Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

EU scuppers “long-term economic value” as NAMA’s first tranche goes through

Yesterday, the Minister for Finance announced details of the first tranche of loans to be transferred to NAMA. These constitute about 1,200 of the anticipated 21,500 total loans and are worth about €16bn of the total €81bn in loan balances that NAMA expects to ultimately control.

There are two aspects of interest to the public from yesterday’s announcements, which are being discussed in detail by Karl Whelan and others on The first is how much we as taxpayers are paying for these loans, which indicates NAMA’s belief on the current state of the property market and any future recovery. The second is the recapitalisation needed by banks as a result of the exchange of loans worth €xbn for Irish securities worth €ybn.

My area of interest is the first and I had hoped to update my NAMA analysis based on the information that would be made public yesterday. However, the biggest single thing we know today that we didn’t know yesterday is that we’re not going to be told much more. Very little in the way of concrete information was disclosed in either the NAMA press release or its supplementary information.

What little we do know – or can now estimate – is summarized below:

  • Anglo-Irish Bank will dominate the first few tranches. They comprise €10bn of the first €16bn (the first tranche) and a further €10bn of the next €22bn (tranches 2 and 3).
  • The first tranche is dominated by a nebulous category called “Investment” – almost two thirds of Tranche 1 – with just 15% coming from land, 6% coming from developments and 5% coming from residential property. The remaining 10% is from, interestingly enough, hotels.
  • NAMA believes that for the first tranche of loans, long-term economic value is 11.3% above current value. (Unfortunately no justification of this is given anywhere.)
  • That said, long-term economic value appears to be ignored. NAMA will pay a “Total consideration” (answers on a postcard) of €8.5bn for loan balances worth €16bn, despite NAMA itself believing the long-term economic value of these loans to be €10.5bn. This more than likely represents the impact of EU guidelines on discounting. How is unclear and not explained anywhere – particularly when the discount rate is seemingly applied for an arbitrary 3.73 years.
  • Working off the original loan-to-value of 77%, that would suggest that NAMA estimates the first tranche of loans have fallen in value by an average of 55%, i.e. property worth €20.8bn is changing hands for €8.5bn.

At first glance, then, a 47% haircut based on an estimated fall in property values of 55% looks broadly in line with back-of-the-envelope figures I worked out earlier in March – and, by hook or by crook (i.e. however they’ve rounded down LTEV, for which I think we have to thank the EU), perhaps things don’t look too bad. The assumed trajectory over time for these loans is given in the graph below, taking 2006 as a representative original value point. As you can see, it doesn’t appear very cavalier – although the same health warning applies to what happens between now and 2020 as always.

Long-term economic value for NAMA loans (1st tranche)
Long-term economic value for NAMA loans (1st tranche, €bn)

However, it’s important to realise what the first tranche is and how it may or may not be representative. Part of the frustration with NAMA’s figures is that they keep on changing their categories. Their previous three headings (land, development and associated loans) have given way to five headings (land, development, residential, investment and hotel) – and it’s far from clear that development means the same thing now as then.

Let’s assume, for the moment, that old “development” is approximately new “development + residential” and that old “associated loans” is approximately new “investment + hotels” (arguments for alternatives welcome in the comments). If that’s the case, then the first tranche is transferring almost 50% of all associated loans but only just over 10% of land and slightly less again of commercial and residential developments.

Therefore, future tranches may yet show significantly larger discounts, as land rather than investment gets moved across. They will also be susceptible to much greater margin for error, particularly when commercial and residential developments get moved across, where NAMA has not shown any understanding (publicly) of how yields might adjust to recent over-construction.

Thanks to the EU, the Irish taxpayer is paying less than current market value for the first set of loans. Given the value of many landbanks in Ireland, though, and given the extremely low yields on Irish residential property in particular, NAMA’s work is far from over.

  • Jagdip Singh ,


    Was there a press conference with Brendan McDonagh yesterday and if so do you have a link or transcript – Brian Lenihan made reference to it in the RTE interview at 7.30pm last night where he said the LEV on the forst tranche was 10.51bn compared with a €16bn loan tranche – isn’t that a haircut of 34%. Why is there a difference between LEV and consideration paid?

    With respect to MVs remember the NAMA assets had a peak value of €120bn approx, a value at loan origination of €88bn and a value last Sept of €47bn – the €120bn came in an answer by BL in the Dail back in Nov 09.

    Also did anyone ask if the first tranche (which let’s be honest by the end of today will still be €370m which is a piddly sum) is subject to disputes and/or claw-back and whether the amounts have been confirmed by Regulator/Ernst and Young or EU and their mooted investment bank?

    • John Heavey ,

      The whole lack of accountability around BANAMA is a disgrace. We never learn in this country. There is no justification for not publishing detailed breakdowns of these figures as the public are footing the bill. If commercial sensitivity is really the issue, no need to name individual developers / companies just aggregate them by category and lender. For loans secured against property this information is publicly available in the PRAI and the CRO in any event. It stinks.

