Dáil Éireann Debate, Wednesday - 22 October 2014
56. Deputy Stephen S. Donnelly asked the Minister for Finance the estimated benefit to the State if the National Asset Management Agency were to achieve a 5%, 10% or 15% net annual return on assets under management for the remainder of its existence. [40519/14]
View answerThe Deputy's question assumes that NAMA is in a position to retain assets over a medium-term horizon with a view to maximising the return which it can generate from them. This assumption is not in line with the requirement in the NAMA Act that NAMA deals expeditiously with the assets acquired by it and it is not in line with the strategy which has been set out by the NAMA Board and endorsed by me at the conclusion of the Section 227 review which was completed this year.
In interpreting its statutory mandate, the NAMA Board, with my endorsement, has taken the view that the best financial outcome for the State would be achieved through a managed process of disposals in an orderly way with the target of redeeming 80% of senior debt (a cumulative €24 billion) by end-2016 and a growing expectation of being in a position to redeem all senior debt by the end of 2018. NAMA's senior debt is a contingent liability of Irish taxpayers and reducing and ultimately eliminating it has to be a major priority at a time when Ireland's sovereign indebtedness is still at very high levels. Indeed, this leveraged condition fundamentally contrasts that of an investment market awash with liquidity, which goes some way towards explaining the diverging motives of sellers and acquirers. NAMA deliberately withheld from significantly divesting of its Irish positions until the end of 2013 until this market liquidity appeared, thereby providing an opportunity for the State to de-risk itself of property exposures at strong pricing levels. To draw comparisons with those purchasing the assets would be to infer that NAMA should prolong the State's exposure to the property market, adopt a speculative risk profile, ignore the requirement to reduce the State's debt burden and add uncertainty to the market's perception of Ireland's recovery process. For that reason, given that it is engaged in a process of deleveraging, I do not expect NAMA to measure its performance by reference to investment entities which have full commercial autonomy in terms of seeking and generating returns.
When international private equity companies make investment decisions, they typically aim for an Internal Rate of Return ('IRR') target in the high single digits given the low returns generally prevailing in the bond markets. Amongst other considerations, there are two fundamental criteria that must exist in order for an IRR or other rate of return measure to be appropriate for an entity that has acquired and holds investment assets:
1. The entity must have control and discretion, without imposed restrictions, over the timing, pricing and composition of what it acquires.
2. The entity must have control and discretion, without imposed restrictions, over the timing and pricing of its asset disposals.
Not only did NAMA have no control or discretion over the assets which it acquired or the timing of the acquisition, it was also faced with many imposed restrictions, including the acquisition price of the assets whereby it was required to pay the banks a price based on the long-term economic value of assets. It was required by legislation to acquire a designated portfolio of assets from five participation institutions at a time when the Irish property market was highly distressed. Unlike the position currently prevailing whereby there are numerous investors interested in acquiring Irish assets, there were no such buyers in 2009 and 2010 when NAMA was being established.
The valuation methodology which was approved by the European Commission required NAMA to acquire assets at 'long term economic value' which incorporated a State Aid uplift averaging 22% above market values. In addition, NAMA acquired assets by reference to a valuation date of 30 November 2009 which meant that it was required to absorb any losses which arose from the 25% - 30% decline in Irish property prices which occurred over the four-year period after the November 2009 acquisition valuation date.
Nor does NAMA now have full control over the timing of its asset disposals. While NAMA is required to obtain the best financial return on its assets, it is also required to carry out its work expeditiously so as to redeem as soon as is commercially feasible the €30.2 billion in senior debt which it issued to acquire loans. NAMA is not, therefore, in a position where it can hold assets for a long-term horizon as would be the case, for instance, with a pension fund.
For the reasons outlined above, it is entirely invalid to suggest that NAMA should be judged by the same IRR criteria as private equity investment funds which are free to operate without the asset acquisition, pricing or asset disposal restrictions applicable to NAMA. Unlike NAMA, these funds are free to set their own risk profiles and acquire assets across a range of asset classes and jurisdictions and to dispose of them freely. It is also the case that such funds are not required to take into account the various public, social and economic objectives which are addressed by NAMA.
If, as part of a hypothetical exercise, NAMA were to assume that (a) instead of deleveraging, it had scope to hold its end-2014 loan portfolio and (b) it had the same flexibility to manage assets as have investment firms, the estimated annual returns up to end-2017, based on 5%, 10% and 15% simple rates of return would be €2bn, €4bn and €6bn respectively and cumulatively. However, as I have pointed out, these measures are irrelevant in the context of NAMA's deleveraging strategy.
