National Asset Management Agency

@KerryBog2 wrote:

Prof. Barrett covers several of the points I’ve already made here, so it is hard to disagree with most of his article. However, much of what he writes is predicated on a supposition that NAMA will take on loans at an uneconomic value. At this stage we do not know the price/discount. Goes back to my point about a lack of communication from our Government, about which I have been rattling on for quite some time. Until we know what the discount is almost all comment is BS. In the 1630’s days of the tulip bubble, bulbs that were exchanged for houses went back to being a regular, albeit slightly expensive garden flower. Many speculative properties/sites in Ireland will never regain the prices paid. We as a nation can only hope that NAMA does not overpay, and that it will be properly constituted and managed. The longer NAMA’s launch is delayed the worse it will get.

PVC King, your comments are based on your perception of the glass being half full. From what I see in the current market, I view the glass as half empty, badly cracked and leaking.

http://www.rte.ie/business/2009/0902/jobless.html

The workforce only leaked 4,000 jobs last month; the worst is over. You are right the Government needs to communicate this.

EADS the parent of Airbus made their first headline investment in Ireland today

http://www.rte.ie/business/2009/0902/jobs.html

If Ireland wasn’t a place to invest they would have gone elsewhere; the UK paid £340m to get 1,200 Airbus jobs or £283k per job. I’m sure this was done on much more favourable terms.

http://www.gazetteseries.co.uk/news/4549166.Airbus_jobs_safe_thanks_to___340_million_government_grant/

@KerryBog2 wrote:

These apply to many other EU States, all of whom, unlike us, have said YES to Lisbon. The cost of our “excellence” is also considerably higher, leading to the closure of pharma and IT companies. Ask anyone at Dell. Our much-vaunted financial skills have long been undermined, as has our total absence of financial regulation for decades, e.g. Irish Trust Bank, Merchant Banking, PMPA, InsCorp, Ruznak, Ansbacher, offshore deposits, overcharging, Parmalat, etc.

The worst is far from over. See my concluding comment below..

Dell made a decision on this before the downturn; once they outsourced production to Singapore based holding company last September this was always on the cards; to have retained the back office and sales support in Cherrywood speaks volumes of the quality of the workforce. Lets not forget the fact that we harbour finance frauds I mean Nick Leeson manages Galway United, Barings still have their entire art collection and most of their clients;it is simply owned by someone else; compare any of the above excluding Parmalat which was an Italian scam on Venezeulan assets and the rest is nickle and dime stuff which happens everywhere. Disaster Myopia is alive and well once you haven’t suffered personally.

@KerryBog2 wrote:

That strengthens my argument. With a total employment force of about 2 million, we have 20% employed in one domestic sector? Eggs, basket comes to mind.

No. There was unwarranted building of houses in the belief that someone living in a housing estate in a city would buy a holiday home in a housing estate in a rural village, with no amenities, few services and no transport. When those houses did not sell, they were used to house the foreign workers and the rent deducted from their wages, to help the builders’ cashflow. This disguised the early signs of the collapse..

Can’t disagree with any of the analyses on the collapse but I would say that no banker will rush into those types of lending decisions in the name of securing market share for a very long time. It is however essential that funds are available to complete North Wall, Heuston Station and other central areas. If Nama fails and the banks default on senior debt there will be one of two outcomes; either the taxpayer will have to inject tens of billions into the banks in some other form be it equity or debt or in the absence of this no Irish bank will raise finanace on reasonable terms for a decade. The Nama formula is best as the level of discount is the only variable and once the valuation methods are transparent the market will rise in anticipation of the sceptre of the perceived fire sale disappearing.

@KerryBog2 wrote:

There is a dim glimmer in the UK property market but that is all it is. In a recent report by accountants BDO, UK manufacturing output – a key figure – remains significantly below pre-recession levels. They also estimate that there will be about 2,500 business failures in 2009, compared to the 1,600 recorded in 2008, and they estimate a figure of 2,000 for 2010. Personal bankruptcy levels are at an all-time high, and probably will exceed 120k this year. (Question – is it a matter of time before Ireland adopts a similar form of personal bankruptcy to the IVA in the UK?).

