July 2010 Archives

Nama Business Plan - 1

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I wish to make the following points about Nama's new business plan:

  1. At best, it is a "concept plan" describing operational arrangements, short-term work plan and structures. It may be a plan but it is not a business one.

  2. Considering that it relates to a loan portfolio of €81 billion, it includes no pro-forma projections and its financial forecasts are confined to a simple 4x4 table containing only nine values summarising Nama's activities for three scenarios over the next ten years! 

  3. The plan indicates that Nama will use the amortised cost method of accounting. This ensures that the true extent of the bale out and foregone interest, exceeding €40 billion, will not appear in its accounts.

  4. Nama says that it will take a neutral view on future property prices, will not engage in speculating hoarding and will wind up in just seven-ten years. This points to a short-term, uncommercial approach and to fire sales, negating a key reason for setting up Nama.

  5. Nama's intention to pursue debtors to the "greatest possible extent" really only refers to recovering the cost of acquiring loans from the banks rather than to the much higher nominal value of the loans owed by developers.

In contrast to its own plan, Nama is seeking extremely detailed business plans from its debtors and its recently published quarterly financial report contain dozens of pages of tables. Clearly, Nama's approach is to disclose as little as possible about future prospects and intentions but endless detail after the horse has bolted. This resembles the "everything is fine" strategies of the banks that it is meant to be rescuing.

Letter published in the Sunday Business Post on 11th July 2010.  For a more detailed assessment of Nama's plan, see Nama's New Business Plan

Nama's New Business Plan

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Nama's latest so-called business plan (dated 30th June 2010) is by no stretch of the imagination a business plan in the accepted sense of the word. At best, it is a "concept plan" describing proposed operational arrangements, short term work plan, organisational and corporate structure along with a review of progress and series of statements relating to accounting matters, proposed operating principles and similar. It may be a plan but it is certainly not a business one.

The plan is remarkably short on numbers for a business plan linked to a loan portfolio of €81 billion. There are no operational or financial projections of any note and no pro-forma projections of any kind. Clearly Nama has learnt from the poor reception given to its first business plan (October 2009) that the fewer the numbers it supplies the better (for it).

Our comments on Nama's first business plan include the following:

In the latest plan, financial projections are confined to a simple 4x4 table containing just nine (yes, nine) values presenting the net present values of Nama's activities over the next ten years for three scenarios i.e. it offers a mere three values per scenario.

Given that Nama will be taking over loans amounting to almost half of Ireland's GDP, its business plan should, at a minimum, have included "scenario-based" P&L statements and balance sheet projections as well as cashflow forecasts for the ten years along with explicit and clear assumptions. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue. For more on this, see my Open Letter to Nama's Board.

Some specific items in the new plan that caught my attention:

  1. It is even less transparent and useful than the initial draft. After the draft was published, I had thought of sending Nama a copy of Free-Plan, a business plan template available for free download from the PlanWare website. It has over 0.25 million registered users covering a huge range of industries etc. If anyone from Nama is reading this, they can download Free-Plan using this link http://www.planware.org/freeplan.zip It would not take much effort to adjust it to suit Nama and would result in vastly improved plan both as regards scope, structure and content.

  2. The new plan indicates that Nama will operate as an "independent commercial entity". However, it also states that its life will be seven-ten years (as determined by the Minister for Finance!). This is much too short a time frame for Nama to realise an optimal return for taxpayers - the chances are that Ireland will still be in the "recovery ward" after the 2008-10 recession and Nama will be selling off properties or doing deals close to the bottom of the cycle.

    Strangely, the plan indicates that "NAMA will not engage in any speculative hoarding of assets. Strategy will be shaped by a neutral view as to future market movements on a portfolio basis". This strategy is completely un-commercial and will ensure that third-parties, rather than taxpayers, will get the greatest benefit from any upswing in the property market as we approach the 2020s.

