one were to attempt to transfer the actual property deeds themselves to NAMA, then the complexity of that operation would soon overwhelm us. It might be simpler, to just pass some kind of legislation that imposed a huge of public ownership on vast areas of the island of Ireland. The minute that happened, the fiscal balance sheet of Ireland would appear to be in a queer state I can tell you. The idea is to transfer loans to NAMA’s balance sheet, before the reality of insolvency of the said loans can be publically declared. In a way, the reality of the situation is apparent, and has been for some time. The only thing left to do is to state manage the public announcements.
My question is: what does the NAMA state agency intend to do with so much property collateral it will receive, when the loans are deemed to be totally insolvent? That seems to be a question that is really worth looking at now, today. I vote for national parks and wild life sanctuaries. We could run safari trips around the mid-lands and NAMA-lands in order to generate some income. People could photograph the stags and wild deer who will no longer be hunted, from the safety of their jeeps. The movie, Jurassic park springs to mind. BOH.
July 5th, 2010 at 3:58 pm
@ Gavin S.
1. On “the banks hadn’t a clue about what was on their books” I suppose that’s one (rather kind) interpretation. Another is that they knew full well who was paying back and who wasn’t and it was the government that hadn’t a clue.
2. As for there being “no suggestion that even with only 20% of loans making payments, that NAMA is entering negative cash flow territory” well, this guy is making that suggestion
http://namawinelake.wordpress.com/2010/07/05/wheres-the-nama-business-plan-day-5/
But sure what does he know about NAMA?
July 5th, 2010 at 4:02 pm
If 80% of the loans are not being repaid by way of interest of principal, presumably interest is rolling up, and with property values still slipping, how can NAMA avoid a cash flow crisis? Sure enough if the interest on 20% of the loans is meeting the charges on the other 80%, it will be at best cash flow neutral, but where will the legendary profits come from in this case (which is fanciful). My fear is that at a certain point in the not too distant future, NAMA will find itself going to the ECB for debt restructuring. Possibly I have everything totally wrong.
July 5th, 2010 at 4:11 pm
@ Alchemist
“NAMA will find itself going to the ECB for debt restructuring. Possibly I have everything totally wrong”
Well the bit about the ECB is wrong. NAMA did not borrow money from the ECB nor will it ever.
http://www.irisheconomy.ie/index.php/2009/11/11/nama-not-borrowing-from-ecb/
July 5th, 2010 at 4:12 pm
@BOH
“what will nama do with the properties”
http://krugman.blogs.nytimes.com/2010/01/21/the-underpants-gnomes-theory-of-reform/
Underpants gnomes business planning is at work here.
July 5th, 2010 at 4:14 pm
@Karl
As for there being “no suggestion that even with only 20% of loans making payments, that NAMA is entering negative cash flow territory” well, this guy is making that suggestion
http://namawinelake.wordpress.com/2010/07/05/wheres-the-nama-business-plan-day-5/
There are an awful lot of ‘if’s’ there. He could be right but NAMA won’t be able to hide the fact that they are not generating enough cash to meet their overheads no matter how glossy they try to make the report. I would imagine it would have been flagged by now if it was an immediate concern. However, I could be letting my optimism get the better of me.
July 5th, 2010 at 4:18 pm
@ Karl
1. On “the banks hadn’t a clue about what was on their books” I suppose that’s one (rather kind) interpretation. Another is that they knew full well who was paying back and who wasn’t and it was the government that hadn’t a clue
I admit I am being kind but I do actually believe that most of our senior bankers are stupid who enjoy living in their bubble of denial rather than cunning!
July 5th, 2010 at 4:38 pm
@ Gavin
I understand that NAMA needed to tackle a lot of complex issues relating to legal titles and underlying collateral and so on.
But honestly, do you really think it was so difficult just to find out who was paying back and who wasn’t?
July 5th, 2010 at 4:52 pm
NAMA haven’t taken over all of the planned book of loans yet. To date the terms of NAMA takeover have suited the banks. Will the revised haircut terms for the next tranche of loans reflect the latest stats? If they do the banks will have to take the hit but the banks are in no position to do so. AIB is already looking very unlikely to come up with €7.4 bn in capital as demanded by the regulator. It all looks very pass the parcel with NAMA a hail mary pass that isn’t working out. What happens when the music stops? The banks will all be state -owned ? And then what?
July 5th, 2010 at 5:06 pm
@seafroid
we will, to answer your question, be several tens of billions worse off and exactly where we would have been had the risk capital been made absorb the losses. Except for the several tens of billions wasted, we will be grand. Except for the several tens of billions. Did I mention the tens of billions?
July 5th, 2010 at 5:07 pm
@Karl
No, I agree with you. Should have been a simple enough task to gather an estimate of what was performing and what wasn’t.
July 5th, 2010 at 5:17 pm
@LorcanRK
I understood that the extension to december covered all deposits - not just the 100k covered by the other scheme???
