Showing posts with label Value destruction. Show all posts
Showing posts with label Value destruction. Show all posts

Sunday, July 26, 2015

26/7/15: It Rains, It Pours... And Next There Can Be a Deluge ...over Nama


When it rains, it darn well pours… in the case of Nama and Irish Banking Inquiry, the rule is iron clad.

First, Nama:

Just yesterday I posted two links on most recent allegations concerning Nama in Northern Ireland. And today, we have a couple from the Republic.

Per first link, apparently, "A furious row has erupted between developer Michael O'Flynn and Nama following his appearance before the Banking Inquiry." The row is about Mr O'Flynn's claim that he was pressured to sell assets to 'preferred bidders' over the top bidders.

Nama says this is not true.

We have no idea as to who to believe, although Mr O'Flynn has nothing to gain from making up anything about Nama, given he has now existed the wretched institution and is free to return to normal life. And Mr O'Flynn appears to have more to say about Nama that seems to be pretty much in accord with what other Namaed developers are saying and what Nama seems to be denying as well. "Mr O'Flynn said while the O'Flynn Group had formulated a business plan for Nama aimed at repaying all the money it owed, this had been rejected without any discussion in relation to its content".

Which, of course, brings us back to that notion of value destruction that Nama should address before any inquiry into Nama attempts to address it.

Recall that Nama required all developers to submit Business Plans. Following their reviews by Nama, Nama issued simple 'decline' letters, requiring new plans to be re-submitted. Nama subsequently rejected a vast majority of these as well. So far - pretty bad, but it gets worse. Nama rejections came with zero specific details given as to the exact reasons for the agency decision. These plans were prepared by professional teams (not by developers personally) and contained very detailed pricings, costings, analysis etc of assets covered by the plans, based on external evaluations, existent permissions and ventures, and so on. Nama appears to have offered no substantive reasons for the rejections of substantive plans. In the case of O'Flynn the allegation is now on the record. In at least five other cases that I am familiar with  the same has been also alleged and in some formed part of submission to the courts.

The rejections of at least some plans led to Nama pursuing strategies for managing underlying assets that can be questioned in terms of their ability to deliver maximum value return to both the taxpayers and the original borrowers (Nama owes the latter the duty of care in relation to their assets). The shortfalls arising from Nama failure to execute reasonable plans was loaded, through personal guarantees, on the original borrowers. Which, effectively, means that for some reasons, undisclosed to anyone, Nama has opted to potentially dump vast amounts of risk and costs onto original borrowers. It would be damaging enough were this was done with at least a token of propriety in the form of explaining the rejection of the Business Plans. But it is doubly bad given that Nama seemed to have simply dismissed the Plans without any explanation.


The second link is more distant to Nama operations than the first, so I won't cover it in any detail here. Still do enjoy Indo's "Daly's charity role is 'private'". Hint: keep an eye out for familiar names...


No wonder the whole place at the higher reaches of the Grand Canal St is now resembling the flock of seagulls abandoned at sea by a fishing trawler: noise, feathers, chaos…

Stay tuned for the Banking Inquiry shambles post next.

Wednesday, June 17, 2015

17/6/15: 10 Cases Worth Asking Nama About...

So we are having an inquiry into IBRC on foot of an allegation that the 'bank' sold Siteserv asset at a loss to the taxpayers of some EUR10 million or so compared to another bid. Or you might want to hike that loss to EUR15 million if you consider a simple fact that EUR5 million gifted to the Siteserv shareholders in this deal was at best bizarre, at worst negligent.

Then again, we are not having an inquiry (yet) into the ways in which Nama has been trading.

May be we should. For one, there are questions worth asking in the context of economic value destruction concept outlined in this post: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html

Why? Because there are some, shall we say, slightly exotic things that might be happening over there.

