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 irisheconomy.ie. 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.
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.