July 5th, 2010 at 5:18 pm
If the banks sold a bunch of loans to NAMA that were allegedly paying interest and this turned around to be economical with the truth.
Does NAMA have the the right to go back to the banks and say you decieved up, we are going to apply a bigger dicount on subsequent tranches or to re price the loan already transferred.
Moreover, if they choose not to explore this option, it is a possibility that the EU could decide to look at the books again in the context of illegal state aid.
Remember, why did the NAMA discount go from sub 20% to over 40% in some cases. It was not due to the cojones of FF and the DOF but rather due to the hidden hand of the EU.
July 5th, 2010 at 5:20 pm
@Brian Lucey
Brian you were right from day one. No wonder you upset the boys in Dail so much. More power to you.
July 5th, 2010 at 5:27 pm
@jules
nobody is 100% right/wrong all the time, but I think most independent economic commentators have been more correct more often than the gp/ff members/shills/true believers have been. If we have saved a few billion that would be work well done.
July 5th, 2010 at 5:30 pm
@Tull
the prob is that the capital bases are either a) taxpayers money so wed be robbin peter to pay peter, or b) eroded to sfa or c) deemed untouchable.
July 5th, 2010 at 6:04 pm
@Karl W.
Glad to hear your interview with Mary Wilson addressed the issue of the fabled “Levy on the Banks” when NAMA fails to break even, or “make a profit”.
Heard you earlier with Thomas Byrne, (I think on Newstalk??) the latest of the FF TD’s rolled out to argue for NAMA.
When he mentioned the so-called “Bank Levy” as an ultimate fall-back solution to save the tax-payer from wipe-out, he actually got away with it!!
Of course, not mentioned at all by Mr. Byrne was that this fail-safe mechanism was completely and totally reversed by BLenny, and what we now have is a “tax surcharge on profits”.
This is how Mr. Eamon Ryan, of the GP, explained this volte-face:
“It’s all the same concept- that if in the event that NAMA loses money we can go back to the banks and saying ‘OK, we’re not going to take the hit’ -it is the banks ultimately (that) are going to pay” Minister Ryan said.
He went on “But that’s about the third or fourth protection that is in there….to protect the public interest. The key thing now is to make NAMA work, so it makes a profit and we won’t have to apply such surcharges”.
http://www.newstalk.ie/news/news-headlines/government-reverses-bank-levy-clause-in-nama/
Oh yeah!!! Alleluia, Thank God for the Green Party….
July 5th, 2010 at 6:06 pm
@Karl,
Thanks for the tip but Gavin S is correct, there are a lot of “ifs” and because there has never been a definition of “performing” loan we have to qualify any calculation with a definition. For example given that so many of the loans were repayable this year (according to information from the banks themselves) then a “performing” rate of 1% and a definition performing as “repaying the principal and interest in accordance with the loan agreement” may mean there are receipts this year of several bn which would cover interest outgoings several times. (Like that is going to be the case!).
If the definition is payment of interest as it accrues on all loans then 20% is pretty much the cut-off point when interest payable exceeds interest receivable.
Until we see a propert Business Plan we won’t know but if it were good news then I think that might have been top of the list for leaks.
July 5th, 2010 at 6:11 pm
@Gavin S
“There are an awful lot of ‘if’s’ there. He could be right but NAMA won’t be able to hide the fact that they are not generating enough cash to meet their overheads no matter how glossy they try to make the report. I would imagine it would have been flagged by now if it was an immediate concern. However, I could be letting my optimism get the better of me.”
Remember NAMA were given an “advance” of €250m by the DoF in May 2010 for a “working capital buffer”. Now most people will have thought that was to cover work on NAMA assets and providing finance to the developers. However NAMA is in the business of managing loans so a working capital requirement might be to cover the difference between interest payable and receivable. Because the first interest is payable by NAMA in September then perhaps the May advance is too early for that, but it does illustrate the point that the government can give NAMA money and although it was flagged, it certainly didn’t get top billing by the media.
July 5th, 2010 at 6:20 pm
a) correct in the case of Anglo etc & less so 36% in the case of Bank of Ireland. AIB remains to be seen. c) deemed untouchable- I do not understand this point.
I cannot see how the ECB will tolerate a siutation where NAMA is not cash-flow positive. After all it is providing liquidity against the NAMA Bond collatoral. If it does not see sufficient income to cover the coupon and a margin of safety then it will not pay the full face value.
The EU would not be happy with a situation whereby NAMA is so obviously overpaying now. This constitutes illegal state aid writ large. If they figure that NAMA is paying 45billion for assets that are only worth 25billion on reasonable assumptions then that 20 billion is a market distorting subsidy to Irish banks and is clearly illegal. Remember, the EU have already curbed the minister’s enthusiasm. that is precisely why the Anglo losses went from 12bn to 20 plus billion in a week. It is also precisely the reason that the DOF is swating now that the Anglo losses will hit 40bn. It fears EU intervention.
July 5th, 2010 at 6:30 pm
I am amazed that anyone (politicians included) can claim to be shocked at this.
