The Right Moves: Nama's sale of Project Eagle loan book saved Irish taxpayer a fortune
Nama is being pilloried from pillar to post and is due to go before the Dáil's Public Accounts Committee regarding its sale of Project Eagle. The report by the Office of the Comptroller and Auditor General (C&AG) into Nama's handling of the transaction, asserts that the sale to Cerberus lost the taxpayer €220m. In fact, that sale has saved us hundreds of millions.
A chasm has developed between the two State agencies over the issue, but the entire 'disconnect' centres on the discount rate used to value the loan portfolio.
The C&AG calculated, applying a discount rate of 5.5pc used by Nama, that the Net Present Value (NPV) of the cash flows was Stg£1.49bn at end 2013, if the loans were sold off individually between 2014 and 2017. Nama's board set a minimum price of Stg£1.3bn and the difference between the C&AG's NPV and the sale price is the alleged loss arising from deciding to sell in one lot.
However, and the C&AG report includes this, the 5.5pc discount rate was a standard rate historically applied in assessing all loan valuations by Nama. It is the rate derived from the 10-year Irish government bond yield in 2010 and was considered the appropriate yield by which to discount projected cash flows when Nama launched its 10-year business plan in 2010.
But that's an accounting convention and that rate has little relevance to the valuation of individual loan portfolios, each of which are different.
Before the Cerberus deal, Nama sold off some loans from the Project Eagle loan book, notably in Germany, to create an entirely 'UK' loan portfolio, with half the properties in Northern Ireland and the rest in northern regions of the UK. As a normal sales strategy, the best assets were parcelled up with the worst, to make sure the agency wasn't left with all the problems.
The question is, what discount rate would the market apply to projected cash flows from a mixed bag of distressed loans, in regional locations, in one large lot size? The sale of the Project Eagle loan book for Stg£1.322bn represented a discounting rate of slightly over 10pc, which doesn't look inappropriate to me.
Central to the debate is whether Nama should have sold in one lot, or sold loans individually over three years. I find myself agreeing with Nama's decision.
Nama had been given a brief to sell these assets within 10 years, and a slow process of individual sales may not have achieved that. Also, it would be difficult to generate strong prices for individual portfolios, as the market would always know that there were similar portfolios to come.
The C&AG report also criticises Nama's handling of some aspects of the loan sale process. It seems to me that Nama has suffered through the absence of the traditional 'safety net', which was the advertising of a sale, by public tender or auction.
The alternative system of rounds of bidding and 'preferred bidders' seems riskier. With no public transparency, you're relying on a letter from your consultant (and a neat file) to prove that the sales strategy and price achieved was appropriate. I suspect we'll see more public advertising of future Nama loan sales.
Nama certainly did not handle the issues of 'conflicts of interest' well, but it was under political pressure to expedite its sales programme and its only option would have been to collapse the Project Eagle sale. That would have destroyed its credibility internationally and disrupted the €10bn or so of loan sales since.
As it turns out, 2014 was the peak of the market for these types of portfolio sales. Investment values have plateaued and Brexit has overturned the market.
UK funds are discounting their property values by 17pc in London, and by far more in the regions where the Project Eagle assets are.
The portfolio would be unsaleable now, unless it was at a discount of perhaps 30pc. Weaker sterling would have further reduced our return.
So, whether by strategic brilliance, or pure luck, Nama's sale of Project Eagle has saved the taxpayer multiples of the amount the C&AG asserts was lost.