Thursday, November 26th, 2009

NAMA – Who are we?

We could get into a philosophical argument but the Interim Managing Director of NAMA says:

“A State agency with a commercial remit to implement Government policy and legislation passed into law by Oireachtas”.

Presentation given by him today seems to illustrate the same old approach and mindset. Just look at the language carefully – so much for innovative thinking!

Niamh Moore

The Global Property Guide reports that Ireland’s house prices are down 14% in the last year (click here for story).  Whilst that is of concern to many home owners, it holds up relatively well compared to some countries.  For example there have been severe falls in Latvia (-59.7% year to date), the UAE (-48.1%), Bulgaria (-28.7%), Iceland (-21.2%), Russia (-19.5%) and Slovakia (-15.3%).  Interestingly, while 17 of the 27 countries have experienced house price falls over the course of the year, during the latest quarter price have risen in 16 countries and falls in only 11.  It seems as if house price falls might have started to bottom out in some countries.  It’s unlikely that Ireland will be reporting the same for some time.

Rob Kitchin

NAMA not a panacea, warns Sheehy – Irish Independent

Nama will not leave country awash with cash, says AIB – Irish Times

“If people think the day after Nama that the country is going to be awash with money – that is not going to happen,” he said. “The banks’ balance sheets will be stronger. That will help the banks access long-term funding cheaper and there will be a trickle down effect.” (Eugene Sheedy, AIB)

So NAMA will help the banks of a hole then and the rest us might – despite it being taxpayers who have bailed the banks out – get a small trickle down effect.  For an initiative that is meant to get liquidity back into the market as quickly as possible to help out small and medium sized businesses this statement from AIB’s head honcho doesn’t inspire a lot of confidence.

Rob Kitchin

It should come as no surprise that people on these shores have had difficulty understanding Nama in recent times. Nama is, after all, the language spoken by the Khoikhoi people of Namaqualand – and I don’t remember that language being on my junior cert syllabus. For a while I was struck by what seemed to be the gross inequity of landing the unsuspecting Khoikhoi people with the unenviable task of gambling billions of Irish taxpayers’ money on mini-bermuda triangles located on the outskirts of every town from Lixnaw to Letterkenny – but, of course, these are difficult times for all concerned and I figured that the Khoikhoi should have to shoulder their fair share of the burden also.

Namaqualand map

Needless to say, I have in the meantime picked up a smattering of the Irish variant of Nama – and, of course, in our local parlance NAMA (National Asset Management Agency) doesn’t lend itself very well to lyrical flourish. However, in the spirit of knowledge-sharing, I’ve decided to put forth the basic NAMA that I have acquired thusfar. Please feel free to correct my NAMA grammar.

  • NAMA will take €68bn of problem loans (+ €9bn unpaid rolled up interest) off the hands of five affected banks (AIB, Bank of Ireland, EBS, Irish Nationwide, and Anglo Irish Bank).  In recent days it has been reported in the media that Ulster Bank (owned by Royal Bank of Scotland) have shown an interest in having their “toxic” Irish-based assets acquired by NAMA rather than being processed through the UK government’s asset protection scheme (APS), the British alternative to Nama.
  • The Draft NAMA Business Plan estimates the current market value of the loans to be €47bn.  How this estimate has been reached isn’t explicitly stated in the business plan. In the discussions surrounding the document, data from CSO, ESRI, and Department of Environment has been referred to, as well as the calculation long term values based on pre-2005 property price indices.
  • NAMA will pay €54bn for the loans it acquired – a discount (“haircut”) of €23bn (30%). Critics have suggested that this 30% was opted for as a more severe “haircut” would create the need to inject further equity in to the banks in question. As it stands, the banks may still require further equity in the foreseeable future.
  • NAMA will issue the five banks with government-backed bonds (with a yield of 1.5%)to the banks, “eligible collateral” which the banks can use to borrow from the ECB.
  • The underlying assets originally valued at €88bn [LTV: 77%,  i.e. €88bn/€68bn]. This implies that the borrowers (property developers) brought, on average, 23% of their own capital to each project.
  • This fall in asset values from €88bn to €47bn suggests that property prices have fallen by 47%. NAMA’s willingness to pay €54bn for these assests indicates its believe that property prices will reach an equilibrium 40% lower than their original values. This 40% write-down brings us back to 2004 property prices. I’m not sure how 2004 prices represent some sort of equilibrium – weren’t we 7 years into the property boom/bubble at that stage? Property prices did, after all, increase by 300% over the period 1997-2007. But, far be it from me to come across all pedantic…
  • As is clear from the above, NAMA will pay €7bn (15%) more than the current value of the underlying assets.
  • 5% of amount paid will be risk sharing payments (in the form of subordinated debt).
  • The NAMA Draft Business Plan (p.10) estimates that 40% of the loans will be cashflow-generating and that 80% of loans will be repaid by borrowers. This default rate is expected to be 20%. This is based on the travails of one British bank over a 5-year period in the 1990s, when it experienced a default rate of 10%. The Draft Business Plan (in the spirit of prudence!) plums or a 20% default rate in the Irish case.
  • The repayments of 80% performing loans will from 2013 onwards change from coming in at a mere trickle to a deluge (p.10, table 5). Some commentators have pointed out that this smacks of giving property developers some breathing space in the hope that their luck will come in and they’ll be somehow able to service their loans!
  • The NAMA Draft Business Plan estimates that should property prices rise by 10% over next ten years, NAMA will make a profit. Such a property price increase, of course, is by no means a given! Even if this sounds like a fairytale, I think you have to admire the symmetry of it all: 10 years, 10% increase, 1% each year……
  • The Government has indicated it is willing to provide capital to banks if required, but only after other options have been explored (raising capital from the stock market etc).
  • 66% of the assets to be managed by NAMA are located in Ireland, 20% are located in the UK,  a further 6% in Northern Ireland, and 2.4% in the USA.  Germany (1.4%) is the largest mainland European location of NAMA-related assets. Eastern European countries, on the other hand,  account for a mere 0.2-0.5% of the assets.
  • AIB will transfer €24bn of loans to NAMA; BOI €16bn, EBS €1bn; Irish Nationwide €8bn; and Anglo Irish Bank €28bn.
  • And lastly (for now), the “special purposes vehicle” – which, by the way, was not mentioned in the NAMA Draft Business Plan: Under the EU stability and growth pact, countries are obliged to have a debt/GDP ratio of 60% or less. To keep the €54billion of government-back bonds from appearing on the state’s accounts, NAMA is to be subsumed into a Eurostat-approved special purposes vehicle (SPV) which, according to Eurostat, is to be majority privately owned and decision making autonomy. Private investors will provide 51% of the equity (the SPV will raise €100 million in capital), with the government holding 49%. If I owned 51% of anything, I would like to think that I would be calling the shots. But no, it’s just not like that. The government has claimed it will retain a veto over the decisions of the SPV board (I will return to this in this in a separate post). How’s that for pro-active decision-making!

