Saturday 20 July 2019

Richard Curran: Nama set to make profit of €3.5bn - now comes the hard part

Nama has offloaded the majority of the so-called ‘ghost estates’ on its books, but could it have done better?
Nama has offloaded the majority of the so-called ‘ghost estates’ on its books, but could it have done better?
Richard Curran

Richard Curran

Nama believes it can deliver a profit for the State of around €3.5bn when it finishes up its job. This is a higher figure than previously estimated but it is hardly a surprise.

Buying assets at a 57pc discount and then selling them into a heavily subsidised buyer's market isn't necessarily rocket science.

The bigger question is when and how Nama should finish the job.

The agency seems keen to summarise its biggest achievements in two figures.

The fact that it paid back all of its €32bn in senior debt three years ahead of schedule and that it will make a profit of €3.5bn. Job done!

But the agency isn't quite out the gate yet. The truth is that it has dealt with all of the low-hanging fruit by selling off its better assets at lightning speed. Its balance sheet says that at the end of 2017 it had just €3.1bn of loans left. Yet, this actually represents original loans of €25bn that were taken out during the boom years.

Nama values them at just €3.1bn. This figure represents 4,634 loans and over one-third of the original loan book it took over.

This is the real tricky stuff.

Nama has enforced on 1,189 of those 4,634 loans, representing just a third of the original par value.

Some 2,800 of them are more than four months delinquent and in truth are probably several years in delinquency. Just 321 of these remaining loans are performing, with the other 4,313 non-performing.

As Nama tries to grapple with these tougher, smaller, and less commercially valuable assets, it will have to work a lot harder to get a decent price for them. Its legal fees, for example, rose from €3.4m in 2016 to €6.5m in 2017. In fact, in the last three months of 2017, Nama was spending €240,000 per week on legal fees.

This reflects the need for more legal activity as the agency tries to grapple with the scrappier and less valuable aspects of its loan book.

Nama chairman Frank Daly didn't seem in any hurry to wrap things up when he talked about how the agency could recover more from the remaining loan book by not jumping to sell too quickly. He even referred to the "medium term".

This will have created more than a wry smile among big developers who believe the agency jumped far too quickly to sell off their prize property assets.

Daly does have a point about the need to take the last part more slowly but that is because it is enormous. It isn't just a small bit at the end, but instead represents over 4,000 loans and more than one-third of the original Nama loan book. It might be the worst bit, but managing it and selling it may be a lot trickier and require more work than selling off trophy assets in a buyer's market.

It is still too early to say whether Nama has been a success.

On the metrics of paying off its massive €32bn of debt and delivering a €3.5bn profit for the state, it appears to have done well.

But it still isn't clear what the advantage of paying off debt three years early actually was? This was cheap borrowing that was not expensive to finance. Paying down early did reduce the scale of potential risk to the state that the €32bn represented but was it so advantageous to pay back so much so soon? This is especially true when holding off on asset sales might have yielded more.

When Nama started, it had to sell some of its best assets in the UK in order to get the ball rolling and pay back something. There was no market in Ireland in 2011 or 2012. Fair enough.

However, Nama didn't create the market in Ireland - the government did, by using tax breaks. By slashing commercial stamp duty and offering breaks to Section 110 entities and even zero Capital Gains Tax on property deals, we all financed the vultures. Undoubtedly, the country has benefited from the positive recovery in the commercial property market and the jobs it has brought. But there will always be the question - could we have done a lot better out of it?

Trump effect starts to take toll on US FDI to Ireland

When IDA Ireland chief executive Martin Shanahan says anything about US multinationals, we have to sit up and take notice. He leads an agency that knows more about how these US corporations think than they even know themselves. IDA Ireland's track record over decades bears this out.

So when Shanahan says we cannot be complacent about future US multinational foreign direct investment, it has to be taken seriously.

During the week he urged caution over Ireland's ability to attract vital FDI and added that US firms are slower to make decisions about investing here because of US president Donald Trump's policies.

Trump is the second US president in a row to name-check Ireland as a place where major tax haven-type activities take place. Throw into the mix the Apple Inc tax finding, and the academic study published last week which found Ireland to be the biggest tax haven in the world with $90bn of multinational profits re-directed to Ireland last year.

The tax haven line is strongly refuted by the government. But while it has a point, it increasingly looks like semantics.

The big issue is whether we can rely on the sizeable corporate tax receipts that have been paid in Ireland in recent years.

In good times Ireland bagged around €4bn to €5bn in Corporation Tax, but last year it was €8bn.

A government-commissioned study suggested these levels were sustainable in the medium term (up to around 2020).

Economist John Fitzgerald believes we need a new tool for measuring real economic activity in Ireland because traditional GDP and even the new GNI measure don't capture the full, complex picture.

Perhaps the way to look at it is how we define the so-called fiscal space. Rather than simply count all corporate tax receipts as money that is available to spend, perhaps for a few years at least some of that extra money should be either set aside or spent only on targeted one-off measures.

Either way, we need to ask some tough questions about the durability of our recovery.

Murtagh gets timing right with Kingspan share sale

Kingspan chairman Eugene Murtagh's decision to sell another €50m worth of his shares in the company shows how carefully he manages his shareholding.

The trick when selling some of an enormous plc stake is to ensure you get a good price, while not doing anything that will undermine or damage the share price.

Murtagh's remaining shares in the group are worth over €1bn but he has to be careful how and when he sells shares. He seemed to get it spot on, given that after cashing in €50m, Kingspan shares went up.

Not so over at Ryanair, where Michael O'Leary recently sold another €30m of his shares. His remaining stake is worth around €710m. Ryanair shares fell after the sale, as the Financial Times tried to link the disposal with concerns about Brexit.

Other executives with big plc shares include Eamonn Rothwell of ICG, whose 14.9pc stake is worth €130m, and Stephen Vernon whose stake in Green Reit is worth €350m.

One plc founder who has not cashed in at all is Jim Flavin of DCC. He retired from the company several years ago, but retained a 3pc stake. That stake has tripled in value in the last five years and is now worth around €230m.

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