25% in 3 months is not a glimmer it is a relief rally; there is no quality stock to be bought at the moment as no one is selling. Bankrauptcy is a lagging indicator and every country in the OECD has hit records recently on personal failure. The hangover for Ireland is that interest rates were out of step with pricing pressures for a sustained period; with deflation particularly in assets such as second hand property and cars I’m sure lenders are taking a view on whether they want the collateral back.

@KerryBog2 wrote:

In Ireland, the rate of business failure is equally high. In the construction sector the increase in failures has been spectacular, with first-half construction failure figures for 2007,2008,2009 being 60, 130 and 250 respectively. Total insolvency figures more than doubled between H1 2008 and H1 2009, from about 300 to about 750..

With so many companies having failed presumably one of two scenarios will play out; either directors of insolvant companies will start up new entities and compete with those still standing or the sector will not be funded and there will be mass emmigration.

@KerryBog2 wrote:

When NAMA gets going we will see the start of the shake-out. Most of the contractors I have seen recently could not be classed as viable. The big guys will be defunct and will bring many more with them. The efficacy of personal guarantees will prove almost worthless, key assets will be unreachable and expensive homes will be in wives’ names. Then the subbies and suppliers will discover that they never will be paid for their debts. Their accountants will not sign off on y/e figures, or balance sheet valuations, so a lot more will fail. A contributory factor will be lack of finance due to the opaqueness of the financials, where lenders will mistrust the stated values of fixed assets and the real or true worth of the applicant’s debtors. (The same reasoning can be applied to why FG’s “Good Bank” idea is a dead duck. There currently is money available, but who would lend on an asset that cannot be properly valued and when the repayment ability is totally suspect?).

I can see International pension funds filling the gap left by the developers who are now out of the market; once yields hit 7% with international tenants such as Vodafone, H & M, Pfiezer etc this ticks all the boxes of investment grade property; it is important to remember that the NAMA portfolio would be made up of loans that are split almost equally between, UK/European/US Commercial, Irish Commercial and Development land / half developed schemes. These are three very distinct asset classes; the former probably has a yield floor close to 6% or 16.67 times net rent; the Irish Commercial if International investors were targetted probably has a yield profile of about 8% although that does factor in local independents and over-rented out of town retail parks which no international investor would touch as they don’t understand the people who pay the rent or don’t as the case may be. The development category is where a third of the loans are and where you can’t accuratley assess value until a market returns for new space.

@KerryBog2 wrote:

For those reasons Joe Public will be slow to buy, unsure of his investment, and the market will stagnate just as it did when the Rotweiler made his comments on Stamp Duty changes. That’s why I remain negative and cannot change until we see what NAMA brings. K.

That it is why it is totally vital that NAMA is completed as quickly as is possible so that a market can regroup in whatever form is deemed sustainable by the participants.

I really think NAMA might be missing the whole point, and mixing up what is ‘good’ or sustainable development and what is bad or un-sustainable development.

There is a lot of talk in the newspapers today about Liam Carroll’s property loans going into NAMA. I think there is absolutely nothing wrong with the Zoe developments property portfolio. It is one of the healthiest in the country, from a point of view. There should be no real rush for NAMA to deal with Liam Carroll’s loans, other than the fact that he made a royal mess out of his company. That is an entirely separate issue, to saying there is something ‘bad’ or otherwise with Liam Carroll’s property portfolio. That important distinction needs to be made.

The first loans I would probably move into NAMA, if it was up to me, are those really un-sustainable ghost towns and so-called ‘development lands’ speculatively purchased in the upper Shannon region. Which may take decades and decades to work through the system and be worth anything, if at all. But the problem with NAMA is, the big boys will be the first to be taken care of. I don’t think there is any real risk with Liam Carroll’s property though. We all know it is going to recover, be developed, leased or sold at some stage. I don’t think there need be any doubt about that.

