Recovery rates need to double for NAMA to break even

The Irish Property Bubble (2006) NAMAwatch (Pt. I)
1

Originally from here:
viewtopic.php?p=310151#p310151

NAMA 77 bn original loan value
60% non-performing: 46.2 bn
40% performing: 30.8 bn
Recovery rate on performing: 100%
Recovery rate on non-performing: 25%
NAMA loss: 11.65 bn

But let’s suppose that over time we get to (which I believe will be best case):
Recovery rate on performing: 80%
Recovery rate on non-performing: 40%
NAMA loss: 10.88 bn

Now let’s suppose that we instead get (which I believe will be worst case):
Recovery rate on performing: 60%
Recovery rate on non-performing: 20%
NAMA loss: 26.28 bn

So let’s look at what needs to happen for NAMA to break even.

Let’s set some parameters, make some assumptions
You can’t make more than 100% on a loan.
Current recovery rates are 25% (we’ve seen this in Zoe and now Fleming)
All the loans that are currently performing stay performing.

In the best case, therefore, the recovery rate for non-performing loans has to improve from the current 25% to 50%:
NAMA 77 bn original loan value
60% non-performing: 46.2 bn
40% performing: 30.8 bn
Price paid 54 bn

54-30.8 = 23.2 bn
Recovery rate required on non-performing = 50%

NAMA requires the prices of underlying assets to go up by nearly 10% a year for ten years, not 10% over ten years.

Please, somebody fault this!

2

You’re way off, you forgot to add the magic pixie dust

3

I did it out in excel and your numbers look good.

Although, it would be a 100 million loss if it was a Recovery rate on non-performing of 50% :wink: (the correct figure is 50.21645%)

I’m not quite sure your logic on this but I’m currently having a look with excel

4

You need Excel 2010 with the new LTEV button to get the correct figures.

5

So, without a donkeys notion of what logic you are using, here’s what I think 10% increase per year looks like:

total from prof/loss 47.00 10% 4.70 51.70 54 -2.30 51.70 10% 5.17 56.87 54 2.87 56.87 10% 5.69 62.56 54 8.56 62.56 10% 6.26 68.81 54 14.81 68.81 10% 6.88 75.69 54 21.69 75.69 10% 7.57 83.26 54 29.26 83.26 10% 8.33 91.59 54 37.59 91.59 10% 9.16 100.75 54 46.75 100.75 10% 10.07 110.82 54 56.82 110.82 10% 11.08 121.91 54 67.91

That’s taking Lenihans 47 billion current market value

so 10% per year for 10 years makes a 67 billion profit so I don’t think that is your logic

6

So, I went and took you’re 26.28 worst case loss. So 54 - 26.28 = 27.72. So I took that as a current market value.

total from prof/loss 27.72 10% 2.77 30.49 54 -23.51 30.49 10% 3.05 33.54 54 -20.46 33.54 10% 3.35 36.90 54 -17.10 36.90 10% 3.69 40.58 54 -13.42 40.58 10% 4.06 44.64 54 -9.36 44.64 10% 4.46 49.11 54 -4.89 49.11 10% 4.91 54.02 54 0.02 54.02 10% 5.40 59.42 54 5.42 59.42 10% 5.94 65.36 54 11.36 65.36 10% 6.54 71.90 54 17.90

So, if your worst case suggested current market value, that means they’d need prices to rise 10% each year for 6-7 years to break even/make a profit.

or, let’s look at it in summary, you could say current prices need to rise from 27.72billion to 54billion. So they need to increase by 95% in 10 years.

Still though YM, I think you need to clarify what you’re going on about.

7

Sorry, what I meant was that from a 25% recovery rate on non-performing loans, that needs to double over ten years (okay, it’s not 10% a year, it’s something less than that - I’ve never been very good at working backwards from a percentage (100%) over time (10 years) to find the increase/year required (x the unknown quantity :blush: ).

The point is that you can’t recover more than 100% of a performing loan, so there is no point in counting increases in recoveries (underlying assets) for those loans. So we are not looking for 10% of 47 bn as the recovery required for NAMA to break even.

