ANALYSIS:The Nama plan figures still need to be verified through a case-by-case analysis of the loans, writes SIMON CARSWELL

FEW PEOPLE like spreadsheets but one page in the Government’s draft business plan on the National Asset Management Agency (Nama) gives fresh insight into the projected sums flowing in and out of the toxic loans agency that will determine its success or failure.

The spreadsheet will be pored over for some time to see if the Government’s figures stack up. Opposition politicians were quick to poke holes in it as soon as it was published on Wednesday evening. Officials constructing Nama have neatly forecast the expected interest income to be paid by the borrowers on the €77 billion bank loans from 2010 to 2020 and, on the other side, the interest to be paid on the debt to buy the loans. In several columns, the numbers are repeated for each year of the expected 10-year life of Nama.

For example, the Government anticipates that it will start repaying the €54 billion in State debt it will raise to buy the bank loans in 2013 at €6.5 billion a year until 2019, with a final payment of €8.5 billion in 2020 when Nama finally completes its work.

Borrowers who owe loans with a face value of €77 billion moving to Nama will pay interest of between €1.3 billion and €1.6 billion a year for the first five years of its life. This will then start to decline as borrowers start to repay the overall principal amounts owing.

The Government expects borrowers to repay larger principal sums from 2013. This will start at a rate of €7.5 billion a year from 2013 to 2016, then €7 billion a year from 2017 to 2019, with the remaining €6.6 billion of €62 billion in good loans repaid in 2020.

All told, the Government expects Nama to generate a cash profit of €5.5 billion – €4.8 billion in today’s terms adjusted for inflation – by 2020 when it will have cleaned up the property loans that are plaguing the banking sector.

The figures are based on the assumption that property values will rise 10 per cent over 10 years.

The plan sets out the calculations for Nama over 11 years to the end of 2020. The agency will be in operation for 10 years as 2011 will mark Nama’s first full year once all 1,500-2,000 borrowers heading into Nama have been transferred by June 2010.

The calculations are so neat in the business plan that they attracted a withering put-down from the Opposition benches. “The tooth fairy, the Easter Bunny and the Loch Ness Monster are all more credible propositions than the financial projections for Nama,” said Fine Gael finance spokesman Richard Bruton.

The Opposition parties have called for an independent audit of the Government’s figures and the assumptions underlying the plan.

However, the clarity of the figures in the Nama business plan is helpful in showing how the agency will operate, though it must be pointed out that the Government has included an all-bets-are-off-type rider at the start of the plan, saying the integrity of the data in the document depends on an examination of each and every loan.

In other words, based on a cursory (if a year of examining loan books at the domestic banks can be described as cursory) assessment of large development loans, the calculations in the plan are estimates and won’t be deemed accurate until due diligence begins and is completed on the loans.

Five months after the Nama plan to fix the banks was unveiled, the hard work – the valuation of each loan to be acquired – will begin next month or in December.

Until the findings of this work are disclosed, the Nama plan figures are to be taken as temporary. There are several key assumptions behind the calculations in the plan.

Officials expect that – in simple terms – of the €77 billion loans owed to Nama €62 billion will be repaid and €15 billion will not.

The Government expects that, of the €15 billion, Nama can recover €4 billion – €1 billion a year for the four years from 2014 to 2017 – by selling properties and other assets securing the loans.

The estimated €15 billion in bad loans represents a default rate of 20 per cent, which the Government believes is based on “conservative and prudent assumptions”.

This is assumed in light of the fact that UK bank Barclays suffered a default rate of less than 10 per cent in the 1990s and Barclays was the worst hit bank during the British property market crash.

However, the current financial crisis – both internationally and for Ireland – is considerably worse.

“To say the assumptions are prudent and conservative based on recent experience could prove optimistic based on what we’ve seen to date in this economic cycle, which includes the biggest financial crisis in over 70 years,” said Sebastian Orsi, bank analyst at Dublin stockbroking firm Merrion Capital.

The plan says that a 31 per cent default rate, which would involve €24 billion of the €77 billion loans not being repaid, would wipe out the forecast profit of €5.5 billion.

The €77 billion Nama loans are broken down across five lenders as follows: Anglo Irish Bank, €28.4 billion; Allied Irish Banks (AIB), €24.1 billion; Bank of Ireland, €15.5 billion; Irish Nationwide, €8.3 billion; and EBS building society, €800 million.

Then there is interest coming in and going out – the Government expects the 40 per cent of interest-generating loans being acquired by Nama to yield €12 billion over its life until 2020, while the agency will pay €16 billion interest on the €54 billion debt to be raised by the Government to buy the loans.

The figures seem to contradict earlier statements from the Government that Nama could “wash its face” – in other words, the interest generated from the loans will meet the interest on the debt. Not so, looking at the calculations in the plan.

However, the Department of Finance clarified this, saying the €62 billion in loans that it expects will be repaid to Nama includes interest income as development loans comprise an element of interest roll-up.

This, according to the department, is because development loans by their nature do not generate interest income until projects are completed and generate either sales or rental income.

Nama expects substantial lump-sum loan repayments to start in earnest in 2013, reducing the good loans of €62 billion over eight years until the end of 2020.

This suggests a recovery in the property market where borrowers can either sell properties and other assets to repay loans or seek refinancing from other lenders in a properly functioning banking sector so they can repay Nama.

Most economic commentators expect a recovery to begin in 2011 and the Government will be keen that this also translates into a return to normality in the property market. By forecasting principal sum repayment to start in 2013, it is erring on the side of caution.

The market responded cautiously as bank shares dipped following publication of the plan. AIB fell 3.5 per cent and Bank of Ireland dropped 3.2 per cent.

Clearly, investors agree with Opposition politicians – the figures need to be verified with an intensive examination of each and every loan. That exercise will not be completed for another eight months.