NAMA Tranche 2 Transferred

Details here. Mysteriously, there are no Anglo loans being transferred yet in this tranche. We’re told “Loans will be acquired from the remaining institution – Anglo Irish Bank – over the coming weeks after all necessary due diligence material has been received and evaluated.” It does seem deeply odd that the bank that NAMA is supposedly having the greatest difficulty processing information from is one that is fully owned by the state. An alternative intepretation offered by Jagdip is that the delay relates to EU State Aid nexus.

The discounts on these loans are higher than the first tranche. I don’t think, however, that I can agree with Brian Woods II that this raises the potential profit for NAMA. The new tranche reflects new information on valuations not available when the business plan was put together, though unlike the first tranche, no valuation estimates have been provided. So, in this case, the lower prices paid likely also reflect a lower long-term economic value. It would, of course. be nice to see NAMA re-issue the business plan after each tranche but it ain’t gonna happen.

It Depends on What the Meaning of “Cashflow Generating” Is

Here‘s an interesting article from the Irish Times by Simon Carswell in which NAMA’s senior officials squirm about their changed assessment of the quality of their loan portfolio, blaming most of it on the fragile psychological state of our bankers last Autumn (poor dears). The highlight:

Mr McDonagh said some loans – on top of the 25 per cent that were generating income – were yielding some, if not all interest due, but Nama was still assessing this.

“Twenty-five per cent is cashflow generating – the rest has some cashflow generating,” he said.

It brings to mind our friend Maurice O’Leary’s favourite quote:

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

NAMA Profit Projection Due to Faulty Haircut Calculation

I had thought there was something a bit odd about how the NAMA business plan extrapolated from the 50% discount applied to the first tranche to come up with its figure for the amount it would be paying for its full portfolio. After all, the fraction of Anglo loans in the first tranche was higher than for the total portfolio and these are likely to be worse in quality than the average loans from AIB or BoI.  Surely, the correct approach would have been to calculate this figure applying the institution-by-institution discount from the first tranche to the total consideration, assuming for example that the first tranche haircut for AIB is the appropriate figure to apply to the rest of AIB’s NAMA portfolio.

So, I did the calculation (here‘s the spreadsheet) and, lo and behold, it projects that NAMA will pay €41.7 billion for the portfolio, not the €40.5 billion they published in the business plan based on extrapolating from the first tranche aggregate discount.

It turns out that Jagdip had done the same calculations before me and discussed them here.  I agree with his comments there and believe this implies some pretty serious questions about the thinking that went into the production of this business plan.

Suffice to say, from here on, I will be assuming that NAMA are going to spend €41.7 billion, not €40.5 billion, and that the baseline case in which full long-term economic value is recovered actually implies a small loss rather than a profit.

Update: As Jagdip points out below, if the base case now becomes a loss of €200 million, this can be made up by not honouring €200 million of subordinated bonds. So the outcome is neither profit or loss. Of course, the “realise ten percent less than LTEV” scenario (known to some as the worst-case scenario) would now be a loss of €2 billion because the original €800 million loss in the business plan already accounted for the sub bonds not being honoured.

Why Larger Losses on NAMA are Likely

Day 2 of the new NAMA business plan and I’m sure people are already a little tired of it as tolerance for all things NAMA has dwindled for most of us. For those still interested, Constantin Gurdgiev has a number of useful calculations in this post.

I’ll conclude on this issue for now by making a few simple points as to why I think the outcome for the taxpayer is likely to be worse than indicated by the plan’s “worst-case scenario’’ of an €800 million loss to be recouped via a levy.

NAMA Business Plan

NAMA have now published their business plan (announcement here). I haven’t looked at it in full detail but a few comments are worth making at this point.

First, it’s not much of a plan. It doesn’t bother trying to update the draft plan‘s year by year analysis of cashflows. As such, the scenario analysis, such as it is, seems like it will be pretty useless to those of trying to assess its credibility.

Second, in relation to Monday’s leaks, the prize for accuracy goes to the Indo’s John Mulligan who correctly reported the new information on cash flows was that NAMA now estimate that 25% of the loans are cash flow producing, which was more accurate than the Times report of about 20 per cent. To be specific, the plan says:

the draft Plan assumption was that 40% of acquired loans would be income-producing; however, the level of debtor impairment evident from the first tranche loan transfers suggests that 25% may be a more reasonable estimate. Similarly, the actual LTV ratios that have become evident during the Tranche 1 due diligence process have been higher than those indicated by institutions last autumn.

There are two possibilities in relation to the difference between the current and draft business plans in relation to their assessment of loan quality. Either the information provided to the government by the banks last year prior to the passing of the NAMA bill was highly inaccurate (speculate yourself as to why this might have been) or the loan portfolio is deteriorating rapidly.   It would be useful for NAMA to clarify the relative contributions of these two factors.

Third, I find it interesting that when NAMA CEO Brendan McDonagh appeared before the Oireachtas Finance Committee on April 13, NAMA had already paid for most of the first tranche of loans. And yet, at the time, McDonagh said that “we estimate the figure is probably closer to one third, that 33% of the loans are cashflow producing.”

It might be possible that the discrepancy between this estimate and the current estimate is accounted for by new information about Anglo’s loans, which were still being analysed when McDonagh gave his one-third estimate. That said, why it should be difficult for a government to find out how many people are repaying the NAMA-bound loans beats me (a point that applies doubly when the bank in case has been nationalised bank.) Less palatable is the idea that we are finding new nasty surprises about loans after we have already paid for them.