Given that the average Joe has seen his property value on his house fall by 50% and more. Given that we have many empty office blocks all over the country. Given that you cannot drive through a single little village without seeing empty housing estates and apartments. We were shocked for less than a day when a billions plus was paid for pieces of land that even the dogs on the street could see was way overvalued. Developers plans in the courts are living in hope of a change of the property market and are alone in their assesment of how things will be in 5 years.
How in God’s name did anyone think any of this would provide a return.
Lets see… average Joes house value rises back to same level in 10 years and the banks will be saved from negative equity assuming all these people continue in employment that can pay the debt…nope
… a sudden surge in job growth in 10 years to fill all the office blocks….. nope
… mass immigration due to job growth and all of them wishing to live in the middle of nowhere in the next 10 years … nope
It is the same story for all the purchases across Europe by developers. NAMA will not provide a return of any description.
July 5th, 2010 at 6:53 pm
I think or rather I hope you have it called correctly Tull.
July 5th, 2010 at 7:01 pm
@tull
“I cannot see how the ECB will tolerate a siutation where NAMA is not cash-flow positive. After all it is providing liquidity against the NAMA Bond collatoral.”
The NAMA bond is guaranteed by the state.
July 5th, 2010 at 7:03 pm
@ gary,
who knows. however a lot of the commentary has concentrated on the top half of the article & ignored the bottom half. My read of it is as follows. “the lazy banks have been playing footsy with the developers and letting them off with irritating T&Cs such as interest payments but there is a new Sherriff NAMA in town. Assets will be sold, principal paid back, other income generating assets garnished if possible blah blah.”
July 5th, 2010 at 7:03 pm
I would repeat that the more bad news we hear the more important it was that NAMA be set up to let us look at the loans one by one. The bad news on NAMA transfers may be extrapolated to the rest of the development loan book. This will give pain but should also deliver credibility. As Colm McCarthy has said, the losses have already been sustained.
July 5th, 2010 at 7:09 pm
@ gary,
“It is now envisaged that approximately €81 billion of loans will transfer to NAMA. Section 50 of the NAMA
legislation places a limit of €54 billion on the total consideration to be paid by NAMA for the loans regardless of
the nominal amounts involved. This limit can only be amended by a positive resolution by the Dáil. The Minister
has no intention of adjusting this figure at this time.”
The above is a quote from the Supplemenatary Doc with the MOF statement of 30 March. To me this implies that this issue on pricing can be revisited.
July 5th, 2010 at 8:20 pm
@ Zhou,
fair point but if the ECB was concerned that the state could not service the debt they would be concerned.
You di d not comment on my 2nd point. If the state funnels billions to bank equity owners via an egregious and obvious overpayment for assets then it is illegal state aid.
July 5th, 2010 at 8:24 pm
@ Zhou,
damn no edit function, what I meant to say that the ECB has to be concerned that NAMA is not cash flow positive. A mere presumption that the state will pay in the event of default is not enough in this brave new world. The mere assumption that all EZ sovereigns will meet all their liabilities can no longer be made.
July 5th, 2010 at 9:49 pm
@zhou I would repeat that the more bad news we hear the more important it was that NAMA be set up to let us look at the loans one by one
Full details of every loan, every write down, repayment amount and date, every loan transfer, every asset secured and every asset sold should be on the public record. As an absolute minimum this should apply to all individuals and directors who have any loan that is not fully performing.
Full transparency is vital.
July 5th, 2010 at 10:19 pm
the 2nd NAMA tranch went through end of last week or is about to go through this week, I’ve lost track, regarding ‘performing loan’ this can be made up of cashflow properties that are cross secured on a non-cashflow property, it could be a development site that the interest is being paid and in some cases capital is being repaid as well (in the example of Battersea). One thing it isn’t is a loan that no payment is being made on.
On the % - was it ever stated whether it was a percentage of properties or a percentage of loan values? They are two v. different things.
NAMA loans are already extensively examined one by one, there are 200 finance questions per property and another 300 on the actual property. Cashflow, like values, are not a constant, they may change, and in some cases it would make sense to continue development. Valuations are reliant on cashflows, I think the concern over ‘performing or not’ is overstated.
July 5th, 2010 at 10:37 pm
@Karl Deeter
“One thing it isn’t is a loan that no payment is being made on.”
What about a loan which has rolled up interest to 2012 and capital repayment in 2013? If that loan doesn’t repay anything in 2010 is that loan performing? It certainly wouldn’t be classed as non-performing, would it if it complied with the terms of its loan agreement?
I hope the Business Plan rumoured to be published this week will provide the answers. You can’t run the world’s biggest property fund on the back of an envelope and hopefully we will at last get a plan in sufficient detail to understand what NAMA is planning to do and also that NAMA might benefit from rigorous testing and examination of its plan.
