Performing loans are expected to generate €12 billion during the agency’s lifetime
THE GOVERNMENT put more flesh on the bones of the Nama skeleton with the publication of a business plan on how the agency will operate, showing the expected profit and cash to be generated over its 10-year lifespan.
The most significant new detail is the Government expects Nama to make a cash profit of €4.8 billion (in today’s terms) by 2020 when the Department of Finance says its work will be completed.
The Government says Nama will emerge with net cash of €5.5 billion or “a net present value” of €4.8 billion after 10 years in operation. This is the sum left after Nama’s outstanding debt of €8.5 billion, including the €2.7 billion held from the banks under the risk-sharing plan, is redeemed.
The Government says that the performing loans (among the total €77 billion face-value of loans being acquired for €54 billion) will generate €12 billion in interest income over Nama’s life.
This is based on the assumption that there will be no major adjustment in the average margins of 2 per cent over the main Euribor rate at which banks borrow money from one another in the markets.
The Government forecasts that Nama will have to pay €16 billion in interest on its debts, leaving a €4 billion shortfall on the interest received and interest being paid. But the expectation is Nama will more than make up this shortfall through the sale of assets to investors and through repayments on good loans over the 10 years.
In this regard, the business plan states that Nama will “engage with domestic and international investors interested in opportunities to invest in one or more of its sub-portfolios”.
A crucial make-or-break detail on whether Nama will succeed is included in the plan: the Government projects that of the €77 billion face value in loans being acquired, €62 billion will be repaid and borrowers will default on the remaining loans of €15 billion.
This represents a default rate of 20 per cent, which the plan says is based on conservative and prudent assumptions. The plan points to a UK bank which experienced a default rate of less than 10 per cent over five years in the early 1990s. This refers to Barclays, which is often cited as a benchmark for gauging bad loans in a recession.
The Government expects that Nama can still recoup €4 billion of the €15 billion in bad loans by selling the assets backing them.
Three potential scenarios are painted where interest rates rise over a period of time. Under one scenario, Nama’s profit would fall by €1.5 billion to €3.3 billion if there is a so-called double-dip in the EU economy over Nama’s life.
The largest 10 borrowers, who account for €16 billion of the €77 billion total face-value loans being acquired, are expected to be moved to Nama by the year’s end.
The remainder of the top 300 borrowers will be transferred by March 2010 with the remaining 1,500-2,000 borrowers moving to Nama by June 2010.
The top 100 borrowers account for loans with a face value of €38 billion and will be transferred to Nama by February, according to the plan. The top 300 have loans with a face value of €50 billion.
For the 100 borrowers, the five participating banks and building societies will receive €26.6 billion in Government debt by February.
The Government says the five lenders had set aside €7.275 billion to cover losses on the €77 billion face-value loans being moved.
The plan also shows that these loans have further facilities of €6.5 billion that have not been drawn from the banks by the borrowers. Nama has the power to lend €5 billion to borrowers; this can be adjusted by Government.
A type of disclaimer is inserted at the start of the plan saying that Nama may not be able to verify “the integrity of the data” until each and every loan is examined.
Nama plans to hire the first 30 of the agency’s proposed 75-100 workforce by the end of the year.