Economics 27/08/2009: Rabo and Namaeland

And so the news come out of the depths of Irish banking sector, like an old Soviet sub, with its nuclear reactor still glowing red. Rabo is, as logically expected, on its way out with ACC delivering 20% loans losses and values on underlying assets down 50-60%. Well, there’s more to come according to them and there is no hope a recovery mid-term. This is all happening while the Government is spinning the idea that Nama is going to be just fine because, apparently, it will be taking loans with low LTVs… Hmmm...

Let me see – anyone wonders why Rabo is not buying this story? Simple: a loan written in 2007 with an LTV of, say 50% in the amount €100 had collateral underlying it valued at €200 back then. Table below shows the expected losses on Nama purchasing such a loan under Rabo impairments and stated declines in underlying value.

The above factor in the rolled up interest and a 20% impairment rate on loans. Interest accrues over 2007-2010 and all values are brought into 2009 Euro. 2007-2009 inflation is assumed to be cumulative 2%. 2010 inflation is assumed to be zero. Interest roll ups are taken at 7% in 2007, 9% in 2008 and 11% 2009-2010.

What is clear from the above is that even before we factor in the cost of bonds issuance, the cost of subsequent recapitalization, and the costs of operating Nama, the required gains on 2010 expected values of the underlying properties (assuming 20% are completely bust) required to restore Nama to break-even on its purchases in 2021 will be in the range of 2-5.5% annually in the case of 40% discount paid by Nama on assets and between 4% and 8.3% in the case of 30% discount paid by Nama.

Now, let us factor in  the cost of financing the Nama bonds and the cost of recapitalization post-Nama. Table below shows identical results to the table above, except with the bond financing cost (over inflation – of 3% pa through 2021), plus Nama recapitalization demand at 8% on the value of the loans transferred (a gross underestimate, but hey, let’s give them some slack):

Yes, folks, that is right – to get break even (almost, as we still did not count the cost of Nama operations, plus the cost of redeveloping loans, etc, but we can cancel these out with property yields, just to cut these endless estimates) on Nama, Ireland Inc will need to run annual property markets inflation of 12-15.1% per annum for 10 years after 2011! And this is based on 50%-60% LTVs!

I mean, are you surprised Rabo and the likes are not rushing to buy into our “Low LTVs” Namaeland?

Note of caution: I am just using Rabo numbers here - this is clearly not a complete picture of Nama, but it does give us the latest up-to-date picture of what is going to be happening in Nama.