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. Continue reading “Why Larger Losses on NAMA are Likely”

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.

Are One Third of NAMA’s Loans Producing Cash? No.

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.

Hard to Deny Now that NAMA is a Developer Rescue Plan

I have been publicly critical of the idea of a “bad bank” plan in which the government overpays for bad assets since a number of months prior to the publication of Peter Bacon’s report. I have consistently objected to the plan on the grounds that it is a bailout of bank shareholders by the government, involving a large direct transfer of funds from the taxpayers to shareholders.

However, at no point have I suggested that NAMA would be a bailout for developers. I have always believed the Minister for Finance’s assurances that the developers who owed money to the Irish taxpayer would be followed to the Gates of Hell in order to get the money back. This, from the Minister’s appearance in August at the Oireachtas Committee on Finance and the Public Service, would be a pretty typical assurance:

The draft legislation also contains a number of provisions which will assist NAMA in its dealings with developers and ensure that every last cent due to the taxpayer is pursued vigorously.

Now, however, we find out how vigorous this pursuit will be. In its draft business plan, NAMA has told the public, and thus property developers, that it expects this vigorous pursuit of the €77 billion that NAMA will be owed to yield principal repayments of €1 billion in 2010 and 2011 and €2.5 billion in 2012. Only in 2013 does NAMA expect the vigorous pursuit to start making real inroads because, at that point, as if by magic, €7.5 billion per year in principal repayments start to pour in.

What this draft plan means is that the developers who owe us €77 billion have just been told that we have no plans to recoup this money any time soon. Effectively, the developers have been told that they can start paying back the money in 2013. Now we’ve been told that NAMA will haul in the developers and look for business plans and the like. However, in light of NAMA’s own business plan, it will be pretty hard for them to quibble with a developer who offers them a plan of “I’ll wait until 2013 and sure things will be grand then.”

It is with great reluctance, then, that I have to say that it’s now pretty hard to see this plan as anything other than a deliberate decision to show extreme forbearance to the property developers who got us into this mess in the first place.

Also, the following is now a fact. This government has told developers that as long as its in office (the latest date for an election is 2012) they will barely have to pay back any money. Interpret this fact how you wish.

NAMA Haven’t Seen Loan Files

From page 2 of the draft NAMA business plan:

It is important to emphasise that much of the information regarding the prospective NAMA portfolio included in this draft Business Plan is based on aggregate data which has been provided by the various institutions. The interim NAMA team has not had direct access to individual transaction records and loan files and will not be in a position to verify the integrity of the data until it carries out its own due diligence on each of the loans proposed for acquisition.

So have any of the famous forms requesting 300 pieces of information on individual loans been filled out? And if they have, where are they? When is whoever is keeping them planning to hand them over to NAMA?

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.

NAMA Business Plan

NAMA has released a draft business plan. It is a truly extraordinary document. To summarise, those who thought that NAMA would largely be a property fund—closing on delinquent developers and selling on the assets—are wrong. It appears that NAMA’s game plan is to wait a few years and then the vast majority of the developers will be able to pay back their loans in full.

Among the highlights:

  1. NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.
  2. However, contrary to the million times that we have been told that NAMA will “wash its face” on an ongoing basis, it is projected that NAMA will pay out €16 billion in interest payments on its debt but will receive €12 billion in interest income on the loans acquired.
  3. In addition, fees and expenses will add up to €2.64 billion over ten years.
  4. The profit of €5.48 billion stems from NAMA recouping payments of €66.1 billion from loan repayments and asset recoveries to pay off the €54 billion in loans issued.
  5. Interestingly, from Table 5’s cash flow projections, the only year in which NAMA is not projected to lose money on an income flow basis is 2010 when an interest outflow of €1.3 billion will be offset by interest income of, em, €1.3 billion. Table 7’s “budget projections” attempts to show that NAMA will make a profit in 2010-2012. The difference between this and Table 5 is “The interest income projections in this table include the impact of contractual rolled-up interest on land and development loans in addition to interest income from cash flow-producing assets.” So any “profit” reported will be of a phantom variety.
  6. From Page 10: “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%). 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. It is also assumed that €4 billion will be realised from the sale of underlying assets secured by the defaulting loans of €15 billion. These are conservative and prudent assumptions.” Yes you read that right. 80% of the loans will be repaid in full.
  7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.
  8. What if more than 20% of the loans can’t be paid back? The document tells us: “Stress-testing of this assumption indicates that the default rate would have to increase to 31% to erode in full NAMA’s projected Net Present Value gain of €4.8 billion.” Feel better now?
  9. NAMA will acquire €14.6 billion in derivatives positions, mainly interest rate swaps.
  10. By the turn of the year, NAMA will only have taken on 10 loans with a total value of €16 billion.
  11. NAMA’s potential new lending: “NAMA will inherit any commitments entered into by the banks as far as the drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion.” This exceeds the €5 billion limit placed on it in the legislation. The document says “the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

Anyone in the Green Party up for a revote?