This time last year, the NAMA CEO Brendan McDonagh was filmed as he waited to go into the press conference for the launch 2010 NAMA Annual Report, and he joked to RTE’s Ian Kehoe whether the first question he would be asked would be how come NAMA was so successful in generating such a big cash mountain. The 2011 Annual Report is expected to be published this Thursday, though we are still awaiting details of any NAMA press conference to accompany the publication. It is to be hoped that NAMA faces more robust questioning than last year.
It should be said that we are also expecting this week, the judgment in the Treasury Holdings judicial review case which was heard earlier this month, and on which there was very little reporting. Remember Treasury was challenging NAMA’s dealings with its loans, and should the High Court find that NAMA acted unlawfully, then the whole NAMA project could be de-railed, and NAMA could face colossal claims for damages from developers whose loans it has foreclosed. The betting is that NAMA will win its case, but if it loses, NAMA might find itself with a busy week!
We already have the unaudited accounts for NAMA for 2011, and you might expect this Thursday’s publication to contain few surprises, but remember last year that the impairment provision (see below) increased from €1bn in the unaudited accounts to €1.485bn in the 2011 annual report. It is also expected that the 2011 Annual Report will contain a treasure trove of information not hitherto in the public domain.
So, ahead of Thursday, here is a preview of ten headings we should look out for:
(1) Overall Profit
The 2011 unaudited accounts showed NAMA made a profit of €200m, and recent rumblings from NAMA indicate the final accounts will show a similar, if not higher profit. This compares with a loss of €1.1bn in 2010. If the impairment cost – see below – has indeed risen by €400m since the publication of the unaudited accounts, then NAMA must have found extra profit someplace else, perhaps with Paddy McKillen’s defeat in London’s High Court, NAMA is able to recognise the profit on the sale of the Maybourne loans.
(2) Impairment
An “impairment” cost is an accounting estimate of the decline in value of NAMA’s loans which has come about through declines in the underlying property or from a deterioration in the prospects of a specific developer. The impairment cost in 2010 was €1.485bn and in the 2011 unaudited accounts, it was €800m. It will be by far the single biggest cost in the NAMA accounts and it is likely to be the figure that has practically no explanation. The NAMA CEO recently seemed to let slip that the audited impairment cost in 2011 would be €1.2bn, up from €800m in the unaudited accounts.
(3) Fair Value of loans
We saw in a recent blogpost that most Irish banks provide two valuations for their loans – the “carrying value” and the “fair value”. The “carrying value” is what is shown in the balance sheet and reflects what the banks believe the loans are worth over their lifetime. The “fair value” reflects what the banks think the loans are worth today if they were sold. The three main Irish banks, Bank of Ireland, AIB/EBS and Permanent TSB believe that the “fair value” of their loans is 14-27% less than the “carrying value”. NAMA seemingly thinks the “fair value” of its loans is just 2% less than the “carrying value”. No reason has been given for such disparity, and Minister Noonan recently said “I may remind the Deputy that any fair value process will be subject to both qualitative and quantitative dimensions that can differ between organisations and for differing assets”
(4) Interest received from developers
It seems that about 20% of the interest income that NAMA books is notional and not received in cash. It reflects NAMA’s estimate of what it will receive over the life of the loan, including an estimate of the sale value of the underlying asset in a few years hence. NAMA won’t tell you how it estimates the future sale value of assets, but the betting is that it is assuming a return to November 2009 values. In Ireland, residential is down 30% since November 2009, and commercial is down 24% so it would appear that there needs to be a considerable recovery in values, before NAMA can realise in cash the interest income it is showing in its accounts.
(5) Profit on the disposal of loans and properties
NAMA says that it has approved the disposal of some €9bn of property – loans and real estate – and that 80% is in Britain. These disposals are widely believed to be the best quality NAMA assets in the most liquid market. Across the UK as a whole, commercial property has increased by 9% since November 2009, the date by reference to which NAMA valued the loans it acquired. And in London where half of NAMA’s assets were located the increase has been even greater. So you would expect NAMA to be showing a great big profit from the disposal of all these assets. Yet the 2011 unaudited accounts show a €306m profit from inception to date. Which doesn’t fill us with confidence about the disposal of the remainder which, is understood to be lesser quality, mostly in Ireland.
(6) Legal fees
With annual costs of €9m in 2011 according to the 2011 unaudited accounts, NAMA is certainly providing a boost to the legal sector in Ireland, and indeed there have been 18 applications made so far this year at Dublin’s High Court, plus the Agency has been in action in London, New York, Atlanta, Florida and Toronto. And these are just the cases of which we are aware. NAMA lost a major case against Paddy McKillen in Dublin’s Supreme Court last year, and we are still waiting to find out how much that defeat is to cost us – the media suggested €7m.
(7) Receivers fees
The unaudited accounts for 2011 showed “portfolio management” fees of nearly €16m. We learned last week that €10.3m of this was for receivers. We know that NAMA has a budget of €75m for receivers in 2012. These are big numbers. It would be nice to find out what the €5m non-receiver component of “portfolio management” fees relates to.
(8) Outlook for the Irish property market
A fortnight ago, Minister Noonan said he was keeping the NAMA advisory board so that he would have someone on the end of a phone to give him advice on property. Truth be told, if someone at that press conference had stuck a blindfold on Minister Noonan, spun him around a few times and had him throw a pencil, chances are that he would have hit someone in that room who knew as much, if not more, about the Irish property market than the three members of the NAMA advisory board, Michael Geoghegan, Denis Rooney and Frank Daly. But despite what experience and qualifications the NAMA board, or indeed NAMA itself might have, NAMA needs to create confidence in the Irish property market. It faces a bit of challenge with commercial property with prices and rents still declining, and NAMA holds a controlling interest in the Irish commercial property market with its loans. With residential, there have been all sorts of claims by those whose jobs depend on residential property transactions, but with average property prices down 50% and the consensus seemingly believing a 60% decline is in prospect, even promoting confidence in residential property is a challenge. Expect NAMA to zero in on parts of Dublin and types of property to claim the recovery – or at least, the bottoming out – is underway. But remember that NAMA has been claiming stabilisation, bottoming and recovery for more than two years now…
(9) Value of NAMA loans by county
Yes, from Leitrim to Offaly, from Longford to Carlow, and for all of the 32 counties, we will learn the value of NAMA’s loans. Some of this information is already in the public domain, but when Sinn Fein’s Pearse Doherty asked Minister Noonan for a comprehensive county analysis recently, the response was that the information would be available in the Annual Report – “I am advised by NAMA that the information sought is currently being collated and validated and that it is expected to be available for inclusion in the Agency’s Annual Report which is due for publication in July”
(10) Misdirection
“Misdirection” is something magicians do. They distract your attention with the pretty lady and the left hand, whilst the right hand is doing the trick. “Misdirection” is something the NTMA does as well, as was evident in last weeks annual reports for the NTMA and one of its units, the NPRF. The reports together totalled more than 200 pages and reported on every little detail in the NTMA’s operations right down to compliance with policy not to invest our pension fund in manufacturers of cluster munitions. On the other hand, there was practically no information given for the basis of valuing the €8bn stakes the State holds in AIB and Bank of Ireland. Expect oodles of misdirection from NAMA on Thursday.