July 5th, 2010 at 10:43 pm
@Jagdip Singh that is where the margin call comes into play, any commercial loan will require a margin to be maintained, if values fall then that roll up doesn’t occur and you have to support your margin, the only way around that is to not value the loans - something which is rife in non-nama loans, allowing banks to stay in cloud cuckoo land [this will become a bigger issue in time], but on nama loans this wouldn’t occur.
interest roll up is not granted on a walk away basis, any prudent bank will want to ensure that they are not setting themselves up for a fall, except for when they are incentivised not to [such is the case with many non-nama loans as explained], for that reason the nama vehicle will actually ensure greater transparency than if the loans remained with the issuers.
July 6th, 2010 at 12:13 am
@Tull
“You did not comment on my 2nd point. If the state funnels billions to bank equity owners via an egregious and obvious overpayment for assets then it is illegal state aid.”
The commission has already approved this.
“fair point but if the ECB was concerned that the state could not service the debt they would be concerned.”
That is what the emergency fund is for. Hopefully we won’t need it.
July 6th, 2010 at 3:21 am
I don’t get this report at all.
Presumably, when the government set up NAMA it had:
a) an estimate in mind of how much the loans would be worth (before an in-depth valuation took place); and
b) an estimate from the banks of how much they would need to return to full solvency
The actual haircut announced by BL was presumably a satisfactory medium between what the government valued the loans and what the banks said they needed (presuming the latter were chancing their arm). In other words, NAMA was designed to make a loss because it could surely have not functioned any other way.
The only explanation for this latest forecast, if it’s based on real figures, is that
a) the government massively undervalued the loans and will need to invest billions more in bank shares; or
b) the bank undervalued its loan values and overestimated how much extra capital it would need; or
c) there’s a massive boom ahead that none of us will see coming
In all cases but option (c), it appears that any supposed “profit” or minor loss by NAMA will be offset by whatever number of billions the government uses to buy bank shares. It just seems like another way of cooking the books, i.e. “we have sunk 30 billion euros into the banks but at least NAMA made a cool 50 million!”
July 6th, 2010 at 7:56 am
@Dave
in essence you are right. Losses that the bank share/bondholders do not meet wil need to be met by the taxpayer via either more money recapped or more losses on NAMA. the issue was never about the quantum of losses (a new bond movie title for the recession?) but about who would share these. The three options were
a) bank capital providers-
b) the taxpayer via losses on NAMA
c) the taxpayer via increased shares etc into the banks
As a) was ruled out (remember that there was about 42b in shareholders funds ex senior bonds in 2008 but it wasnt tapped) then its swings and roundabouts on b/c. the danger is that as the government strives mightily to make NAMA profitable then it results in weaker banks, Japanifing them. The govt will then blame the banks for “not lending”.
you are on the hook - the only issue is that in an honest society you would have ownership of the assets you bailed out, assets that could have been easily sold off for a profit. But that would have been bad, for some reason that we havent been told.
July 6th, 2010 at 8:08 am
@Karl Deeter
“that is where the margin call comes into play, any commercial loan will require a margin to be maintained,”
Absolutely but remember that 1/3rd (according to Brian Lenihan in the Oireachtas last week) of NAMA assets are located in the UK where commercial values are up 8%+ since last November 2009 (IPD index Dec-May inclusive) and residential is up 4-5% (Nationwide BS Dec-Jun inclusive). So margin calls mightn’t be required in a large number of cases even if there were revaluations. So a loan whose agreement was signed in 2008 mightn’t have capital repayment until 2012 and might have rolled up interest to 2011 so no payment due in 2010 - would that loan be performing?
It’s pretty academic and hopefully all will be revealed in the actual Business Plan itself later this week.
July 6th, 2010 at 8:15 am
@Jagdip Singh
That is a fair point on the UK, firstly, that is only 1/3 as you have mentioned, secondly - if the security warrants no margin call and the loan conditions allow interest roll up then that is performing because it is satisfying the loan conditions.
Battersea (loan portion) for instance is NAMA owned in part, 50% is held by Lloyds, the other by BOI, the LTV is c. 65% pre planning (biggest planning app in UK history submitted for the site but not yet granted). If interest is being rolled up and capital values appreciated then it is performing and doing what was intended, if on the other hand values are falling then margin calls come into play, there are many factors at play, but the UK example supports the concept as opposed to disproving it regarding what is considered performance
July 6th, 2010 at 9:03 am
@ BL,
I would disagree with your conclusion on a). The total value of the equity in Anglo and INBS has been wiped but such as been the scale of the catastrophe that losses far exceed shareholders equity and other capital.
AIB will transfer 23bn to NAMA we are told & at the first tranche discount, close to 100% of its 2008 Equity will be wiped. Hence the need to sell everything that is not nailed down.
The reality is that most of the pre recession shareholder value has been destroyed as of course it should have been.
BOI will transfer 12bn and again at the first tranch discount a third of its pre recession equity is gone up in smoke.