      • The EU may save us from ourselves on NAMA ,

        […] […]

        • Ronan Lyons ,

          The information I used was from the most recent uploads at – in particular a press release with some tables (but not a transcript) and a PDF of supplementary data (unfortunately not a lot). They are linked above in the article.

          Hope that helps, thanks for the comment as always,


          • Jagdip Singh ,

            Thanks Ronan,

            No – I have the documents you refer to. It was the press conference that Brian Lenihan referred to with Brendan McDonagh that I am trying to locate. Brian Lenihan said that Brendan McDonagh will have explained that the MV on the first tranche wa 9.44bn and LEV was 10.51bn.

            That begs the questions – why is the 8.51bn consideration for the first tranche less than the LEV? And given the definition of haircut – (1- LEV/Loan Value), isn’t the haircut 34%, not 46.5%?

            By the way, as always very interesting article.

            • Ronan Lyons ,

              Yes, the LEV as they call it of €10.51bn seems to be discounted (possibly via this EU rate of 5.25% +.25% for diligence – although why for 3.7 years is not clear) down to €8.51bn. I.e. that’s what €10.5bn in the long-term is worth to society today hence that’s the amount the banks will get.

              We do need better clarification of that, though.

              • Jagdip Singh ,

                Hi Ronan, looking at the breakdown of the CMV, LEV and consideration on page 3 of the Supplementary, I see that the total difference (2bn) between LEV and consideration to be paid is mostly down to Anglo (1.55bn), not just in quantum terms but in % of LEV also. The LEV for AIB, BOI and EBS is 5-10% off LEV, INBS (tiny quantum) and Anglo are around 30%.

                It’s very difficult to assess NAMA’s performance and what it means for property when the basics of its MO are still such a mystery. Many commentators are saying the large haircut, 46.9%, is good and prudent but is the haircut not 34% based on the original definitions?

                Maybe an approach by a distinguished economist like yourself might yield some answers which you might be able to pass on?

                • David O'Donnell ,

                  • FT Alphaville » The Enig-NAMA variations ,

                    […] assumptions NAMA has used about Ireland’s economy. Independent analyst Ronan Lyons isn’t so sure how representative it will really turn out to be for future transfers (emphasis and links his): The […]

                    • Jagdip Singh ,

                      So how about it Ronan? Since Karl Whelan doesn’t appear to think that any response on the website merits the 46-signature letter prize, why don’t you make your own approach to NAMA – send them a quick email to asking them to clarify the overall aggregate workings for deriving the LEV, CMV and consideration paid for the first tranche? Given the interest generated, you should get a few press articles from it…

                      • Jagdip Singh ,


                        I sent NAMA the following email “Dear Sirs,

                        I have studied your four publications from Tuesday 30th March 2010 with respect to the transfer of the first tranche of loans to NAMA. I write to ask if you could make publicly available the overall methodology to derive the Long Term Economic Value (LEV), Current Market Value (CMV) and consideration paid with respect to the first tranche of €16bn of gross loans.

                        In summary the gross loans of the first tranche are estimated at €16.03bn, the LEV is shown as €10.51bn, the CMV as €9.44bn and the consideration paid is €8.51bn. Could you explain in general terms how the LEV and CMV were calculated and why the consideration paid is different to the LEV.

                        Also the press have widely reported the estimated haircut on the first tranche at 47%. Would it be more accurate to quantify the haircut as 34% (1 – LEV/Loan Value or 1 – 10.51/16.03)?

                        I have read the Act and the LEV Regulations before writing to you and I can still not resolve the figures produced for the first tranche. I propose publishing any response from NAMA to the above questions on the blog.” and they sent the following reply today “Thank you for your email.

                        Please see below a brief guide to how NAMA obtains these calculations:

                        1. The €16.03bn is the nominal value of the loan balances transferring to NAMA.

                        2. The property CMV represents the current market value of the property as at 30 November 2009.

                        3. An LEV uplift factor is applied to the property CMV to arrive at the property LEV which is one of many inputs to the valuation methodology to arrive at the consideration NAMA will pay for any of the transferring loans. In addition to the LEV of the property, the loan valuation is determined by reference the discount rates per the valuation regulations taking account of enforcement costs and the legal due diligence levy, and the potential for legal haircuts regarding defects in security and title amongst other inputs which influences the consideration paid by NAMA for the loans. The average LEV uplifts per participating institution are available on our website.

                        4. The discount applied can therefore be calculated as: (1- (Consideration paid/Loan balances at transfer)).

                        Some additional information is available on our website”

                        So there you have it there are a large number of inputs to the consideration but they include the potential for legal haircuts regarding defects in security and title. Presumably no-one outside of NAMA can quantify these so this is the best we’re likely to get it would seem.

                        • Ronan Lyons ,

                          Great work Jagdip, at least now we know we not only don’t know but won’t know… so to speak.

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