Define: value destruction as an action or a strategy for managing assets that results in asset value realisation at sale that is below the alternative value that can be obtained by adopting different approach to managing the asset. Now, take some public domain information:

1) In late January 2014 Nama sold project Holly portfolio of Irish non-performing loans to Lone Star Funds for "around €220m and reflecting a circa 41% discount" on par value of the loans. "The nominally-valued €373m Project Holly is comprised of 28 commercial property investment and development loans all lent to Sean Reilly’s McGarrell Reilly Group, secured by around 40 assets," as reported in CostarFinance (http://costarfinance.com/2014/01/23/lone-star-wins-namas-project-holly-loan-sale-paying-around-e220m/). In March 2015 Lone Star Funds sold Project Holly portfolio to US fund Starwood Properties for €350 million. http://costarfinance.com/2015/03/12/starwoods-mortgage-reit-acquires-lone-stars-dublin-office-pool-in-e350m-debut-equity-investment/. Which means the vultures got a return of 59% over 13 months or cool annualised rate of return of 53.5%. That is doubling your money every 16 months. The portfolio included already developed and operating properties, so Lone Star did not add any value to them to make this sort of a return - it simply put up funds in early 2014 to cover the purchase and the sat on the assets for just a year before flipping them. Thus, Nama lost taxpayers a cool EUR130 million and it also wasted EUR130 million of Sean Reilly’s asset. Question is - any inquiry into this transaction by Nama forthcoming? Question two is: did Sean Reilly incur a claim from Nama due to this loss?

2) Property at One Warrington Place, Dublin 2 was sold by Nama to the US fund Northwood Investors for €27 million on 25th of April, 2012. Based on reports in the media, Nama provided 'staple finance' on the deal, whereby it took an unknown percentage of the final price paid as a deposit from the buyer, and allowed the buyer to repay the remainder of funds over some period of time. In July 2014, the building was sold for €42 million to Irish Life http://www.d2private.com/portfolio/one-warrington-place-dublin-2/. This implies an annualised rate of return of 27.2% doubling your money every 31 months. Zero value was added to the building by Northwood as it was fully leased. Given this was a staple finance deal, Northwood most likely had to put down not much more than a few million for taking charge of the asset. Again, we have no idea how the original developer was treated with respect to this loss that Nama crystallised, but we do know that taxpayers got shortchanged on some EUR15 million. As an aside, here is Namawinelake description of the 'financing' side of this deal: "the Northwood deal was NAMA’s first vendor finance deal, whereby NAMA, accepted part of the purchase price by way of a loan. The interest on the loan would have been around 3%, and repayable within five years. The property was yielding 7.25%, based on a €27m purchase price." So Nama 'gifted' Northwood a guaranteed 4.25% uplift via staple financing arrangement on the amount covered by deferred payment - a margin that could have remained taxpayers'. Reports had it, Northwood only put EUR8 million down on its EUR27 purchase.

3) The Forum Building, IFSC, Dublin 1 was sold by Nama for €28 million to Atlas Capital Group (https://namawinelake.wordpress.com/2012/12/30/nama-sells-dublin-office-block-for-e28m-with-eye-watering-10-yield/) in late December 2012. Subsequently, it was flipped for €37.8 million to Hibernia REIT (http://www.irishtimes.com/business/commercial-property/hibernia-reit-acquires-forum-building-in-ifsc-for-37-8m-1.1904874) in late August 2014. There was no value added to the building as it is fully let to Depfa Bank on an annual rent of €40 per square feet on lease which expires in 2029. So over 20 months, the return on this purely speculative holding totalled 89% with annualised rate of return of 46.5% or doubling of your money in roughly 18 months. Taxpayers lost EUR9.8 million.