July 6th, 2010 at 9:03 am
@ BL,
I would disagree with your conclusion on a). The total value of the equity in Anglo and INBS has been wiped but such as been the scale of the catastrophe that losses far exceed shareholders equity and other capital.
AIB will transfer 23bn to NAMA we are told & at the first tranche discount, close to 100% of its 2008 Equity will be wiped. Hence the need to sell everything that is not nailed down.
The reality is that most of the pre recession shareholder value has been destroyed as of course it should have been.
BOI will transfer 12bn and again at the first tranch discount a third of its pre recession equity is gone up in smoke.
July 6th, 2010 at 9:21 am
@Tull
why do my shares in AIB have any value? Answer - they were left have some. Agree re anglo/inbs equity, but why were the subbies left untouched? That is the literal €10b question? And dont forget PH noted that the seniors, the untouchables, were “locked in” as of 9/08, and could have been then negotiated with. so, a) was very much an option.
July 6th, 2010 at 9:43 am
@BL
The subbies weren’t left untouched. Most sub holders have sold debt back at a huge discount so have suffered 40-60% losses. This amounts to over €5 billion so far. I accept that it is hard to justify them not losing 100%.
I don’t understand how you can say shareholders in the main banks weren’t touched? Even PH in his report says that shareholders have picked up 50% of the bank bailout cost and the taxpayer the rest. Your shares have a value of 60c or whatever AIB trade at.
July 6th, 2010 at 9:50 am
The original point is key
Either
1/ The NAMA boss was misinformed on the performance of the agency he was running or else he has misinformed the Dail.
2/ Or the performance of NAMA has collapsed within a few months.
3/ Or this new information or business plan is bogus.
Any of these are possible, to me the worst of these is option 2.
From 33% performing to 20% performing within a few months implies the NAMA business has worsened by 40%. for this to happen within a a few months indicates collapse.
It is highly unlikely that its performance has stabilized just as the figures were leaked, so it would be prudent to assume the collapse is ongoing…
No matter what, reports of a fall from 33% to 20% performing requires immediate action from the politicians to establish the true state of NAMA and what is going on in there.
July 6th, 2010 at 9:56 am
It could be 20% of the loan book by nominal value, but 30% of the loan book at NAMA book value.
July 6th, 2010 at 10:10 am
Gavin
It’s the value of the subbies AT 2008 that’s relevant not subsequent performance.
And why were they then saved? Qui Bono?
July 6th, 2010 at 10:16 am
@Brian Lucey
I don’t get your point. Why is it the value at 2008 that matters and not the subsequent buy backs transactions? Dated sub debt might have been wrongly included in the guarantee but holders of the debt still suffered losses when they sold back the debt during the bank tender offers. As I say, sub debt holders have been hit to the tune of over €5 billion. Whether that loss happened in 2008 or in subsequent periods is irelevant.
July 6th, 2010 at 10:17 am
I would guess there are some developers who have decided that there is no point in flogging a dead horse at home when they have foreign properties unconnected to loans from Irish banks to keep them in reasonable wealth.
There was an estimated €60bn invested in overseas commercial property in the past decade.
A commercial building owned by a foreign company where the loan can be serviced would be we well worth holding onto and let NAMA go hang.
July 6th, 2010 at 10:53 am
@Michael Finnegan
I would not be confident that Irish banks and building societies have legally enforceable charges over many ‘foreign’ properties. In many cases developers (their companies in some shape or form) raised capital to fund foreign acquisitions based on their Irish assets. Locally registered companies would then undertake the development and management of the development using funds advanced by an Irish registered entity. This was convenient for Irish banks who didn’t want to be drawn into litigation in other jurisdictions.
As an aside, at some point in time during the rolling autopsy of the present economic crisis, the actual structuring of loans approved to developers should be scrutinized. I was surprised that the recent reports didn’t drill down into this issue, i.e. were intermediate management companies involved siphoning money into rainy day vehicles?
July 6th, 2010 at 10:55 am
@ BL,
Your point seems to be that bank capital providers sharing in losses was somehow “ruled out”. I disagree with this contentionfor reasons stated. AIB remains work in progress. Whether shareholders have any residual value is subject to the management efforts to restructure their affairs.
Others have answered the question of subbies. Basically these have had to share losses through coupon suspensions and sales back at par. Whether this is enough is moot.
As to the seniors, well you know the issues there. They are not capital providers. Maybe they could have been negotiated with, maybe that was not a runner in the context of the times.
So bottom line, I do not agree with your characterization that risk capital in the banks was not to be burned.
July 6th, 2010 at 11:05 am
@ MH,
Agreed. That is the situation our island nation finds itself in today. We are on a large empty bus, but with no bus driver up front. The last few remaining passengers are headed for the edge of the cliff, and there isn’t much one can do. It is like being in a bad grade ‘B’ movie. I am sure the developers knew they occupied the important position, in the grand scheme of things, for several years. They became the ‘captains’ of the Irish economy. Their egos’ did expand to fit that job description. Instead of trying to mitigate that, we fanned the flame, we lionized them in the broadsheets and tabloids.
