Ireland’s National Loan Recovery Agency aka NAMA
It would be pleasant and cosy but innocent to accept that all the cash flow loans will be recovered 100%….. If that was the case it would now be easy for the Banks to arrange a re-financing of those loans with other foreign Banks e.g. (HSBC that doesn’t have a capital problem) or to sell the entire cash-flow loan book and that would immediately solve 40% of the Irish banks €77bn bad loans problem. So, it is correct to infer that these cash flow loans too are really poor and highly exposed (i.e. hyper bubble loans). Also remember the true case example of the 3 year old Dublin Retail Shopping Centre [€3.2m Annual Rent Roll €52m 20 year loan (no problems yet!)] valued 3 years ago at just under 5% yield – to give a valuation of €72m; professionally re-valued in last number of weeks applying a more correct yield of 7.5% to the annual cash rent roll of €3.2m (in absence of bubble 7.5% yield should have always applied for this class of property investment), to give a current valuation of €43m – Bank now concerned that Loan/ Value ratio has disimproved from intial L/V (52/72 = 72%) – a perfectly acceptable L/V for the Bank at the time of disbursement for the Bank eager to “throw” a 20 year term loan at this “flagship” rent rolling property investment let to undoubted retail tenants, B&Q etc etc. and to an experienced, undoubted property investment client [who knows, without having to be told that the correct value of this investment is at most €40m!]
Now, let’s turn to the €42.6bn non-cash generating loans…. You can safely take it (from yours truly, an experienced professional veteran) that these loans are all actually non-performing in the sense that they will never perform to correct loan standards. It may well be that the loans contain terms that allow roll-up of interest in the course of development and that technically this may still be happening…. a bit like the driver in the car who is licensed to drive and continues to drive the car with no brakes and with the steering locked in position aimed and driving towards straight over the cliff …. everything is tick box correct, technically (fully performing!), but definitely going to end up in tears. The long term economic value concept naively implies that Nature and Markets are cyclical and that somehow magically (post a hyper bubble) the road level in front of this car with no brakes is going to tilt upwards and bring the car to a long-term economic value benign natural halt!! I know where I’d place my bet!! And it’s centrally important to remember too that there’s 20% unoccupied Commercial Office Space in Dublin! And rents have fallen 40% ! …..which means Commercial Office property values have also fallen 40% …. and that’s for existing office space ….. remember Judge Peter Kelly’s recent walk-about Dublin 2 (time of Zoe application for Examinership) and his observation of all the unoccupied finished space etc etc..!
So, once again, let’s get real…. if even 25% of the €46.2m non-cash flow loans are collected I would consider that a Magical Success Outcome!
So, in summary, loan to value ratios are historic and irrelevant!
I go back to my observation of the Barclays early 1990’s experience. After the top of a UK cycle (which had not been an extended credit and property prices hyper bubble like we have had) poor property lending was identified when it was observed that the defaulting loans across the entire Barclays loan book amounted to 10% of the entire loan book and, not surprisingly, those defaulting loans turned out to be pretty much all property loans, and, furthermore, that pretty well most, if not all property loans advanced by Barclays had got into trouble.
So, when Irish financial melt-down occurred in Sept 2008 and the Banks took a look to see what amount of hyper lending had been disbursed into property …. they identified €77bn Loans to Property (comprising only loans of over €5m!) …. some elephant! (and think also about the quality, or rather lack of quality in the many more loans into property under €5m)
So, as a cross check and by reference to the Barclays experience, what might we expect to see in the Irish Banks’ loan books? Well let’s apply the Barclays 10% default rate experience to the Irish Bank’s Total Loan book (€396.86bn) . That shows that we would expect to see €39.68bn default loans and, furthermore, we would expect these loans to be in the property sector. And, in fact, that’s in no way at odds with the results of the property loans discovery trawl by the Banks which shows that there at least €77bn loans into the Property Development and Investment Sector. It further suggests that the default amount will in fact be much higher than €39.68bn. The NAMA Business Plan had incorrectly only considered a total default loans amount of €15bn (of which €4bn would be recovered). But, at this point we’ll desist from increasing the defaulting loans amounts above €39.68bn. In relation to the NAMA Business Plan recovery rate on the default loans, I acknowledge the NAMA Business Plan rate applied is 4/15 = 26.6%, but I would suggest that the recovery rate will be max 25%.