The side of the portfolio that really worries me, is the ghost towns way out there in the sticks of NAMA land. Unfortunately, though it is causing the worst fears and doubts in terms of the bank loans, it will be last in the queue to go into NAMA. Because the smallest of the 1500 lenders in the NAMA portfolio, hold those bad developments in the upper Shannon ghost towns. If there was some way we could get them moved in the NAMA vehicle first and simply bull doze the construction, which is never going to pay for itself, I would be all for it. I don’t know how you do that in legal or financial terms though.

Also, in today’s paper.

The incumbent, John Hurley, retires on September 25.

http://www.independent.ie/business/irish/tcd-expert-to-be-named–as-central-bank-chief-1876748.html

So this is how the timeline is shaping up. The Liam Carroll High court decision, the NAMA debate and an Irish Davos all in one week from 14-18th sept. With Pat Honohan setting into his new role in the Central Banking Commission a week later on the 25th Sept.

Of course, this is not to mention, a Lisbon Treaty referendum, another budget and a possible general election.

Did someone say politicians will be handling political dynamite over the next 3 months? A lot of work for media, a lot of opportunities for speakers and all in all, a lot of ‘debating’ to be done.

Brian O’ Hanlon

Has anyone read the ECB’s comments about the draft NAMA legislation? I am beginning to understand further now, how NAMA has to operate within the wider Euro-system. I mean, it is the ECB who is buying the bonds, or at least the Euro-system which the ECD is responsible for managing.

I can understand now, why this NAMA thing has to work within the European context. It cannot be treated as a primarily Irish thing. We tend to think that the Irish people are paying for NAMA, and hopefully Ireland will be able to ‘settle up’ its tab at the end of the day. But in the meantime, it is the ECB who is funding the entire project.

Why hasn’t this distinction been made in most discussions?

Paragraph 2.2 specifically I am referring to in this document:

http://www.ecb.europa.eu/ecb/legal/pdf/opinion_con_2009_68_f_sign.pdf

Brian O’ Hanlon

@garethace wrote:

…………. It cannot be treated as a primarily Irish thing. We tend to think that the Irish people are paying for NAMA, and hopefully Ireland will be able to ‘settle up’ its tab at the end of the day. But in the meantime, it is the ECB who is funding the entire project.

No, no, no.
Simplistically, Ireland issues bonds (think post-dated cheques) and uses these to buy the debts from the Irish banks. The banks then take these bonds to the ECB who exchange them for cash, which FF contend banks will lend to industry. FG say the banks will sit on it, Labour says it is all me eye and the banks should be nationalized.

It is a tenet of international finance that governments cannot “go bankrupt.” When they default, their debts are rescheduled, (Google Paris Club and you will find what you need) and payment is eventually made. Mainly used for binnned economies in Africa and Latin America. If the country is totally screwed, like Haiti, the debt is written off, which happened a few months ago.

Ireland (i.e. you & me as taxpayers, or rather our grandchildren) will have to pay for those bonds. If the EU is worried we are off-track, they will send in the ECB to make sure they get their money back.
The piper always has to be paid!
Rs
K.

PS. Haiti put me in mind of the time it closed its border with Santo Domingo. Migrant Haitian workers could not cross, so the Santo D sugar harvest was in doubt. The solution for SD? Its President told the public servants that they were to down pens, take up machetes and get out into the cane fields. Now there is a thought. The boys from Kildare St down the Bog of Allen with sleans, directed by wee Mary and Biffo!

The banks then take these bonds to the ECB who exchange them for cash,

Not necessarily.

The banks don’t have to cash them at all. But the bonds may add additional collateral to the Eurosystem, and be used as parts of other deals within that system. NAMA has to be careful though, in how it deals with other collateral already existing within the Eurosystem. That was stated clearly in one of their paragraphs.

What the ECB is saying in other words, is that Irish property debt is going to be exposed to the Eurosystem in order to create more liquidity within that system, and thereby, as a consequence, free up funds that will be available to the Irish banking institutions – or free up funds to the Eurosystem as a whole. It is a way for the ECB to issue more money into the system too. The ECB want this as much as anyone. The ECB is betting on Irish property debt as much as anyone else. Call it an ‘estimated risk’ or whatever you want to call it.