Every great racing team, no matter how sophisticated and well kitted out it may be, is somewhat dependent on the human driver at the end of the day, in order to win a race. Ireland’s racing drivers, all had building and development projects attached to them. You couldn’t be a hero, if you didn’t lay one brick on top of another - at any level in Irish society. It was up to ourselves to alter the rules of the game, during the Celtic Tiger years, to ensure we did not depend on a sub-section of the entrepreneurship class. We didn’t act fast enough as we should have done, and we have to suffer the stark consequences of that. BOH.
July 6th, 2010 at 11:08 am
@BL
“why do my shares in AIB have any value?”
Because its US, Polish and UK banking interests have value. If you deduct their combined value from AIB’s market capitalisation, then you shares have a minuis value!
July 6th, 2010 at 12:50 pm
@ All,
Very disappointing story to read in this mornings Irish Independent newspaper. Nice to know we have our priorities in Ireland all wrong as per usual. The protestation from minister Conor Lenihan is very welcome on this. BOH.
http://www.independent.ie/national-news/blow-to-smart-economy-as-950-research-jobs-face-axe-2247188.html
July 6th, 2010 at 1:41 pm
@Brian O’Hanlon
Hopefully this will be shoved down the throat of the next politician to come out and talk about the smart economy and how it was going to save Ireland.
July 6th, 2010 at 2:35 pm
I’m curious as to whether the faith of those who blog here day in and day out in their own free time (as I could not possible conceive of anyone being paid to do this) in support of the Government’s approach on NAMA has been even slightly ruffled by Commissioner Alumnia’s views on the quality of the Anglo business plan.
July 6th, 2010 at 2:35 pm
@ Gavin,
I know this isn’t the right thread to discuss it, but to qualify a few things for the benefit of readers. I am aware there is a difference between ‘big R’ research and development funded by SFI, and ‘big D’ of the same, which may take place in the mainstream knowledge economy in Ireland. Each require a different sort of mentoring from public and private investors, to allow maturity times to be reached. In the meanwhile, any form of R&D has finite capacity for employment creation. There are pertinent questions to do with ROI for low level research and university spin off type models. This has been discussed at length already on the IE blog. I like blue sky thinking, personally. But I have to admit, there is a large segment of small and medium entreprise, which doesn’t require either ‘big R’ or ‘big D’, investment. It requires a basic funding stream from somewhere, and that segment of the economy is employment intensive enough to make a real dint in the live register figure. I am talking about economic activity which depends on competitiveness in terms of business processes and exploitation of available resources, talent, etc to provide value to a wider European market. What ever happened to those movies which used to be made in Ireland. Remember Saving Private Ryan, Braveheart, and so on? Have those all gone now to New Zealand, with the associated support industries in post-production and so forth? It would be nice to see some ideas like that receiving attention again, even at some small scale. BOH.
July 6th, 2010 at 3:15 pm
20% of loans generating “cash flow” does not mean they are performing.
It just means they are not complete basket cases.
€6.5bn to €10bn of finishing out costs.
What’s the probability of that being recovered?
What’s that I hear? We’ll get that back through LTEV.
We will in our backsides.
LTEV was and is a lie (an EU one at that).
We will get the market value at some future date. There is no such thing as LTEV. There is only market value either now or in five/ten years time.
With the austerity measures being imposed throughout Europe the Pollyanna view of LTEV should be revisited.
Expect the propaganda like the unpaid interest to roll on and on.
July 6th, 2010 at 3:25 pm
For clarity, there is a discount for cost of funds to NAMA. If the loans are cash-flow producing the anticipated cash flow is set off against it. If they are not cashflow producing then there is no set-off and the full discount is applied.
July 6th, 2010 at 3:25 pm
Colm,
“(as I could not possible conceive of anyone being paid to do this)”
You forgot to use the sarcasm off indicator.
“/sarcasm”
July 6th, 2010 at 3:33 pm
zhou_enlai,
Which means insufficient discount was applied on the first tranche.
July 6th, 2010 at 4:04 pm
@Greg
Not if the lack of cashflow was known at the time of the valuation as I assume it was.
July 6th, 2010 at 4:17 pm
zhou_enlai,
It’s perfectly obvious that it was not known (or if known, kept hidden in order to overpay).
It doesn’t matter what way you look at it. If the discount factor was reduced to take account of positive cash flow on 40% of the book and it subsequently emerges (shock horror) that only 20% of the book was positive cash flow generating then NAMA overpaid, even by its own methodology.
I wonder just what level of incompetence is required to fail in the most simply of due diligence checks.
NAMA “Mr Banker is the loan producing cash flow?”
Mr Banker “Sure it is begorra”
NAMA “Excellent. Now prove it”
July 6th, 2010 at 4:27 pm
Colm
“I’m curious as to whether the faith of those who blog here day in and day out in their own free time (as I could not possible conceive of anyone being paid to do this) in support of the Government’s approach on NAMA has been even slightly ruffled by Commissioner Alumnia’s views on the quality of the Anglo business plan.”