  3. The plan states that "Nama will pursue all debts owed by debtors to the greatest possible extent" on page 2, 7, 8 and 10. It also says that "debtors will continue to be liable to Nama for full loan balance recovery of €81 billion" but that the recoveries assumed in its NPV projections are based on the amounts that would be recovered if NAMA foreclosed on debtors and underlying assets had to be realised by reference to the long-term economic value of the assets".

    This all means is that Nama's "official" debts only relate to the actual payments made to acquire loans from the covered institutions rather than to the nominal value of these loans. In other words, Nama does not appear to be officially expecting (or demanding) any payment of the haircut on these loans with the result that its debtors could be securing a bale out of up to €40 billion (based on the 50% discount being paid by Nama for the loans). This view is confirmed by looking at the accounting treatment of the loans (€814 million nominal) from EBS and INBS which were taken into Nama's balance sheet (at €371 million) during the first quarter of 2010 (see page 17 and accompanying note in Nama's quarterly financial statements for period ended 31 March 2010).

    This huge "forgiveness" of debtors i.e. bale out for developers, merely merits a note in the accounts. At the very least, Nama should show the nominal value of the loans up front in its balance sheets and clearly indicates write off as they arise.

  4. Nama is adopting an accounting policy (page 18) which "considers expected cash flows, not contractual cash flows, on loans. This means that the Profit & Loss account will reflect what is happening in reality in cashflow terms, rather than taking income to the Profit & Loss account that is not cashflow-based e.g. NAMA will not accrue interest rollup to its Profit & Loss account. It reflects an accounting approach which values the loans by taking the 'actual' initial value plus future expected cashflows less potential impairments."

    However, it also means that Nama will be effectively writing off almost all rolled up (or unpayable) interest arising over the next ten years! Based on the draft business plan (October 2009), we estimated that write offs of rolled-up interest could amount to €11 billion over the ten years to 2020 - see Nama - The "real" Default Rate for more on this.

    The latest business plan indicates that only about 25% of acquired loans will be income producing (as compared with 40% estimated in the October 2009 plan) and suggests that our original estimate for rolled up interest write offs is very conservative.

  5. The discount rate used in the scenario projections in the business plan was 5.5%. This is much too low to cover the risks facing Nama. For example, the October 2009 plan indicated that the NPV (using a 5% discount rate) for its activities over the ten years to 2020 would be €4.8 billion. The base case in the latest plan suggests a lower NPV of €1 billion.

    When account is taken of the plan's expectation that Nama's operating costs will be €1.04 billion lower than originally envisaged, there has been deterioration in Nama's projected profitability of about €5 billion in the space of just nine months. Proof positive that Nama is not risk-free and that a much higher discount rate should be used.

  6. The projected NPV in the new plan for Nama's activities over the ten years is €1 billion (scenario A) as compared with €4.6 billion in the initial plan.

    If, for simplicity, we ignore the the effect of discounting and simply add back the €2.64 billion expenses to the projected NPV in the initial plan we get a value of €7.44 billion representing the total projected contribution to Nama's expenses and "profit" over the ten years. If, for the new plan, we add back the updated forecast of expenses (reduced to €1.6 billion) to scenario A's NPV, we get €2.4 billion. The difference (€5.04 billion) is a indicator of the deterioration in the outlook for Nama's activities in just nine months. If this trend were to continue then Nama is in real trouble.

  7. Given the inadequacy of Nama's published business plan, I wonder does it have a different one for internal use and, if so, is it clearer or different? In either case, surely it should have been published? How acceptable is it for Nama to have two separate plans but keep one hidden? Surely, there should be only one plan. 

Where is the openness and transparency?

Its not there and, worse still, there are clear signs that Nama is striving to bury losses of up to €50 billion (haircut plus interest write offs). In contrast, it is seeking extremely detailed business plans from its debtors and the statuary financial reports covering its first three months operations contain dozens of pages of tables.

Clearly, Nama's strategy is to disclose as little as possible about future prospects and intentions but endless detail after the horse has bolted. This is no way to run an organisation that could end up costing taxpayers tens of billions and resembles the "in denial" strategies of the very same banks that it is meant to be rescuing. 

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