ANALYSIS: Sceptics may differ with the plan's projection of a default rate of 20% on development loans
BUSINESS PLANS are usually internal, confidential and, occasionally, aspirational. They are rarely seen in public. The Nama business plan released yesterday is, thus, quite unusual but it reflects the times that are in it and the commitment given by the Minister for Finance to be as transparent as possible. It is very unlikely that a document of this nature would see the light of day in other European countries.
Much of it is the usual stuff that you would expect to find in any business plan: objectives, risks, etc. More of it is a reiteration of detail that was published a few weeks ago regarding the aggregate estimated valuation of the loans being transferred to Nama.
It is worth reiterating that these figures, about which there has been so much controversy, are not the real figures at all.
They are merely best estimates and the actual figures could differ significantly when compiled on a loan-by-loan basis.
The critical new information in the business plan is the cashflow projections for the period 2010-2020, by which time the whole operation is forecast to be over. The 10 largest borrower exposures are expected to be transferred by the end of the year. The remainder of the 1,500 to 2,000 exposures are scheduled to be taken over by mid-2010.
Nama is forecast to make a cash profit from the outset. In 2010, the interest income from the 40 per cent of loans which are cash generating is forecast to yield an income of €1.3 billion, or 3.5 per cent.
This reflects the fact that these floating rate loans yield about 2 per cent over Euribor, the interbank borrowing rate.
The interest outflow on the Nama debt of €54 billion is also €1.3 billion. This is higher than earlier expected for reasons that are not explained. However, the two flows broadly offset each other. In addition, Nama will have to pay fees and expenses of another quarter of a billion, leaving it in the red on a current account basis. However, borrowers are expected to repay €1 billion principal, which leaves a net cashflow surplus of €0.75 billion in 2010.
The new element here is the principal repayment.
Nama commentators tend to assume no principal repayments in the early years. However, the document indicates that Nama is likely to go after borrowers with saleable assets from the outset. It is likely that these will be located in the UK in the early years. This will be key to keeping the show on the road.
Over the 10-year period, Nama will collect €12 billion in interest income from borrowers and pay €16 billion in interest on the bonds issued to the banks in lieu of the assets transferred from the banks. In addition, it will pay €2.6 billion in fees and expenses, much of this to the banks which will continue to manage the smaller exposures under the supervision and control of Nama.
Nama expects to recover €62 billion or 80 per cent of the €77 billion of loans taken over. This is the billion dollar question. The plan notes that over a five-year period in the early 1990s, one UK bank experienced a default rate of less than 10 per cent. One would have liked to see more extensive evidence on this as, no doubt, the Nama neggies will say that most of the portfolio will never be recovered. In addition, the plan expects to recover another €4 billion from the sale of the collateral underlying the €15 billion bad debts.
Add them all together, and Nama shows a profit of €5.5 billion over the next decade.
Discounted at a rate of 5 per cent, for the nerds, this reduces to just under €5 billion in net present value terms.
Stress tests show that the default rate would have to increase to 31 per cent to erode this gain and have Nama to break even.
If the default rate is higher still, the next €2.7 billion will come from the banks under the risk-sharing provisions in the draft Bill. Beyond that, there will be a levy on the banks.
There is lots more in the plan, including an incredibly complicated Appendix dealing with the valuation process. Initially the banks will value the loans, then Nama-hired specialists will adjudicate with provision for external advisers, appeals, etc. Little wonder that only 10 borrowers will be processed by Christmas.
Finally, the Minister for Finance retains a central role. In addition to the usual annual reports, he will get detailed quarterly reports of loans outstanding which he will lay before the Houses of the Oireachtas. However, the degree of detail in them remains to be seen given the usual banking secrecy norms. The document is also silent on the treatment of bankrupt builders. We can expect more detail as the legislation progresses though the Dáil.