…. and dismayed by all the indications that the senior managments and advisers in the banks have been either grossly incompetent or lying through their teeth.
July 6th, 2010 at 4:29 pm
@Colm,
I recommend everyone takes a look at Mr Almunia’s letter regarding the Anglo restructuring plan (which as Colm says is a business plan) published yesterday and available here.
http://ec.europa.eu/competition/state_aid/register/ii/doc/NN-12-2010-C-11-2010-WLAL-en-31.03.2010.pdf
Not only does it conclude that Brian Lenihan broke State-aid rules in December 2009, it gives a damning criticism of the shoddy piece of work that was the Anglo restructuring plan in November 2009. It made me cringe.
When you read about the assumptions on the property market (average drop from peak to trough 47% - worst case 69% and base case falls in values in 2010 and 2011 before stabilisation in 2012), you might want to ask if there has been an outbreak of multiple personality disorder in the DoF.
July 6th, 2010 at 4:41 pm
Anglo clearly shares with Nama an unwillingness to produce proper business plans with proforma projections and a love for optimist projections.
“(107) The Commission notes that […] have not provided a detailed business plan for New Bank or Old Anglo, whether under the base case or the adverse case. It is therefore not possible for the Commission to assess to which extent the business plans of both entities are credible and rely on prudent assumptions. Accordingly, the Commission would need to receive a stress test of the New Bank.
(108) […] in particular submit that in 2014 New Bank will generate profits of approximately EUR […] billion, whereas Old Anglo will generate losses of EUR […] million only. This means that that the total profits of Old Anglo/New bank together would amount to EUR […] million. That profit would be equivalent to the profit generated by Anglo in […], ([…]), i.e. at the top of the commercial real estate cycle. Considering the level of impairments in Anglo, the projected reduced size of New Bank and taking into account that it intends to develop activities in areas in which it has no previous experience, the Commission doubts that such an objective is achievable under prudent assumptions and with reasonable risks.”
July 6th, 2010 at 5:04 pm
NAMA Business Plan just published and also quarterly report
http://www.nama.ie/Publications/2010/NamaBusinessPlan30June2010.pdf
http://www.nama.ie/Publications/2010/Section55QuarterlyReport31March2010.pdf
July 6th, 2010 at 5:27 pm
@Brian O’Hanlon - “Very disappointing story to read…”
Er, didn’t they tell us recently that the smart/green/shiny new/NAMA-led/enterprise economy was going to create something like 120,000 jobs by 2014? Not much point in trying to look at doing a PhD after my studies then
I had better go and get a real… Oh… There aren’t any. Any cheap tickets out of here? I need to join the exodus (I’m far too modest to call it a ‘brain drain’).
July 6th, 2010 at 5:28 pm
real job…
July 6th, 2010 at 5:33 pm
@ Jagdip,
My initial reaction looking at the business plan, is it speaks to any borrower whose loans are moving to NAMA, that this is a well resourced machine. This is not the kind of opponent like the typical Irish lender, with a Seanie or a Fingers sitting at the helm. This body, who now owns all of their Irish-based loans is not one, which you can pull the wool over. If that was the desired effect that NAMA wishes to achieve, then I can say they have succeeded in that much. This is a crucial factor I believe, and wanted to include this comment into the mix. The borrowers in future will have to face their endeavours in a much less care-free manner, than they got away with for the last decade. BOH.
July 6th, 2010 at 5:48 pm
@Greg
“It’s perfectly obvious that it was not known (or if known, kept hidden in order to overpay).”
It is not obvious at all. There is no evidence that individual loans which were not producing cashflow were valued on the basis that they were producing cashflow. On the contrary, it is more likely that cashflow problems were disclosed during due-diligence.
July 6th, 2010 at 5:49 pm
I can say with some confidence from experience that if a Business Plan with the back of an envelope level of detail contained in this Business Plan was presented to a bank to get a €10k loan, you would be shown the door.
There is no P&L, no Balance Sheet, no Cash flow, no definition of performing loans, no estimate of default never mind a definition, no indication when NAMA will dispose of assets, no estimate on demolitions, no plan for the spending of development money, no explanation of interest rate assumptions, no geographical spread of the assets, no plan as to future profiles of property prices, no indication of salaries (in any decent PLC you would have the compensation packages of the directors), no indication of future cash requirements from the state (like the €250m advance in May 2010). This is not a Business Plan.
Given the “Business Plan” has the DoF’s imprimatur, let’s see what Michael Noonan and Joan Burton are made of. Another 46-signature letter? A complaint to the EU?
July 6th, 2010 at 6:04 pm
@ Jagdip,
Given the “Business Plan” has the DoF’s imprimatur, let’s see what Michael Noonan and Joan Burton are made of. Another 46-signature letter? A complaint to the EU?
