Mr. Seamus McCarthy:

I thank the Chairman.

The Project Eagle loan sale was completed in June 2014 and, therefore, was reviewed as part of the 2014 audit of NAMA's financial statements. The audit noted that NAMA had incurred a large loss on the sale and that the sale process had been compressed. In addition, we had a concern about the circumstances of PIMCO's withdrawal from the sale competition. I decided, therefore, that, following completion of the 2014 audit, the sale should be examined in more depth in the context of a report I was then planning on NAMA's progress over the period 2013 to 2015 - referred to as a section 226 report - as required under the NAMA Act. At a meeting of the PAC with NAMA in mid-July 2015, I informed members of my intention to examine the Project Eagle sale. On foot of the likely time required to produce the section 226 report, I decided to carry out a parallel examination of the value for money achieved on Project Eagle. This allowed me to report separately on the sale. The key issues examined in the report reflect the concerns raised at the July 2015 PAC meeting. I should point out that my focus is entirely on assessing and reporting on the performance by NAMA of its functions. Any references to any third party, whether named or not, are incidental to that purpose.

NAMA recorded a loss of £162 million in 2014 as a result of sales relating to its Northern Ireland debtors. Most of this related to Project Eagle. Losses of £478 million on the Northern Ireland loans had already been recognised in earlier years, reflecting deterioration in market conditions since November 2009. That was the market value reference point used by NAMA when it bought all its loans.

The process of selling some of the Northern Ireland debtor assets was already in progress when the PIMCO approach was made to NAMA. Those sales continued, and NAMA had sold about one eighth of the assets by the time the Project Eagle portfolio sale was completed. NAMA incurred a loss of 1% on average on those asset sales compared to a loss of 13% on the Project Eagle loan sale. The key choice for NAMA, following the PIMCO-Brown Rudnick approaches in 2013, was whether to continue with its planned workout of the Northern Ireland debtor loans through disposal of the assets over time or to put the loans on the market in a single portfolio sale. Prior to other loan portfolio sales, NAMA obtained current market valuations of the property assets from its loan sale advisers. This did not happen with Project Eagle. In assessing the proposal from PIMCO, NAMA relied on its existing cashflow projections for the assets. These indicated the net cash amounts NAMA projected it would receive from working out the loans, through sales of the assets, as currently planned. Using NAMA's standard methodology and assumptions, the net present value, or NPV, of the Project Eagle cashflows as at the end of 2013 was an estimated £1.49 billion.

The board decided that it would be willing to sell the loans at a minimum price of £1.3 billion, as recommended to it by the NAMA executive. The difference between that minimum price and the projected net present value was around £190 million in net present value terms. As a result, the decision to sell the loans in a portfolio, as opposed to continuing with the loan workout as planned, involved a significant probable loss of value. In the paper to the board in December 2013, NAMA pointed out that, in formulating a bid, the purchaser of a portfolio of non-performing loans would expect to discount the current market value of the underlying property collateral assets by at least 10%. NAMA did not have a current valuation of the property assets to which to apply this discount. In the end, there are many strategic and commercial reasons why NAMA might prefer an early loan sale over a medium to long-term loan workout. That is a business decision for NAMA, and is something I express no opinion on. In fact, it falls into the realm of a policy area and I am prohibited from commenting on policy.

The possibility of a sale of the Northern Ireland loans came about as a result of a reverse inquiry, with PIMCO presenting an offer on the basis that there would be a closed sale process. NAMA's response was that any loan sale would have to be conducted using an open sales process in line with its policy. NAMA's policy is consistent with the standard market approach to loan portfolio sales. If implemented, this should provide reasonable assurance that the best price currently achievable in the market is obtained. As figure 4.1 of the report illustrates, NAMA fully implemented its own policy for Projects Tower and Arrow but not for Project Eagle.

The report sets out in detail the evolution of the sales process, as circumstances changed. Key features are: the limited role of the loan sale advisers, Lazard; the staggered process of admission of potential purchasers to the competition; the limited information about the loans and assets; the short time allowed to the firms; and prohibition on the firms using property valuers in Northern Ireland or having contact with the debtors. A number of the firms indicated that they had issues with the sale process rather than with the quality of the assets themselves. At the end of the bid process, Lazard reported to NAMA that the Cerberus bid was the better of the two received. It later provided an assurance letter to NAMA, which stated that "having regard to the information available to us and NAMA's objectives, the sell-side process for the transaction was appropriate for the sale of a loan portfolio of this nature". Taking this restricted statement together with the limitations imposed on the sale process and the absence of up to date property valuations, I feel I do not have sufficient assurance that a different marketing strategy, or different timing of the sale, could not have resulted in NAMA achieving a higher price from the sale of the loans.

