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Banking on NAMA: The Fall of the Celtic Tiger?

Banking on NAMA: The Fall of the Celtic Tiger?. 17 th Annual ERES Conference Milano June 2010 Jim Berry Terry Grissom Martin Haran Stanley McGreal University of Ulster. Irish Response to the Banking Crisis. Unprecedented Government intervention Irish Government underwrite deposits

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Banking on NAMA: The Fall of the Celtic Tiger?

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  1. Banking on NAMA: The Fall of the Celtic Tiger? 17th Annual ERES ConferenceMilano June 2010 Jim Berry Terry Grissom Martin Haran Stanley McGreal University of Ulster

  2. Irish Response to the Banking Crisis • Unprecedented Government intervention • Irish Government underwrite deposits • National Asset Management Agency (NAMA) • NAMA is not a ‘toxic bank’ • EU Commission Approval Secured – Feb 2010

  3. BANK NAMA Bank sells Borrower A’s €100m loan to NAMA NAMA Pays bank with Government Guaranteed Securities* Borrower A continues to owe €100m to NAMA, who assume responsibility for the loan until it is paid. *Amount determined by the value of underlying Assets of the participating institutions The NAMA Model

  4. NAMA Loan Portfolio • €81bn Loan Transfers (March 2010) • €62bn Loans are Performing • Property and Associated Loans • Circa €35bn Land • Circa €21bn Development • Circa €25bn Associated Loans • €47bn Estimated Value of Underlying Assets

  5. Financial Institutions – Loan Distribution

  6. Distribution of Securities Exchanged for Loans

  7. Yield Input Illustration of Cash Flow and IRR Inputs for Normal Market Appreciation £95,000 £17,000 £78,000 £37,598 £19,500 Ve £19,500 Ve(t) £1,098 Vo Equity Build-up, amortization £58,500 £57,402 $58,500 Vm -£10,000 Vm(t) 1 2 3 4 5 £7,410 £7,781 £8,170 £8,578 £9,007 NOI £6,175 £6,175 £6,175 £6,175 £6,175 DS £1,235 £1,606 £1,995 £2,403 £2,832 EFC

  8. A Key Problem issue: Mortgage Balance Exceeds Collateral value - Only Direct Experience if need to sale Property Value Loss £78,000 £19,500 Ve £19,500 Equity Eroded EBU Vo £1,098 £58,500 £57,402 Value loss below Debt, say : £30,000 Vm Vm(t) Cash Flow ? Issue is solvency – can cash flow cover obligations?

  9. Aggregate Asset and Debt Analysis • {[A(1+git)]dt+(1-)[A(1+git)]}MP1/snYe • Vm-DS-B

  10. Aggregate Debt to Collateral Situation Value Cash Flow from Mortgage Pool and Securities Property Value (Vo) Equity growth in Vo|d Mortgage Value Diminished Value (Vo|d) Time

  11. Case of Distressed Land Assets Land value forecast growth with development assumed Value VL (1+tx+i) Land Value Requirements: growth at tax rate (tx) and opportunity cost (i) Drop in VL trend Problem: Windfall Tax Impact : VL (1+tx+i) Wtx=0.80 Time

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