I have listened to the debate and discussion at the Irish Economy blog, the broadcast media, the Oireachtas, the newspapers and at professional seminars of various kinds for well over a year now. I am fairly current with a lot of the debate, objections and concerns expressed by many quarters. However, the ‘business plan’ is probably an unfortunate label, because as long as the government can swing a majority in the chamber, we aren’t really trying selling this ‘business plan’ to anyone. The ECB has published its guidelines for government interventions at member state level, on foot of the international financial crisis. As long as the NAMA demonstrates a compliance within those parameters, who is going to mount a meaningful, well informed objection?
The only party which the NAMA organisation really needs to impress its intentions upon, is the borrowers it is set up to deal with. From that point of view, if I was a borrower, I would be whimpering today. The holiday period of unreality is entirely used up and over. Apart from getting real with the borrowers whose plans never had a chance, the NAMA approach also has the advantage of throwing up many of the schemes and projects, which do have a reasonable chance of proceeding, even in today’s climate. That is welcome news for many of the more responsible borrowers who will now deal with NAMA. It was no fun at all, for many of the more genuine, intelligent and responsible borrowers to operate in Ireland for the last decade. When they knew that every action the bank took in flogging out more loans, was simply driving the costs of everything up, and general competitiveness down. You can see it right across the country at the moment, NAMA has began to turn the tide of un-reality, which pervaded almost every sector of Irish society for nearly a decade. Sorry if I do sound like a cheerleader, but it is worth putting forward some counter arguments for the sake of some degree of balance. BOH.
July 6th, 2010 at 6:13 pm
First glance suggests that the new BP is merely a framework document which sets out operating principles, structures, definitions etc.
It is most certainly not a business plan as it contains no proforma financial projections or detailed financial picture. Maybe, Nama learnt from last year’s draft business plan that the few the number supplied the better.
Given that Nama will be taking over loans amounting to almost half of Ireland’s GDP, its business plan should, at a minimum, have included “scenario-based” P&L statements and balance sheet projections as well as cashflow forecasts for the ten years. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue.
Nama is adopting an accounting policy (page 18) which “considers expected cash flows, not contractual cash flows, on loans. This means that the Profit & Loss account will reflect what is happening in reality in cashflow terms, rather than taking income to the Profit & Loss account that is not cashflow-based e.g. NAMA will not accrue interest rollup to its Profit & Loss account. It reflects an accounting approach which values the loans by taking the “actual” initial value plus future expected cashflows less potential impairments.” This means that Nama will be burying loan and interest write offs over the next ten years. These could amount to, think of a large number, €30-50 billion.
July 6th, 2010 at 6:15 pm
When do they have to issue the next business plan?
What odds the next business plan will predict worse outcomes than this plan?
July 6th, 2010 at 8:31 pm
zhou_enlai,
Sorry zhou, it is perfectly obvious.
Let me break it down for you.
1. NAMA sets out to acquire loans.
2. The banks provide a list of loans they intend transferring.
3. NAMA asks for written response on 101 questions.
With me so far?
Remember NAMA took 4eva to take on the first tranche. So they had all the time in the world.
Each loan had/has a unique record of its financial history.
It’s called BOOKKEEPING zhou.
The record has DEBITS and CREDITS.
If there are no credits there is no positive cash flow.
Simples.
A stroppy teenager could be trained in 30 minutes and finish the job in a week for a new pair of trainers.
Thank God we have experts working on this.
July 6th, 2010 at 9:49 pm
Brian Flanagan says:
Good paragraph, good post also. BOH.
July 8th, 2010 at 4:39 pm
@Greg
“3. NAMA asks for written response on 101 questions.
With me so far?
Remember NAMA took 4eva to take on the first tranche. So they had all the time in the world.
Each loan had/has a unique record of its financial history.
It’s called BOOKKEEPING zhou.
The record has DEBITS and CREDITS.
If there are no credits there is no positive cash flow.
Simples.”
That’s the way I see it too. NAMA looks at the cashflow disclosed by the questions and the discount for the value for cost of funds is based on that. No overpayment.
The only problems arise where, as Karl Whelan has pointed out, where cashflow stops. However, even that would require there to be an error in that cashflow projections should take account of the risks to cash-flow and should even themselves out across the various loans (unless there is a further general disturbance in the market such that the individual projections are no longer independent of each other.)
July 8th, 2010 at 5:12 pm
@ Zhou,
On that, it seemed to be pretty clear from Michael Soden’s interview with Sean O’Rourke on RTE radio yesterday, that the Irish banks were in fact not pursuing borrowers as they normally would do - because of their fear of a domino effect being set off - the domino effect of course, resulting in a new bottom level being set to the price of their assets and associated dirt/concrete etc. Clearly, it is not a question of ‘if’ there might be dependencies in the market - but, it is all unavoidably dependent, and that is the biggest difficulty the Irish banks did face. I guess, that is why they become known by the term zombie. Still walking but dead. BOH.
http://www.rte.ie/news/news1pm/player.html?20100707,2783562,2783562,real,209