In the foothills of a big climb

Twenty-seven months into a 10-year project, Nama boss Brendan McDonagh is confident the State will get back its €32bn investment

Even though he has built Nama up from the ground to an agency holding loans with a face value of €74 billion purchased with €31.8 billion of State-backed borrowings, the chief executive of the State loans agency is still in the foothills of what is a big climb.

The challenges to ensure that the State at least breaks even on Nama by the time it ceases to exist in 2020 can be seen in the €1.3 billion impairment charge it took on loans for 2011, reported on Wednesday. This reflected further falls in the property market and the hit on the Irish loans. The charge brought total impairments to €2.75 billion and left Nama with a profit of €247 million for 2011 (including a tax credit of €235 million).

“I have always had the view that short-term profitability on an annual basis means nothing in the context of Nama,” says McDonagh, sitting in the Djouce meeting room. “What is important is that the €31.8 billion liability of the State is zero by 2020 and that we have recovered all that money and the State doesn’t have another hole to fill. That means trying to get the best price for the assets and use the cashflow surpluses that we are generating on overseas assets to help the Irish market.”

Impairments on loans account for declines of more than 20 per cent on commercial property values and more than 25 per cent on residential property values since the €74 billion in loans were valued in November 2009. “Nobody ever thought back in 2009 that we were heading for bailout territory and that has downstream consequences for the Irish economy,” he says.

Nama would be “quite confident” that it will remove the €31.8 billion contingent liability facing the State by the time the agency is shut down, he says. But people shouldn’t expect that the State agency will be able to recover the €74 billion the property developers on its books originally borrowed from five lenders.

There is “no crock of gold out there” by way of assets that debtors have not disclosed, he says. Nama has recovered more than €500 million in assets not previously pledged for borrowings by the agency’s 780 debtors.

Still, the optimism shown about Nama’s prospects has softened as the property prices have continued to fall in recent years. In 2009 Nama was expecting to make a profit of €5.5 billion by 2020. Last year, that forecast had fallen to €1 billion. McDonagh said earlier this month that it would at least break even.

“What we are going to have to realise at the end of the day is what we are going to sell the assets for plus any additional security or assets we can get off the debtors,” says McDonagh. “I wish it could be more but I have to be upfront with people and that is what we are going to get.

“If you’re going to get anything above it, then it is going to be on the back of very strong economic recovery. I don’t see anybody predicting anything other than a steady ship from 2014. It is going to be about 2 per cent annual growth on average until 2020.”

McDonagh says Nama’s loans have “better characteristics” than those of other banks, as more than 90 per cent of the €17.5 billion of loans in the Republic are “urban-centric” in Dublin and the commuter belt around the city, Cork, Limerick and Galway.

Nama has spent €400,000 searching for hidden assets and this has yielded €5 million in the likes of company shares, properties and racehorses that had not been disclosed. But value for money is not the issue, he says.

“It is basically sending the message out that you have to be upfront with us if you want to work with us,” he says.

McDonagh declines to say whether there would have been a better way of removing that €74 billion of the most toxic loans, relating to developers and land speculators, from the five financial institutions.

The prolonged transfer of assets through 2010 and the uncertainty around the final size of the hole the State had to fill in the banks didn’t help confidence in the Government’s ability to cope at a time of a budgetary crisis.

“The policy decision was the policy decision at the time. I am precluded from commenting on policy decisions,” says McDonagh.

Nama has been contacted by the Spanish authorities who are looking at how to purge their own banks of toxic assets. If he could advise them to do anything differently, it would be around how the loans were transferred from the banks. “The transfers did not happen as quickly as I would have hoped because the banks didn’t have the information to be able to get it together, to package it up to give it to us,” says McDonagh.

The banks transferred nominal loans of €27 billion of the most indebted debtors by September 2010 but the death-by-a-thousand-

haircuts and mounting banking losses aroused concerns about the Government’s ability to cover them. The European Commission insisted that the assets were valued loan-by-loan in a painfully protracted process.

“If there was one thing that might have been done quicker, maybe at the start, it would have been for the European Commission to allow the transfer of assets in bulk form, estimate the discount and do the adjustment afterwards. That wasn’t in the gift at the time,” says McDonagh.

After September 2010, the remaining loans were moved at an estimated discount of 58 per cent. The actual discount came in at 57 per cent because Nama could see how the loans were composed from earlier transfers.