The agency's unaudited accounts a reveal a startling €46 million for administrative expenses, writes SIMON CARSWELL,Finance Correspondent

THAT THE National Asset Management Agency (Nama) has had to write down a further €1 billion on loans that have already been subject to “haircuts” of €42 billion at the banks is a worrying sign.

On Wednesday, the State’s “toxic” loans agency released its unaudited figures for the final quarter of 2010 which give the first picture of the performance in its first year of operation.

The €1 billion impairment provision left Nama with a loss of €714 million for the year.

The accounts for 2010, however, still have to be audited by the State’s watchdog, the Comptroller and Auditor General (CAG). The €1 billion figure has still not been independently verified and so may well increase following the CAG’s appraisal of the loans.

Further declines in the Irish property market are to blame for the writedown in the value of the loans on Nama’s books since the they were valued in November 2009 as part of the process of acquiring them from five lenders.

The agency, like most involved in commercial property, has used the IPD (International Property Database) index to determine the value of property loans. Commercial property values have fallen by an average of 10.7 per cent since November 2009 which is how Nama’s writedown materialises.

Retail values have dropped 12.9 per cent since then, office values 12.2 per cent and industrial values about 14.9 per cent, according to IPD. Land values are estimated to have dropped by between 10 per cent and 12 per cent during 2010.

From peak, development land values have fallen by about 60 per cent in Dublin. In some rural areas – where there is little or no prospect of housing demand – development land has been written down by up to 90 per cent.

Property economist Patrick Koucheravy at estate agents CB Richard Ellis said actual estimates are very difficult to determine due to the lack of banking funding for land purchases which leads to few transactions by which to truly grasp the fall in land values.

The decline in property values in a market as dislocated as Ireland has been offset somewhat by the buoyancy of the UK market.

Nama has acquired loans with a face value of €72.3 billion from the banks, but valued the loans on acquisition at almost €30 billion (now €28.6 billion following the €1 billion impairment charge).

Of this, €10 billion are in the UK and the bulk of the remainder, about €17.5 billion, are in Ireland.

The UK market has seen an uplift of about 7 per cent over the past year, which is why Nama has targeted asset disposals in the UK ahead of the domestic market.

Among the Irish loans are about €8.5 billion in land and development, of which €5 billion are in or around the Dublin area where values have fallen sharply but not as dramatically as in rural areas.

Outside Ireland and the UK, Nama has loans of about €3 billion, including loans on about 80 properties in the US and 55 in Germany, with other assets in Portugal, France, Belgium, Spain and as far away as South Africa.

Nama can recoup losses on loan values from the banks. The agency was structured on the basis that the banks would be paid in senior bonds, accounting for 95 per cent of the price paid for the bank loans, and subordinated bonds, covering the remaining 5 per cent.

The agency has stopped interest payments due on its subordinated bond as a result of the impairment charge and can choose not to pay the outstanding capital of about €1.5 billion due on this debt if Nama is left with a final loss. So, in effect, the banks bear the first loss.

Bank of Ireland first disclosed problems at Nama when it said in a trading update last February that the agency would not be paying a coupon on its subordinated bonds when it took an impairment charge of €70 million.

This arose as a result of the agency’s decision not to pay a discretionary coupon on March 1st.

The withholding of money on bonds from the banks, however, is largely academic. Given that the banking system is almost fully nationalised, any clawback will involve transferring losses from one arm of the State to another. The taxpayer must pay either way.

While Nama’s profit and loss account makes for grim reading, its cash flow statements offers a better insight into whether it can pay its way over the coming years.

The agency had net cash of €740 million at the end of 2010. This now stands at €1.1 billion.

For Nama to achieve its target of reducing its debt by 25 per cent by 2013, the agency will have to repay some €7.5 billion in debt over the coming 19 months.

Therefore the agency has to keep the cash flowing in. Nama has relied on its strategy of pressurising borrowers to sell properties and to repay loans from the proceeds rather than seizing assets.

This strategy seems to have worked well so far – the agency approved asset sales of €2 billion last year and this has since risen to more than €3 billion, though this was shared with non-Nama banks.

Based on these asset sales, the agency appears to be on track to meet its target, though it will be relying on the UK market to continue to perform strongly over the coming two years.

Thereafter, Nama will be relying on some kind of uplift in the Irish property market to keep cash flowing into its coffers. Looking at the level of non-performing loans, this looks challenging based on current values.

Just 23 per cent of the loans at the agency are performing, which is down from an estimated 25 per cent in the Nama business plan. The agency estimates that this will rise again to 25 per cent when a residual €3.5 billion of loans transfers to the agency.

Loans of about €1.3 billion connected to businessman Paddy McKillen who successfully challenged Nama to the Supreme Court on the basis that his loans are performing and shouldn’t be moved to Nama are included in these.

Despite the increase in non-performing loans and the €1 billion impairment, Nama has managed to cover its expenses and paid off some debt owing to the banks.

The accounts show that 8,149 loans out of a total of 10,726 on Nama’s books were in arrears of 120 days or more. These delinquent loans totalled €39.5 billion (face value) and €13.5 billion (as Nama has valued them).

The agency had agreed memorandums of understanding with 16 of the top 30 borrowers and is close to completion on two more.

Enforcement procedures have been taken against seven of the top 30 borrowers and negotiations are continuing with a further five debtors.

Glenkerrin, the property company owned by Ray and Danny Grehan, became the latest developer to be subjected to Nama enforcement action when statutory receivers were reappointed to the company on Wednesday.

Nama foreclosed on 894 loans worth €4.5 billion at face value on the banks’ books and €1.3 billion at its own value. The agency appointed receivers in 13 cases.

The other startling figures that jump out from Nama’s unaudited figures covering the period since its inception in December 2009 are the expenses it has incurred.

Administrative expenses totalled €46 million, including €15 million due to the Nama’s parent body, the National Treasury Management Agency (NTMA). Of this €7.8 million relates to staff costs, though not all of this relates to payments to Nama’s 122 staff who are hired as employees of the NTMA.

A further €15 million was paid to Capita, the financial services company which provides administration of the loans, and to the banks for servicing the loans.

The cost of financial advisers, auditors and fees paid to Deloitte and PricewaterhouseCoopers who helped set up Nama amounted to €7 million. Costs for due diligence on the €71.4 billion in loans acquired amounted to €29 million which will be recouped from banks. Nama’s 2010 audited accounts are expected to be published by June. All eyes will be on whether the CAG takes a more severe view of Nama’s appraisal of property market declines since the valuation of loans at the banks.

NATIONAL ASSET MANAGEMENT AGENCY: THE NUMBERS

Salary costs:€7.8m

Write-down on loans:€1bn

Performing loans:23%

€714m loss for 2010