8

You know… if you took what McWilliams wrote here: thepost.ie/commentandanalysi … 44915.html

You could almost add that 38billion into your figures to give something more like this:

In which case you’d probably need the prices of underlying assets to go up by nearly 10% a year for ten years

maybe 15-20 years if the worst case scenario happened

9

:open_mouth:
It’s worse than that, it’s a dead loss Jim…

Yeah, I’d steered clear of funding costs. I’m not mad convinced by using proxy costs - issuing the NAMA bonds directly to the banks without intermediation skips the risk premium from the government’s point of view (i.e. we are weighted on a european risk premium rather than an Irish specific one by using euribor. Of course, if levels of risk in Europe rise and fall in Ireland, that will kind of negate the saving).

10

I don’t know if you’re including the intesest cost of NAMA bonds and the running costs of NAMA in to your recovery rates. Oh, and the nasty issue of 9bn rolled up interest. Equally we don’t know if discounts are being applied to performing loans.

For green/brown field sites, it’s easy to create a scenario with close to 100% write-off. If property drops 50%, it makes sense that the site falls a lot further (the cost of building accounts for a larger portion of the price as sales price falls).

11

TBH it’s irrelevant to run the numbers , as, either the assets will flounder along the bottom for quite a while, or if at any stage the assets are projected to increase in value over the next few years , they will be sold off to someone within the circle at current market value( or more likely a discount as the “patriot” is doing his bit for the country) :unamused:

12

An episode of Star Trek couldn’t get to the bottom of NAMA…

“What is it, bones?”

“It’s debt Jim but not as we know it.”

13

Nope. This is just looking at the loans in aggregate as a bunch of loans. They could be for anything.

Recovery rates from Zoe and Fleming appear to be about 25%

To get the 60% non-performing loans to the amount that the state is paying for them (excluding any costs, inflation, deflation, further write-offs, dig-outs, further falls in market price etc.) requires the recovery value to double to 50%, so either a significant proportion of them start to become performing or the underlying asset value improves (doubles).

The point is that the underlying asset value doesn’t matter too much. It is what is likely to happen to loan recoveries or repayments that matter.

I think it highly unlikely that the 60% non-performing will become performing.

I think it highly unlikely that recovery values will double to 50% from current levels. As far as I know, 40% is the historical recovery level for property loans.

Now, it’s probably possible to do a more granular analysis based on current/expected recovery values for the three categories of loans being NAMA’d: C&D, Commercial, and Other (which now appears to constitute the largest bundle of loans!).

14

“Strange alien lifeforms…”
“Thank you David Davenpower from the FF Ard Fheis…”
“By the way David, you appear to have a tribble on your head…”

15

“Beam me up Scotty…” :smiling_imp:

16

YM - are you talking about a 10% recovery in property values or a 10% increase in recovery rates for distressed assets sold by companies in liquidation or a 10% increase in cashflow from loans?

As I understand the NAMA model it works on the following assumptions/expectations:

(a) MV of property (assuming non-distressed sales) = €47bn
(b) (Running costs of NAMA + interest on NAMA bonds) <= cashflow from NAMA loans
(c) NAMA loans can be turned into cash of >= €51.3bn (€54bn less 5% subordinate NAMA bonds) in 10 years time if property prices have increased by 10% or more (€47bn * 110% = €51.7bn).

The premise of (c) is that NAMA assets/property will not have to be sold as distressed assets, i.e. can be sold at the then current MV rather than at a discount to the then current MV.

Can you fit your theory into that?

17

I am talking about an increase in recovery rates. This is an increase in asset values. Remember a few things:

  1. We are not talking about just property here.
  2. We have no idea what the ‘other’ loans have underlying them (all 36.5 bn of them).
  3. We can only talk about loans and recovery rates.
  4. You cannot earn more than 100% of the outstanding loan from a performing loan.

(c) is where you (they!) have gone wildly wrong.
Try and pick some holes in the following:
NAMA has a claim on the underlying assets.
It does not own them.
It matters not a jot that the value of performing assets goes up.
It matters if the realisable value of non-performing assets goes up only if they are foreclosed.
This is the same as liquidating the loans for the underlying assets.
Liquidation values appear to be running at 25%
NAMA needs liquidation valued to run at 50% for the non-performing loans to break even.
NAMA needs the 40% of performing loans to continue to perform for the duration (or be paid back in full).
This is just on the basis of buying back the bonds that have been issued (including the subordinate bonds).
Assets underlying performing loans (performing assets) are likely to rise more quickly in value than assets underlying non-performing loans (non-performing assets).
Ships no longer need to come in before they come out. Through the magic of IOUs we can virtually spend the money before the ship arrives and hope it doesn’t sink in a storm.