Mr. Seamus McCarthy:

The National Asset Management Agency is tasked under the National Asset Management Agency Act 2009 with acquiring loans from certain Irish financial institutions, protecting and enhancing the value of the assets that it has acquired and ultimately disposing of those assets or the underlying collateral in a timely manner. A key objective for NAMA in its management and ultimate disposal of the assets is to maximise the return to the State.

The financial statements for 2014 received a clear audit report, which issued on 29 April 2015. Without qualifying my audit opinion, I have drawn attention to note 2.1 in the financial statements. This describes NAMA’s main funding source, which is in the form of short-term borrowing, with a Government guarantee. The note explains the basis on which the board is satisfied that it was appropriate to prepare the financial statements on a going concern basis.

Some of the key financial highlights for 2014 are that NAMA generated a profit, after impairment, of €458 million; interest on loans recognised in the year amounted to €950 million; around €7.6 billion was raised in 2014 from asset sales, which were divided between sales of loan assets amounting to €3.4 billion and sales of underlying collateral amounting to €4.2 billion; the 2014 impairment charge was €137 million; the total accumulated impairment charge to end 2014 was €3.5 billion, reflecting the deterioration in NAMA’s expectation of total loan asset cashflows relative to the value of the remaining loans when they were taken on; the carrying value of loans and receivables at end 2014 was €16.9 billion, before impairment; and by end 2014, NAMA had redeemed €16.6 billion of its initial borrowing.

The largest single disposal of loan assets undertaken by NAMA since its establishment was in relation to a bundle of debtor connection portfolios disposed of in 2014. The disposal was code named Project Eagle, and involved the bundling of the loans of all 55 debtor connections based in Northern Ireland. The loans were secured by around 900 property assets and around 68% of the properties were located in Northern Ireland itself, 18% in the rest of Ireland, 12% in Great Britain and 2% elsewhere.

We have drawn up a figure, now on screen, to try to summarise the Project Eagle transaction. At the time the loan bundle was sold, the par value of the loans, which is the amount the borrowers collectively owed NAMA, amounted to a total of around €5.7 billion. The carrying value of the loans before impairment was just under €2.2 billion. The difference of €3.5 billion, or 61% of the par value, is accounted for mainly by the discount in the price paid by NAMA to the relevant banks when it acquired the loans in the bundle.

Much of the Project Eagle borrowing was in sterling and the sale was in sterling. All the values, as presented in the figures on screen, are in euros, which is how they are accounted for in the NAMA accounts. When the bundle of loans was sold, and after payment of disposal costs, NAMA received net proceeds from the sale amounting to just under €1.4 billion. As a result, the total loss on disposal was around €783 million. This was made up of impairment provisions previously booked amounting to €572 million that crystallised when the sale went through plus a further loss of €211 million incurred on disposal.

Under section 226 of the National Asset Management Agency Act, I am required every three years to carry out a review of the progress NAMA has made towards achieving its overall objectives. Members will recall that the first report related to the period up to the end of 2012, which the committee examined last May or so. The next report will cover NAMA’s progress up to the end of 2015. I reported in the first report on loan sales by NAMA up to the end of 2012. Our analysis indicated that those sales resulted in NAMA securing net proceeds of €1.4 billion. Unlike Project Eagle, those disposals, taken together, resulted in a gain for NAMA of around €112 million over and above the carrying value of the loans.

Members may recall that, in the report, I recommended the NAMA board set an overall target rate of return and targets for the overall rates of return on disposals and on property that NAMA decides to hold and-or invest in. These are the kinds of benchmarks commonly used by investors to guide investment and divestment decisions. However, NAMA disagreed on the relevance of such measures for its business, on the basis that they would act as an unnecessary constraint on its flexibility, given the imperative that it be open to commercially sensible disposal opportunities when they arise.

I previously indicated to the committee that, when preparing the next section 226 report, I intended to look in detail at a sample of NAMA disposals and a sample of properties held by it for investment. Given the scale of the loss incurred on the Project Eagle disposal, it was and remains my intention to examine that disposal further in the course of that work. As I mentioned here a couple of weeks ago, planning work on the section 226 examination has commenced.