tag:blogger.com,1999:blog-8817171247555815363.post4937377969695352979..comments2024-03-26T05:57:44.937+00:00Comments on True Economics: Economics 28/09/2009: Aggressive pre-Nama re-writing of loans?TrueEconomicshttp://www.blogger.com/profile/07350536454228478974noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8817171247555815363.post-18676615133359406712009-09-28T20:32:03.767+01:002009-09-28T20:32:03.767+01:00I wonder could you rig it so LTV is greater than 1...I wonder could you rig it so LTV is greater than 1 simply because the 1st tranche of the loan was much larger. Now there'd be a money maker - for someone.Philipnoreply@blogger.comtag:blogger.com,1999:blog-8817171247555815363.post-85956891546427397972009-09-28T16:01:19.919+01:002009-09-28T16:01:19.919+01:00Adrem - you are right on numbers - see revised.
...Adrem - you are right on numbers - see revised. <br /><br />I am of course assuming that the work-out process for Nama loans pricing will be not exact. This is an assumption. Now, if it is and Nama disregards rolled up interest, guess what - somehow this has to be covered, for the entire amount of the current loan (rolled up interest inclusive and charges and costs rolled up inclusive, plus whatever the bits that are cross-collateralized - in short all there is on the books today, not on the date of loan origination) require cover by capital base. If Nama were to repair capital bases of the banks, it will have to take these amounts on-board and give banks something in return.<br /><br />It is, really, that simple.<br /><br />Cross-collateralization: banks gave multiple loans on same properties in several forms -<br />1) most commonly, a property was valued several times consecutively and whatever capital gains acrued on the property, these gains were re-mortgaged under new loans;<br />2) also commonly, capital gains were priced out of new building permits being extended to the properties. I am aware of several cases of mega deals (hundereds of millions borrowed) where a developer/investor bought a site with the site itself being collateralized for this first round of borrowing at the market value, then rezoned it, taking out a new loan against the site value after rezoning in excess of original loan, then obtained a planning application and re-collateralized the site again;<br />3) less commonly, the banks simply did not check if a colleteral property has already been pledged elsewhere.<br /><br />What happens here then?<br /><br />Suppose a site was bought for 100mln at 75LTV, so that the developer borrowed 75mln for it. New zoning applied lifting the site value to 200mln, providing another 75mln loan facility at 75%LTV on 200-100mln capital gains. The building permission was then granted that, say lifted the site value to 300mln, and a new loan was taken out at 75LTV. Total value of the site was 300mln. Suppose each step in borrowing and capital gains took 1 year (a very short period of time), suppose interest rate was 5%. This means that<br />Loan 1 now totaled Euro83mln<br />Loan 2 now totaled Euro78.8mln<br />Loan 3 now totals Euro75mln.<br />At loan 3 origination, LTV ratio on the entire site was 79%.<br /><br />I assumed in my calculations on the blog that 20% of loans are written against sites that are cross-collateralized - so that other banks hold claims against the same site.<br /><br />This assumption is based on a guess. It can be challenged if someone has any evidence on better numbers.<br /><br />Now, that means in example above that some 20% of the site value was cross-collateralized with another bank. If it was the first loan that was cross-collateralized, LTV rises to 257.2/300 or 85.7%. If all three loans were cross-collateralized at 20%, the resulting LTV is 284.2/300 or 94.7%.<br /><br />So here you have the maths on Nama - 75LTVs on each loan in reality mask 95% LTV of total loan package.TrueEconomicshttps://www.blogger.com/profile/07350536454228478974noreply@blogger.comtag:blogger.com,1999:blog-8817171247555815363.post-40001635643055887412009-09-28T15:28:31.282+01:002009-09-28T15:28:31.282+01:00How does the cross collateralisation work? It all ...How does the cross collateralisation work? It all seems a bit sneaky (and therefore likely to be going on !) alright. Not sure how the bank benefits though. The loan evaluation questionnaire will establish that the loan has been non-performing for some years and has now moved to a moratorium. Not sure that it would be treated as performing on that basis? Would it? To an extent . . so what if it is? The valuation process isn't (apparently) as simply as "we pay more for performing loans". It is supposed to be done loan by loan property by property, valuation by valuation. Using the high level figures we have and applying them here if the loan was 100M in 2006 on a 75% LTV does that not imply a 133.33mn asset originally? So (to follow through on the NAMA numbers) if that asset has fallen in value by 47% it implies an underlying asset value of c 72mn. So it all depends on what they pay for the (now) 118mn loan. As it is completely non-performing to date with no interest or capital payments I assume they would hit it with a fairly hefty haircut. Presumably 35% ish? Too much? Maybe. Anyway something along those lines - that means they'd pay the bank something around 77mn for the loan. That 77mn would by them an "obligation" on 118mn plus an asset worth 72mn. I'd agree with you that the "obligation" is probably worth feck all.<br /><br />Am I missing something? Can the banks really get paid more simply by adding rollup covenants to existing non performing loans? Seems unusual?Unknownhttps://www.blogger.com/profile/17627813366693973836noreply@blogger.com