So what is really being tested is not only NAMA, and the long term economic valuation model (which the ECB is not that keen on) but also the wider European economic union, as a concept. It is really, when the European economic union ‘vehicle’ if that is an appropriate term to use, starts up its engines, is when Irish people will see the benefits flow into our tiny economy.

Now you may be pro- or anti- European integration. But what everyone, who has anything to do with NAMA is saying, is that greater European integration is the answer. This is a completely different debate to the one, we have engaged in here. Where we tend to talk about Ireland, as if it was an island on the edge of mainland Europe.

If this European integration thing has anything going for it, then the ECB must be ‘seen’ to be providing a solution to a remote island of little consequence in the bigger picture. It has become my view, that it is Europeans who are paying for NAMA. The same way as they paid for road infrastructure etc in the 1980s. We are back to where we started from effectively, being supported by Germans. The only difference is, in this arranagement, this time, the Irish do get to contribute down the road, to the degree to which they are able. Yeah, you could say it is taxation on the Irish, but spread out.

Now, whether you are in agreement or disagreement with that, is a whole different discussion, a wider discussion to the one I have engaged in so far.

Brian O’ Hanlon

The credit crunch and NAMA and its banana bonds were predicted 4 years ago by McWIlliams
http://www.davidmcwilliams.ie/2005/08/03/how-secure-will-you-be-when-the-credit-runs-out

NAMA is a system for taking 60 billion euro from Irish taxpayers and using it to save two private limited companies. This is criminally stupid. There is a legally prescribed method for the wind down of the companies. It’s called liquidation and it’s paid for by the creditors of the companies concerned not the taxpayer.

@jimg wrote:

So to summarise: the government ends up paying the banks interest on the 90 billion (say 1.5 billion a year currently but this could rise if the ECB rates rise) plus at some date in the future will be obliged to pay them 90 billion cash. In exchange they get to own a bunch of loans to insolvent builders and developers many of whom are close to bankruptcy; the collateral for which (if the claims about O’Carroll are any guideline) is likely to be worth 30% of the value of the loan.

You are seriously wrong on this figure of 30% or an assumed 70% destruction of value; one third of the total loan book is development land or half completed developments. 65% – 70% is mostly tenanted commercial property of which half is outside Ireland. Wait until the valuation exercise is completed before swallowing the suicide capsule that is in you hand! I have not read such a defeatist ill informed statement previously

I don’t know if I linked Anthony Leddin’s article from Thursday’s Irish Times or not. It is well worth hearing Leddin’s perspective too, which deals a lot with getting Ireland out of recession, as fast as possible.

WILL THE proposed Nama toxic bank prolong the recession?

http://www.irishtimes.com/newspaper/finance/2009/0904/1224253814185.html

Brian O’ Hanlon

@jimg wrote:

Valuation exercise? Don’t make me laugh. Producing the “valuation model” will be in the hands of one of the most senior auctioneers in the country. So we have a senior auctioneer deciding how much the government should pay for bank loans.

“ill informed”? Before the start of this year I spent half a decade working in an Irish bank and now I work for an incredibly profitable proprietary trading company. I know markets and how they work, I can read balance sheets and I’ve done financial models for huge government projects. All you have contributed to this thread is a load of horse shit figures pulled from your arse mascerading as “macro economic analysis” which clearly demonstrate that you know f*ck all about macro economics or markets. Your bluster might impress people who know no better but it wont work with me. You are a bullshitter, plain and simple. You wouldn’t survive a second in the company of the people I work with.

I don’t think I’ve been as blunt with anyone else on this forum and I am almost embarrassed that I’ve risen to your bait but even missarchi provides far more enlightening input here than you. I don’t know how you’ve managed it but you’re making maramjam look good on the transport21 thread.

If you have an issue on the Transport 21 thread post it there I have no doubts €2bn to deliver 24.4m passengers is a complete white elephant.

