New NAMA plan makes fire sales more likely
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The worse-than-expected performance of the loans NAMA has purchased puts a major doubt over its ability to return any profit to the taxpayer when it winds up within a decade.
In fact, NAMA is no longer providing detailed cashflow projections at all, despite publishing such information last October. However, working off those figures one can see that the poor loans the agency has purchased are going to place a doubt over whether it can ever be profitable.
In the October plan the agency said it expected to collect €12bn in interest income from borrowers, not to mention €60bn in principal payments on the loans it will take over. This generates income of €72bn, but this is based on 40pc of loans being repaid in full, with interest.
Assumptions
With only 25pc of the loans now likely to "perform'' -- that is, be repaid in full with interest at 2pc above Euribor -- these assumptions have been seriously eroded. A rise in rates next year by the European Central Bank (ECB) could even make the 25pc figure shrink further, making the interest income smaller than forecast in October.
The chances of a profit were always reasonably slim even under the October business plan, but the deterioration in the assets makes it a very difficult task. The large scale of loans transferred into the portfolio by AIB, Anglo Irish and Irish Nationwide appears to have infected the quality levels, with a 25pc performing rate extraordinarily low even for a group of distressed loans.
With the level of performing loans sliding, the success or failure of NAMA falls back on what the agency can recoup from assets sales after taking possession of the underlying collateral of developers.
For example, the new business plan envisages 25pc of NAMA's debts being paid down by 2013. This is an ambitious target and means that about €10bn of cashflow has to come in over the next three years, via interest payments and asset sales. This is probable, but will rely heavily on asset sales. Under the earlier more optimistic plan of October (when 40pc of loans were going to be performing), the agency was barely bringing in €10bn of income. But with even less loans throwing off cash the agency will have to increase the amount of land and investment assets it sells to make ends meet. The original plan only envisaged asset sales kicking in from 2014, but the new plan appears to suggest that asset sales will happen earlier and more often.
When debtors can't meet their repayments, they are going to be forced to pay all their available cash flows over to NAMA.
This is likely to cause a huge strain on development companies who will be balancing the demands of trade creditors, other lenders, development levies, employees and, of course, their own need to earn an income.
Strained
Of course, NAMA's ability to recoup its money is getting strained in another way. The agency plans to raise €5bn from a commercial paper programme and a bond programme.
This is presumably going to be added to the amount of debt NAMA must redeem as it works through the loans it has bought and sells its assets.
There is no certainty that the €5bn, which will go into joint ventures and longer-term restructurings, will be returned in full. The new business plan does not disclose the kind of return on capital the agency expects to get from these funds.
One factor going in NAMA's favour is that fees and expenses are falling from €240m a year to €160m a year. But again, this will be a gradual process, with the fees falling in the latter years of the agency's life rather than in the initial period.
This once again will mean that NAMA faces its biggest financial hurdles in the first three years of operation, making fire sales of assets -- one of the things NAMA was hoping to avoid -- more likely.
- Emmet Oliver Deputy Business Editor
Irish Independent
