by namawinelake |
May 4, 2011 at 4:17 pm source URL: http://wp.me/pNlCf-1mA
The Minister for Finance, Michael Noonan gave the green-light this morning for the publication of the report and accounts for NAMA for the quarter ending 31st December, 2010. The outstanding feature of the accounts is the €1bn provision that NAMA has created for losses on the loans it has acquired from the NAMA Participating Institutions (PIs – AIB, Anglo, Bank of Ireland, EBS and INBS). To summarise, NAMA has acquired loans worth €71bn at face value, paid €29bn for them but now believes the loans are worth €28bn. This entry examines the €1bn provision and argues that it vastly overestimates the current value of the loans that NAMA has acquired.
First up, it should be said that the €1bn provision is an estimate and is unaudited. But that said, NAMA claim that the full accounts for the agency were handed over to the agency’s auditor, the Comptroller and Auditor General, in February, 2011 so you would expect the €1bn provision to be not too far off what will be reported in NAMA’s audited annual accounts in June 2011. Secondly, the provision is prepared in accordance with International Financial Reporting Standards (IFRS) and it is IFRS 9 that will be particularly applicable to the valuation of the €29bn of loans in the annual accounts; and that IFRS will still allow NAMA to value loans in the same optimistic way that banks here have been valuing loans in recent years. Although the IFRS is going through some changes, organisations like NAMA can, until 2013, choose a method of valuing loans which can be divorced from the underlying value of the security.
But if you were to revalue the loans by reference to their underlying value, I believe the loss booked at the end of 2010 should be closer to €3bn. Here’s why:
(1) We don’t have a precise breakdown of the location of NAMA assets but the latest we have from NAMA is that 67% of NAMA loans will be in the State, 6% inNorthern Ireland, 21% in the rest of theUKand 6% in the Rest of World.
(2) NAMA is valuing loans by reference to the 30th November, 2009
(3) Although NAMA has valued the current market values of loans by reference to 30th November, 2009 it had applied an uplift – a long term economic value premium – to help out the banks on the assumption that November 2009 was the bottom of the market. The average uplift applied appears to be 10%.
(4) NAMA is paying for loans with NAMA Bonds (making up 95% of the payment) and NAMA subordinated debt (making up the remaining 5%). The subordinated debt will only be honoured if NAMA makes a profit. So if NAMA makes a loss then these subordinated debt instruments won’t be honoured. NAMA paid roughly €29bn for the loans of which €1.5bn approximately was in subordinated debt.
(5) The breakdown of tranches 1 and 2 shows that 13% of the loans relate to completed residences. In addition 26% relates to development and presumably some will be residential. I assume that residential makes up 20% of all loans acquired in all territories. And commercial makes up the remaining 80%. NAMA has not issued any detailed breakdown of the loans since 23rd August 2010 when it provided details on tranche 2.
(6) Irelandand the UKcomprise the majority of NAMA assets. We keep track on here of the commercial and residential indices for bothIrelandand theUK. See the top of this page for the most up-to-date price movements. As you can seeIrelandhasn’t done so well whereas theUK’s commercial index has performed quite well.
(7) Taking into account the assumed split of NAMA’s loans between Ireland and the UK and the assumed split between residential and commercial and using the indices shown at the top of this page as at 31st December, 2010 and assuming that NAMA on average paid a 10% long term economic value premium but will not need honour its subordinated bonds if the agency makes a loss would point to the €29bn of loans being worth €25bn. NAMA won’t need honour €1.5bn of the €29bn consideration paid, if the agency makes a loss so taking €1.5bn from €29bn gives us NAMA’s consideration in a loss-making scenario, that is €27.5bn and yet the underlying security of the loans is only worth €25bn today. So NAMA should recognize a loss of €2.5bn.
What’s potentially wrong with the above?
(1) It uses a lot of assumptions – based on the best published information, I would argue, but assumptions nonetheless
(2) NAMA says that it found the value of residential property inIrelandto be an average of 50% off peak in November 2009 whereas the official index, the Permanent TSB/ESRI, indicated it was 30% off peak at that point. An implication is that NAMA’s losses on Irish residential property won’t be as great as the official index implies.
(3) NAMA claims, it is reported, that the “majority” of itsUKassets are inLondon. And it seems to be accepted thatLondonhas recovered from the 2007/8 financial crisis quicker than other parts of theUK(Northern Irelandstill seems to be suffering most).
(4) NAMA can claim that the relevant IFRS allows the agency not to value on the basis of underlying security.
And what about the future for NAMA?
NAMA was conceived on the principle that we were close to the bottom in terms of property prices in 2009. Minister Lenihan pointed to record high property yields at the time as indicative of the state of the market. He was wrong, or wrongly advised. The outlook for the residential market is still shaky forIrelandwith the Central Bank ofIrelandindicating in March 2011 that prices were still some 30% off the bottom. The CBI was more upbeat on commercial prices but it acknowledged if the government were to abolish Upward Only Rent Reviews that prices might fall another 20% plus. The outlook for theUKis more positive but there doesn’t appear to be a boom in prospect there – residential seems to be bouncing along more or less flat and commercial generally seems to be modestly increasing (less than 5% per annum). However NAMA is a 10-year project and part of the skill of managing assets will be in optimizing the timing of disposals. It’s a long way of saying that NAMA might see some recovery in prices though it needs also consider the ongoing interest charges on unredeemed NAMA bonds as well as its operating costs.
The agency has not had a good year in 2010. It lost more than €2m per day (based on an inception on 27th of March 2010, being 304 days to 31st December 2010 and a loss of €714m). However, even if prices had stayed flat, NAMA would still have potentially have reported a loss as it was paying a long term economic value premium to the banks. It remains to be seen if NAMA can turn a profit, it would be helpful to get some detail on the €3bn assets which the agency says has been approved for sale. The accounts today however do place NAMA at a disadvantage, just as Minister Noonan is considering the future operation of the agency.
So all we have here is yet another spin operation in progress to hide the real losses and guess who is responsible for all of this? the same backroom boys that put this whole fraud together in the first place because they are now working for NAMA