We all know the mess caused by quants led modelling in every market from equities to currencies to commodities. There is no economic model that works in volatile markets full stop; before you to claim that anyone knows anything about what markets will do next I would refer you to Long Term Capital Managment

http://en.wikipedia.org/wiki/When_Genius_Failed:_The_Rise_and_Fall_of_Long-Term_Capital_Management

Your background is finance or trading; I have no idea how good or bad you are at it so I will not comment. However your area is not real estate and Nama is an issue dealing primarily with Real Estate a sector to which I have a lot of experience in and exposure to.

Your analysis was that Nama is a loan book of €90bn and has a net realisable value of €30bn. That unlike the LTCM fiasco which was overly complicated you view is deficient due to an oversimplification. It is like comparing equities in the US, Taiwan and the UK after the Asian crisis; every asset class has its sub markets and geographical variances.

The position with Nama is simple two thirds of the loan book can be valued very easily; it is known that prime commercial yields in London are back to c6% from recent transactions that have completed and those that have exchanged with concrete funding behind the offers. It is likely that International pension fund investors will purchase prime commercial stock in Ireland at yields of 7% – 8% if prime stock reaches the market. The potential to access a top slice of 200-300 bps with tenants they have elsewhere in their portfolios e.g. Vodafone, Citigroup etc will be too attractive to pass up; they are in effect betting on the tenant and not the property market as rent reviews are upwards only.

The final third of the loanbook is difficult to value, there is limited occupier demand for commercial space and residential value indexes being quoted in asking prices as opposed to completed transactions makes valuation difficult. However you need a set of assumptions on likely selling/rental prices, constructions costs, void period or time to let/sell and what level of discount you concede in the form of developers profit.

Until that process is complete no one will know the outcome not even those as celebrated as LTCM or Seanie Fitz

@garethace wrote:

I know, guys this is dreadful times for all of us to be attempting any kind of rational debate on the issues.

What is so dreadful about it?

The property collateral tro these loans is if Pat McArdle is right was bought for €110bn

The outstanding loan book is €90bn

The Value of the collateral underpinning the loan book is undetermined.

From this point it can’t get any worse unless the position we have been led to believe i.e. the split of three classes is incorrect and a higher proportion relates to the landbank which in itself is going to be a very mixed bag.

What we do know is that outside Ireland economic activity is picking up; from an employment location point of view that commercial rents are a lot more attractive when compared to rival markets than in the recent past and that many unemployed people will be happy to work for a more competitive wage than they would have 2 years ago. Unemployment fell by 4,000 last month which is a long way from the 20,000 positions wiped out in March. The challenge is to get unemployment down and spread opportunity across a wider percentage of the population.

The first step to resolving the Nama issue has to be to get a reputable International Property Consultancy with the Geographic reach to the value assets to give a red book open market valuation of the total loan book.

The global economic pick up will feed into values over time and values will recover; if Pat McArdle is right borrowers will take a hit for €30bn or not if there loans are performing they will hold onto their equity, the three main banks have already written down close to €10bn which if you add other players such as RBS, BoSI etc you can probably double that figure to arrive at write offs to date to €20bn.

If that is the case the unprovisioned postion with the Nama loanbook is probably about €65bn from an initial purchase value of the assets being some €115bn or put another way €55bn is not the Governments problem. Looking individually at asset sub-classes the Q3 2009 book right downs on a class by class basis my look something like the figures below. Again these are worst case scenario as a lot of this debt will have been taken on long before the peak values were reached whilst the rent roll may have increased in line with the market.

The UK market is off about 30% from peak to Trough – book loss €11.5bn
Irish Commercial is off about 43% from peak to trough – book loss €16.5bn
Development land is probably off about 65% from peak to trough – book loss €24.9bn

On that basis the value of the portfolio is probably about €62bn and with €20bn already provisioned in losses that leaves a gap of €8bn or €10bn arcording to Pat McArdle to be plugged in.

Medium term commercial yields accross a European market would suggest c5.00% – 5.50% are typical; in assuming yields of 6.00% for the UK and 7.00% in Ireland there is a lot more upside than downside in the next decade.