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Nama - A Flawed Business Plan

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Nama's draft business plan is merely a work in progress and no taxpayers' money should be invested until the plan has been fully researched, presented in final form and approved by the Dail.

If the plan was used to seek €54,000 from investors, it would be rejected as an extremely poor document. Given that it is being used to raise a million times more, no taxpayers' money should be invested until the plan has been fully researched, presented in final form and approved by the Dail.

As developer of financial projection software with a user base in over a hundred countries, I'd like to comment on Nama's 10-year projections as follows:

  1. The discount rate used to convert future cashflows to present-day values is 5 percent. This corresponds to the current rate, presumably risk-free, for Government bonds. If a more realistic rate of, say, 15 percent is used to partly counter the plan's rosy assumptions, the projected net cash value drops from €4.8 billion to €3.7 billion for the ten years.

  2. Every business plan, especially one involving an investment of €54 billion of taxpayers' money, should include projected P&L statements and balance sheets as well as cashflow forecasts for each year. This would present the full picture and facilitate ratio analyses which might help anticipate problems similar to those experienced by very same banks that Nama is trying to rescue.

  3. Given the huge uncertainties, projections for less favourable scenarios, based on the plan's own risk assessments, should have been published. These would facilitate the development of defensible strategies and mini-max assessments (to minimise the maximum regret that might be anticipated once the final outcome is known) as well as Monte Carlo simulations to take account of the compounding effect of risk. 

  4. The projections assume modest principal repayments during the initial three years and a surge in repayments during the final seven years. If over half of all borrowers cannot pay any interest during the initial years, what are the chances that property markets will recover sufficiently to facilitate repayment of loans as well as rolled up interest in later years?

  5. The plan forecasts a profit of €5.5 billion by 2020. Surely, this forecast undermines the need for Nama and begs the question as to why the banks' shareholders are not lining up to get a share of the action. In truth, the plan's projections are "very best case" and other scenarios should be published based on lower repayments and interest income, higher defaults, higher debt interest and expenses and a higher discount rate. These would be more realistic and explain why the banks are enthusiastic about Nama.

  6. After market risk, the greatest challenge facing Nama relates to management. To succeed, its resources and expertise must be appropriate to one of the largest property portfolios in the world. This means experience of world-scale asset recovery and portfolio management with minimal reliance on inexperienced local secondments, expensive advisers and delegation of nothing but basic administrative activities back to covered institutions. According to its plan, Nama's inhouse staff of under a hundred people people will be managing a highly fragmented, complex portfolio worth €77 billion covering 20,500 loans linked to almost 2,000 developers' business plans.

  7. The business plan explores six alternative scenarios. Only one of these is linked to Nama's operational performance and the trading environment and indicates that Nama would only break even if a default rate of 31% is used. The other five relate to interest rate trends and indicate that the impacts will be either negligible or highly unlikely. Extraordinarily, no attempt was made to assess the impact of any of the eight risk factors detailed in the business plan.

  8. The plan contains no assessments of likely economic conditions over the next ten years to provide a basis for its projections regarding loan defaults and repayments. Notwithstanding this, the Government has already decided that the long-term outlook justifies paying €7 billion more than the market value of the properties linked to the loans to be repaid over the next decade.

  9. The plan makes no reference whatsoever to the creation and role of Special Purpose Vehicles (SPV) which will be majority private-owned and play a pivital role in the execution of Nama's plans. Does Nama's right hand know what the left one is doing?

Instead of discussing the Nama Bill, the Dail should undertake an indepth review of Nama's business plan. 

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This page contains a single entry by Brian published on October 22, 2009 10:07 AM.

Nama's Business Plan was the previous entry in this blog.

Nama - The "real" Default Rate is the next entry in this blog.

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