In terms of conflict of interest issues, I want to emphasise that the report focuses exclusively on the actions of NAMA and not on the actions of individuals or third parties. Over time, Mr. Cushnahan declared to NAMA his involvement as an adviser to six NAMA debtors, mainly on a non-fee basis. We found that the loans of those debtors represented approximately half the value of the Northern Ireland loan book. A concern, therefore, arises as to whether NAMA should have considered if it was appropriate that he would engage in discussion of its Northern Ireland strategy in general and of the PIMCO proposal.

In March 2014, NAMA learned from PIMCO of the existence of an alleged success fee arrangement involving Brown Rudnick, the managing partner of Tughans and Mr. Cushnahan. NAMA subsequently learned of the existence of a success fee arrangement involving Cerberus, on one hand, and Brown Rudnick and Tughans, on the other. NAMA sought and relied on an assurance from Cerberus that no fee or payment was payable to anyone connected with NAMA. Having examined the matter in detail, my view is that the allegations of Mr. Cushnahan's involvement in a fee-sharing arrangement warranted more action by NAMA when the issue came to light.

If I may, Chairman, before I finish I would like to explain a little about how the work on this examination was undertaken given some public comment in that regard. The team I appointed to carry out the examination are all qualified accountants with significant audit and evaluation experience, including the audit of NAMA. The examination was led by Mr. Riordan who is here with me today. He has worked on all my office's examinations of NAMA since its inception. When the 2014 NAMA audit concluded, we transferred the audit manager and another staff member to the examination team. They became available to start work on the examination in June 2015. I am satisfied that the team tasked to carry out the Project Eagle examination had the requisite skills, knowledge, experience and expertise to do the required work.

Contrary to what has been stated elsewhere, my office did not seek external expert assistance to carry out the Project Eagle examination. We did, however, seek to secure a contractor to provide supplementary resources, with requisite skills and experience, to carry out reviews for us as part of the planned section 226 examination. Specifically, I wanted to examine the level of returns NAMA has achieved through the disposal of loans and what it expected to achieve through investment in assets it continued to hold, based on a sample of approximately 50 cases. Given the likely volume of work involved, we published an open request for tenders on 29 June 2015. Despite a reasonable level of inquiries, we got just one tender proposal, from a firm based in London. The proposal disclosed that one of the firm’s principal team members had a conflict of interest. As a result, I did not consider it appropriate to appoint the firm to carry out the work.

When we complete our analysis and field work, our standard approach is to present the findings to the public bodies concerned and ask them for a formal written response. Where evidence presented to us shows a change is required, we gladly make that change. If comments or points of view presented by an audited body are relevant but not supported by evidence, we represent those comments as the audited body’s views in the report, so readers of the reports have both sides of the argument to hand. I am satisfied that I have done that with this report.

In addition to the input we receive through audited bodies’ comments on reports, we undertake quality assurance processes for examinations, as required. For this report, we applied more than the usual testing and challenge because of NAMA’s strong objections to the findings. We arranged, on a collegial basis, with our sister organisation, the UK National Audit Office, NAO, that two senior managers from its financial markets unit would review and challenge the draft report. Both had market experience before their employment with the NAO. As it happened, they were also just at that time finalising a report on the UK Government’s sale of former Northern Rock financial assets. In April 2016, they challenged my team on the findings and provisional conclusions of the draft report and provided useful information and suggestions which we took on board. In May 2016, I asked for a further and deeper challenge process, which was undertaken by a former secretary and director of audit of my office. He was involved in setting up and overseeing the audit of NAMA until 2012 and has also served as a member of the audit board of the European Investment Bank. We asked him to examine all the evidence we were using regarding Project Eagle and the written responses from NAMA and to consider if the conclusions were appropriate, given the evidence. His advice and suggestions were also taken on board in further refining the report. These processes were a process of assurance for me. Ultimately, as the Comptroller and Auditor General, I must draw the conclusions and make the report.

I hope this gives the committee an insight into the manner in which the report was prepared. I thank it for its attention.