I bet this would never happen in Namaqualand.

Declan Curran

As it has been for over a decade, Dublin Docklands is still making headline news but in the current economic crisis it is for all the wrong reasons, What has transpired in this part of Dublin city over the last decade epitomises the best and worst of Celtic Tiger Ireland. It is indisputable that a major transformation has occurred making the area unrecognisable from the docklands of the late 1980s and many improvements have been made in areas such as housing, employment and education. But for over two decades, local communities and others have questioned the means employed to achieve this regeneration and the role of the state and its partners in fuelling what was perhaps one of the greatest speculative booms ever generated.

According to weekend media reports, two independent investigations into the financial and planning activities of the Dublin Docklands Development Authority (DDDA) have been commissioned by recently appointed Chair of the Board of Directors, Professor Niamh Brennan.  One of the key impetuses leading to an emergent questioning of the activities of the DDDA has been the disastrous consequences of a decision by the DDDA Board to enter a partnership arrangement with Bernard McNamara and Derek Quinlan to purchase the Irish Glass Bottle site for €413million in late 2006. Writing in the Irish Times on 4 December 2006, John McManus questioned the ethics of a State development agency getting involved in such a massively leveraged project highlighting the conflict of interest inherent in the DDDA acting as co-developer and planning authority. As recently as last month, this site was devalued by 85% to just €60million. Originally financed by Anglo-Irish bank and subsequently transferred to AIB, it is likely that these loans will be transferred to NAMA so the tax payer is exposed by a state agency for the second time to significant risk on this one site.

Yet the Irish Glass Bottle site is only the most visible project on which the activities of the DDDA have been less than transparent. The controversy over the redevelopment of the Stack A warehouse in the north docklands, now known as chq, highlighted the total lack of transparency and accountability within the DDDA. In internal confidential correspondence at the Department of Arts, Sport and Tourism, one senior government official argued that ‘it is the view of this division that [the DDDA] setting this target range for a brand new museum is tantamount to vetoing the concept’. In a clear case of the tail wagging the dog, the unlimited and uncontrolled power of the DDDA to force Government acquiescence on key projects within the docklands is a matter of serious concern.

But why has it taken a financial crisis for the activities of this state agency to come under such scrutiny? How could it have been considered acceptable practice for a state agency to become so entangled with private sector interests and a solely profit-based vision of acceptable land use and functions? But lest we get carried away, the reports about the DDDA are just the latest in a series of revelations about the actions of some state agencies during the boom. What is more worrying is that while there were many people sounding the alarm bells they went unheeded for as long as the boom party remained in full swing. Even those at the heart of Government seemed to brush aside the questionable tactics of some state agencies. For example on the morning that the news broke that the national public transport company (CIÉ) had entered a private partnership arrangement with Treasury Holdings to form the Spencer Dock Development Consortium, the Minister for Transport and by extension the cabinet had no knowledge of it. CIE pitted themselves against other state agencies such as the DDDA and Dublin City Council in the bid to profiteer from this prime site at the heart of the north docklands.

So this maverick buccaneering approach appears to be almost systemic among some state agencies. Appointments to the Boards of the DDDA, CIE and other state agencies including NAMA are within the gift of the relevant Minister. If the failure of these Boards to perform their scrutinising function with relevant local government officials, accountants, consultants, bankers and others literally ‘on board’ why will NAMA be any different? If the Government has failed to do its job and control the operations of these other institutions, will they succeed with NAMA? If the same political ideology underpins decision-making, will we just have old patterns repeated? Will we ever know what the taxpayer has taken on, at what real cost and to whose benefit? It is time to broaden the scope, to appoint people with no vested interest in the operation of these agencies. Maybe with a bit of common sense prevailing the job that state Boards are tasked to do will actually get done. Now is the time to make the change. Although unlikely, NAMA could be the first step in a new dawn for Irish politics if only the Minister goes beyond the same old tired faces.

Niamh Moore