4) Per Irish Independent report: "The site, at 1-6 Sir John Rogerson's Quay in Dublin's Docklands was sold by NAMA to Australia-based student accommodation firm Urbanest for €7.5m in June 2013. Property investment company Hibernia Reit then paid €17.75m for the same site in August this year - a 136pc increase." http://www.independent.ie/business/irish/nama-site-was-sold-for-double-the-price-after-barely-a-year-30680193.html The set of transactions involving the site is quite bizarre. Urbanest bought the site with a plan to develop student accommodation. It failed to secure planning permission for that and sold the site with no new value added to it for "close to EUR10 million" to "a consortium of private investors" February 2014. Four months later, with no value added to it, the site was resold once again to Hibernia Reit for €17.75m. Adding insult to the injury, the site "has planning permission for 102,000 sq ft of offices, about 5,000 sq ft of retail, two live & work units and one residential unit along with 34 parking spaces. The planning permission expires in 2018". Which means large share of the site value is already attached to it (planning permissions attached to sites carry a large share of the value of the site). At least Urbanest were trying to add more value to the site, but - here's additional farce - it couldn't. Taxpayers lost EUR10 million.

5) Dock Mills, Grand Canal Dock, Dublin 2 was sold in 2013 by Nama to the developer Chris Jones for €1.3 million. Spent €1.4 million converting to offices and then sold on for €13 million to Google in January 2014 (http://www.irishtimes.com/business/commercial-property/google-buys-former-warehouse-at-grand-canal-dock-1.2081392). At least Jones added some value to the building, raising his original investment a return of 381 percent in one year. Taxpayers loss (remember, Nama employs 'the best specialists in property markets' available in Ireland, who, in theory, should have been able to do what Jones did many times over) EUR12 million.

6) There is a big issue with Nama operations as the example of the Battersea Station in London exemplifies. Nama held a loan attached to Battersea that is 'acquired' for roughly EUR480mln. Nama sold the loan in a fire sale in June 2012 for EUR600mln, making, officially a 'profit'. The loan recovered 100% of the value. However, Battersea is expected to generate EUR9-10 billion in profit for the buyers, led by SP Setia. The site is 40-acre sized South Bank of the Thames location with a planning permission for 8.5 million sq.f. of development attached to it. At the time of sale, there were plans afoot for the Tube new northern line extension and a pedestrian bridge linking Battersea with the northern part of London. In other words, the key value points related to EUR9-10 billion in expected profit have already been in place. The sale by Nama represents a clear case of opportunity cost being generated to expedite sales of non-Irish properties under the pressure from the Troika for Nama to generate early disposals. It is also a sign of just how poor Nama development opportunity foresight is. In a joint venture as a passive participant, Nama could have expected to get around 20 percent  share of the profit. Assuming net profit of around EUR5-6 billion, that means an opportunity cost of early disposal of some EUR1.0-1.2 billion. There was virtually no cost for Nama to carry the loans into longer term development. Even if Nama were to hold off on selling the site for another 12-24 months, the likely foregone return on the site would have been some EUR120-150 million. (http://www.independent.ie/irish-news/nama-lost-a-fortune-on-power-station-sale-29950832.html)

Update: in response to some queries about Batttersea Station sale, here are couple of links: http://www.costar.co.uk/en/assets/news/2012/July/EPF-SP-Setia-and-Sime-Darby-complete-400m-Battersea-Power-Station-buy/ and http://www.irishtimes.com/business/commercial-property/nama-lloyds-to-seek-buyer-for-battersea-power-station-1.10783. Contrary to the arguments presented to me by some readers, Nama was in the driving seat of the process, at least Nama is the one that ended up facing the risk of defending the sale: https://namawinelake.wordpress.com/2012/05/01/treasury-holdings-sues-nama-for-hundreds-of-millions/

