But there is an added complication that was revealed by Liam Carroll’s examinership case. As we all knew, loans to developers, by and large – all developers – to date have not been serviced with interest roll overs becoming a routine at the very latest mid 2008. This means that by the time NAMA purchases a given loan with face value €X, given the reasonably expected average rate of interest on refinanced loans of 8-11%, this loan will be refelective of:
- 12.24-16.95% cumulative rate of rolled interest, plus
- the orignal principal of €0.8305-0.8776 to the Euro of the face value of the loan
Now, suppose NAMA applies a haircut of 25% on the loan, so we buy €1 of the loan at a price of €0.75. What do we get for that €0.75? A loan that had at the time of its origination an underlying asset value of €0.83-0.88. So the real face value discount we are getting is 0.75/0.83 – 0.75/0.88 or 9.64% to 14.77%.
But wait, the actual principal (face value) amount has depreciated by, say, roughly 50% since the time the loan was written, so in reality, the discount NAMA will take will be negative 70-78%! What does it mean? Take a simple analogy. You walk into a shop and see a TV advertised ‘For Sale’. The signs reads:
Original Price €100.00
Sale Price €178.00
How fast will you walk away from this ‘deal’?
NAMA will overpay for the assets it buys on a vast scale!