FT Alphaville " Nama and El Nama How far will Spain's bad bank be like Ireland's? There's a superficially similar structure. When Nama acquired €74bn of bad loans from Irish banks in return for €32bn in bonds, the discount was supposed to reflect the loans" "long-term real economic value." Nama's acquisition price for an initial five tranches of purchases of bad loans was also some 23 per cent above market value. The same phrase - "long-term real economic value" - has popped up with Spain's Asset Management Company (AMC). That's because the purpose was to clean up balance sheets - while also providing state aid to the banks at the same time, keeping the property assets at official arm's length from the government's own balance sheet, and working-out loans so that Nama could eventually send the taxpayer a profit. Since there is that "long-term economic value" phrase, you could try comparing the two bad banks on valuation. But it might first be interesting to compare their portfolios... Here's a point made by Dimitris Drakopoulos and Lefteris Farnakis of Nomura, in a Wednesday note: ...NAMA was in the fortunate position to own some good UK assets as well that helped its initial profitability. NAMA asset sales approved so far are in excess of €8 billion, of which about 90% refers to assets located outside Ireland. As a result, operating profit in 2011 was robust at more than €1bn, up from €0.3bn in 2010. However, as the focus of the portfolio shifts to Irish assets, NAMA is very keen to find ways to boost disposals of Irish assets (e.g. using vendor financing schemes and deferred payment initiatives). A report by the Controller and Auditor General in May identified considerable challenges to NAMA's ability to meet its debt redemption targets going forward, owing to deteriorating market conditions for property assets (thus making future disposals more difficult), risks to rental income collection and further deterioration in property prices affecting collateral values. In 2012, NAMA is already set to make a loss and could even end up impairing subordinated debt. In comparison, the composition of assets that are to be transferred to the AMC in Spain might not be as diversified as in NAMA's case. Instead they are likely to be concentrated in areas where the Spanish real estate market is unlikely to recover any time soon. This might mean that AMC will have to keep its assets until maturity in many cases and hope that it will be able to service its debt if the REV is realistic. This will also mean that the AMC bonds might end up even more illiquid than NAMA bonds (assuming as we do that Irish property market recovers more quickly than the Spanish) limiting their practical use for domestic banks only as collateral at the ECB. That's ultimately why the original acquisition price (and valuation of "REV") is going to matter for Spain. When it comes to valuation, Nomura also noted that the MoU sees the Spanish bad bank (after its creation in autumn 2012) acquiring loans from banks really quickly compared to Ireland's Nama. Spain's worst banks - the Bankias of this crisis, for which we'd assume reliable valuation is going to be the most difficult of all the banks tapping the AMC - are supposed to offload assets by the end of the year. Less-damaged banks have until June 2013. Still a punchy timeline. Nama acquired tranches of loans over 2010 and 2011; even after acquisition, Nama's due diligence process on valuations has taken a long time. Cows can't eat concrete Also in light of the likely portfolio, there's the question of what the MoU's "long-term (real) economic value" actually means for Spain's bad bank. Again, it's originally a Nama phrase: The long-term economic value (or real economic value) of the property or other collateral underlying the loans (the "Property LEV"), defined as "the value, as determined by NAMA, [...], that it can reasonably be expected to attain in a stable financial system when the crisis conditions prevailing [...] are ameliorated and in which a future price or yield of the property is consistent with reasonable expectations having regard to the long-term historical average... The long-term economic value (or real economic value) of the loan asset itself (the "Bank Asset LEV"), defined as "the value, as determined by NAMA [...], that it can reasonably be expected to attain in a stable financial system when the crisis conditions prevailing at the passing of this Act are ameliorated." It's an elastic term. The links between bank subsidy, economic value, and market value aren't simple either. The "state aid" character of the Nama acquisitions came from low discount rates used to value loans, versus the "market" discount rate. Anyway, that'll be the kind of thing to watch out for in Spain. Sony Kapoor has meanwhile written that the "most glaring gap in the MoU" is that Spain's recession is going to muddy the future economic value of loans, especially when you factor in austerity measures by the Spanish government. Maybe. You could also flip it round. The other oddity with long-term economic value, we'd guess - and we're looking at things like ghost estates in Ireland and Spain here - is how Spain and its banks will control for the fact that quite a few assets came out of a bubble. Related links: Nama and its loan valuations - Nama Winelake Impaired assets communication - EC, 2009 Issues in establishing AMCs - IMF paper, 2004 This entry was posted by Joseph Cotterill on Friday, July 13th, 2012 at 10:50 and is filed under Capital markets. Tagged with bad banks, ireland, Irish banks, Nama, Spain, spanish banks.