7) Nama sale of the Chicago Spire was a massive miss. Chicago Spire is a large development project located in the U.S. city of Chicago, on 2.53 acre site located immediately north of the Chicago River and bisected by the Lake Shore Drive. The site is zoned as a planned development with present zoning allowing for FAR of 25:1, which means the site can sustain 2.75 million sq.ft. of improvements. Nama-held liabilities associated with the Chicago Spire totalling US$93 million, including rolled up interest. Liabilities to the contractors added some USD22 million but were not held by Nama. CBRE estimated in January 2014 the value of the Chicago Spire site and associated assets at US$327 million at the upper envelope of valuations and with lower applied density at the lower envelope of US$255 million. Nama refused to fund further development of the project or to allow such funding to be raised by the developer in the markets. Nama sold USD93 million (EUR68.4 million) of its loans at close to 40 cents on the dollar, for USD37.2 million (EUR27.4 million). Many turns and twists in this saga aside, the loss to taxpayers on this transaction by Nama can be computed, at lower end, as the loss on the fact that the original developer had a connected party willing to bid some USD110 million on the project and that CBRE's lower end estimate is at USD255 million. Which means a conservative loss of some USD70-USD185 million. This disregards the fact that the Spire had pre-sold a large share of properties to be developed, and Nama actions on the Spire forced these pre-sales to be cancelled.

8) There is an issue of Nama interest rate hedging, which was costing the agency, at around 2012-2014, some 1% of the interest-paying bonds, or roughly EUR200 million per annum. Not exactly cheap pennies when one considers that the rates have been declining, not rising. Here's a living example: in 2013 Annual Report, Nama shows that it made gross profit of EUR6 million on its underwriting the IBRC. But Nama hedging of the interest vis-à-vis IBRC cost the agency EUR8 million. Net result - a loss of interest of EUR2 million. Nama also rung in administrative expenses relating to IBRC of some EUR6 million in 2013, which means total net loss for Nama from its dealings with IBRC stood at EUR8 million in that year. Total cost of dealing with IBRC for Nama was, therefore, greater than the total cost charged by IBRC liquidators.

9) In CAG report looking at Nama operations over 2010-2012, the agency was shown to be net yield of 5% on its holdings of rented properties. Net of funding cost, the yield was around 4% pa. At the same time, Nama was aggressively disposing of rented properties. The only way that strategy made sense was if Nama expected declining capital values in the markets where it was selling properties: U.S., UK and (smaller segment) Ireland. Nama was, during that time, of a view that property prices will rise in all three markets, directly contradicting the logic for accelerated disposal. Namawinelake provided an example of "the madness of NAMA’s strategy to dispose of rent-producing properties. Take a €100m commercial property which is generating €5m per annum. NAMA’s cost of funding is 1% or €1m. So,NAMA is generating a profit of €4m. In addition, the likelihood is that the value of the underly-ing property is increasing. Commercial prices are up 7.7% in the UK in the 12 months to April 2014, commercial prices in Ireland are up 14.1% in the four quarters to Q1,2014. So, by selling the property at the start of 2013, NAMA will have foregone €4m in profit in 2013, [and] the benefit of the capital appreciation of €7.7-14.1m." Chop change this ain't: hold a rent-yielding asset for an extra year, get a return of EUR11.7-18.1 million on each EUR100 million, net of all costs. Speculation aside, actual numbers: Nama's interest income was down 20% in 2013, but Nama's non-disposal income (primarily income from rents) was down €400m or 33% in 2013, having declined b EUR300 million annually in 2010-2012. That's cool EUR1 billion foregone in just 3 years in rental income alone, and capital gains lost of some 21% - estimating very conservatively.

10) Small, but visible, Booterstown Marsh site was sold by Nama for EUR400K and resold less than two years after that for over EUR1 million.




You can follow the topic of overcharging and other sharp practices and questionable strategies deployed in the post-banking crisis resolution process in Ireland here:


  1. Deputy Peter Mathews June 2015 speech on the issue of overcharging by Anglo, its legacy and issues relating to Nama was covered here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html
  2. My summary view of the Anglo’s sharp practices toxic legacy: http://trueeconomics.blogspot.ie/2015/06/11615-anglos-toxic-legacy-it-is-still.html
  3. Mr. Declan Ganley’s Affidavit from 2013 concerning overcharging: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html
  4. Deputy Mick Wallace’s speech in June 2015 delivered in the Dail on the subject of Nama and Anglo legacy with my introduction of the concept of value destruction: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html 
  5. John Morrissey’s legal letter on overcharging: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html