Tag: NAMA

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.

State Gets 18% of AIB

AIB have released an interim management statement. As expected, the bank has not been able to pay the state its cash dividend of €280 million, so they are issuing shares for this amount instead. The NAMA bonds are referred to “enhancing our contingent liquidity resources.”

As an aside—and sorry to bring up Frank Fahey twice in two days—I’d note when I appeared on the radio with Deputy Fahey in February, he told listeners that the government would definitely be getting its cash dividend from AIB in May. I noted at the time that the coupon stopper was in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements” and so this was highly unlikely. To my mind, the fact that government politicians are sent out to continuously over-promise in relation to their banking strategy ultimately ends up just undermining their credibility.

Update: I just noticed that the Department of Finance press release contains the following:

The Minister explained:

“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”

I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother.

Are One Third of NAMA’s Loans Producing Cash?

I received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes act.

The argument put to me was that while Brendan McDonagh says that only one third of NAMA’s loans are income producing and NAMA is projecting to pay a discount of 47% for these loans, the fact that the interest rate on NAMA’s income generating loans are higher than on its bonds means that it will still generate positive cash flow.

Specifically, NAMA’s bonds will pay six-month Euribor while, we are told, that its assets are generally Euribor plus two percent. In this case, NAMA would be cash flow positive as long as 0.33(i+2) is greater than 0.53 i. This requires i < 3.3. In other words, as long as six month Euribor is less than 3.3% (it’s currently about one percent) then NAMA would be cash flow positive.

I don’t disagree with the algebra of the above paragraph. But I do disagree with some of its underlying assumptions. I’m going to write a couple of posts on the various aspects of NAMA’s cash flows.

Here, I want to discuss the extent to which NAMA’s loan portfolio is generating cash.

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McDonagh at the Oireachtas Committee

NAMA CEO Brendan McDonagh appeared today before the Oireachtas Committee on Finance and Public Service. Here‘s a copy of his opening statement. Normally, when there are important Oireachtas committee meetings, I usually have to wait for the transcript to go up on the website. However, thanks to the tireless work of our friend Jagdip Singh, you can get a lot of information on what happened today here and here as well as lots of excellent questions.

One statement from McDonagh that got a lot of attention today was that, of the loans in the first tranche, only one-third are paying interest. I wasn’t too surprised about this because it tallys well with information from the annual reports released by Anglo, AIB and Bank of Ireland.

As I noted earlier in comments, the amounts going in to NAMA from these banks in terms of initial face value are as follows: €36 billion from Anglo, €23 billion from AIB and €12 billion from BoI. That’s a total of €71 billion.

All three banks have released detailed analyses of the loans going into NAMA (here, here and here). From these, we know that €6.6 billion of Anglo’s NAMA-bound loans are neither past due or impaired while the figure for AIB is €10.4 billion and for BoI is €5.4 billion. Add them up and we get that, according to the banks own figures, only $22.4 billion of these loans are performing.

So, according to the figures released by the banks, of the original €71 billion in loans made, only €22.4 billion or 31.5% are currently performing.

One can also point out that if the discounts from face value of 50% for Anglo, 43% for AIB and 35% for BoI are applied across the board to the rest of the tranches, then NAMA will pay €18 billion, €13 billion and €8 billion respectively for a total of €39 billion for the loans from these three banks. So, for these banks, we are paying €39 billion euros for a portfolio of loans of which only €22.4 billion are ostensibly currently generating any revenue.

Donal O’Mahony Returns

Our old friend Donal O’Mahony from Davy’s returns to defend NAMA in today’s Irish Times and he’s on form.

The article starts with some reasonable observations:

IT HAS proved a prolonged and at times frustrating gestation period, but the policy prescription to stabilise the Irish banking system and help kick-start credit creation has finally reached its implementation stage. Nama’s journey has been an understandably arduous one, confronted as it has been by a welter of legislative, regulatory and, not least, administrative needs.

Fair enough. However, one doesn’t get any sense from this article that there was an alternative to the slow and tedious procedures surrounding The World’s Slowest RecapTM. The delays, it seems, are simply something that must be endured.

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