And finally, Richard, you’re last sentence -”Interestingly, collecting 4bn on defaults of 15.4bn is a 26% recovery rate – around what you said Peter. Apply that recovery rate to all the land & development loans and collect only 65% of the performing loans, and you lose €22.5bn” – contains probably the most acurate forecast. It’s depressing to think about it! And that’s only the Commercial Property (Development and Investment) Loans Books. And the 2nd wave of Default and losses on Mortgage Household Lending etc has yet to gather size and pace!!
That’s why the Banks’ need major re-Capitalisation urgently …. whether they realise it or not …. At least we know it!!
Best regards,
Peter
I evoked your name in a message I sent about Nama to all Senators as below. Hope you don’t mind.
Dear Senator
As you head into the Seanad’s Nama debate, I wish to follow up my email to you (dated 1st November) about the magnitude of the risk to which taxpayers are exposed by Nama.
In a letter in today’s Sunday Business Post, I ask “what is the point of the Dail debating the Nama Bill before Nama has undertaken basic research on its prospective loan portfolio and finalised its business plan and strategies? If Nama’s draft plan was used to seek €54,000 from investors, it would be rejected out of hand as an extremely poor document. Given that Nama needs to effectively raise an amount which is a million times larger i.e €54,000,000,000, surely no taxpayers’ money should be provided until its plan has been fully researched and approved by the Dail. Only at that point would it be appropriate to resume consideration of the Nama Bill.”
A detailed analysis of Nama’s business plan indicates that it fails to disclose rolled up interest arising over the ten years to 2020. It can be established from the plan’s limited projections that this will amount to almost €5 billion for 2010-2012. You can see this for yourself by comparing the total “interest income” for 2010-12 in table 7 with the total “interest income from borrowers” for these years in table 5. The difference of €4.85 billion (9.35-4.50) is rolled up. I estimate that a further €5.9 billion could be rolled up over the following seven years. In the absence of proforma projections, it is impossible to know exactly how this interest, totalling €10.75 billion, is being accounted for but the following alternative treatments can be deduced:
1. It is included in the €62 billion of principal repaid by borrowers. In this case, the “real” principal repaid is only €51.2 billion and the the “real” default rate on the €77 billion of loans acquired is 34% rather than 20% indicated in the plan. This would transform Nama’s projected cash surplus into a trading deficit of at least €5 billion. It would signify that the bank/building crisis will be far more serious than implied in Nama’s plan and that Nama would be extremely costly for taxpayers.
2. It is included in the plan’s assumed €15 billion write-down. This means that the “real” write-down on borrowings would be only about €4 billion to yield a “real” default rate of 6% on loans acquired. This rate would be extraordinarily low given the scale of bank write offs to date and widespread expectations about the depth and duration of the crisis.
3. Rolled up interest is not being paid at all and written off at some point in unpublished trading accounts for 2013-2020.
One way or the other, this is a huge issue which should be addressed before the Nama bill passes into law. I should also point out that my concern about the €10.75 billion of rolled up interest is separate to the €9 billion of rolled up interest included the €77 billion of loans to be acquired by Nama. It is also additional to the €11.65 which Peter Mathews (letter in Irish Times on 6th November) claims will be lost due to overstatement of the realisable value of properties underpinning these loans.
Even if we are both only half right, about €10 billion of taxpayers’ funds will be sucked into the Nama black hole.
Good luck with the debate – in many ways the medium-term prospects for the State ride on the outcome. If you have any queries, feel free to contact me by email or phone at (01) 283 4083 (day or evenings).
Brian
PS You’ll find a full discussion on the treatment of rolled up interest and a nine-point critique of Nama’s half-baked business plan at: