Mr. Seamus McCarthy:

I am joined for this part of the meeting by Ms Patricia Devlin, deputy director of audit.

The National Asset Management Agency Act 2009 defines the purposes which NAMA is statutorily designed to serve, and requires the board of NAMA to set strategic objectives and targets to guide its activities. Under section 226 of the Act, I am required to carry out periodic reviews of the extent to which NAMA has made progress towards achieving its overall strategic objectives. The report on the findings of the second progress review is before the committee today and covers the period to the end of 2016. I propose in these comments to outline the report’s findings in just a few key areas, updating where relevant to incorporate information from the 2017 audited financial statements.

NAMA is a complex organisation, comprising a group of interrelated companies. At group level, NAMA has returned a surplus each year since 2011, following a significant loss incurred in 2010, its first year of operation. The strongest surpluses were returned in 2015 and 2016. This is reflected in NAMA’s retained earnings of €3.4 billion by the end of 2017, as indicated in the figure now on screen. As at the end of 2017, the board expected NAMA will return a surplus of between €3 billion and €3.5 billion to the Exchequer upon completion of its work, assuming property market conditions remain favourable while the remaining assets are worked out.

NAMA’s primary purpose was to acquire property related loans and related collateral from distressed banks, to hold and manage those assets, and ultimately to dispose of them within the ten-year timeframe in a manner that protects the State’s interests. Members will recall from earlier reports that NAMA paid the banks participating in the rescue a total of €31.8 billion for loans that had a par value of €74.4 billion. Because the average prices paid for the loans exceeded their assessed November 2009 market value and the property market continued to fall, NAMA subsequently recognised significant loan impairment charges.

After acquiring the loans, NAMA developed strategies for dealing with debtors on an individual so-called debtor connection basis. Sales of loan assets commenced early on, and additional loans were provided to certain co-operating debtors to fund agreed work-out plans. The net effect of these changes, including impairment, is reflected in the value of NAMA’s stock of loans and receivables, which reduced from €27.9 billion at the end of 2010 to €3.2 billion at the end of 2017, a reduction of 89%, as indicated in the figure now on screen. On this basis, the disposal by NAMA of its loan assets is substantially completed.

By the end of 2017, NAMA had generated proceeds of €34.1 billion from the sale of loans and receivables. This comprised €23.5 billion realised through the sale of underlying collateral and €10.6 billion realised through loan sales. Almost €22 billion, or 64%, of the proceeds were generated in the three years 2014 to 2016, when NAMA loan sales peaked, as shown in the figure on screen now.

The 2009 Act requires NAMA to obtain the best achievable financial return for the State in carrying out its statutory functions. How that return is to be measured is not defined in the Act. Following examination by this committee in 2014 of the first progress report, the NAMA board set an entity return on investment, EROI, target to be achieved over its projected lifetime. This measure was designed to relate NAMA’s projected final surplus in 2020 to its initial investment, less an estimated €5.6 billion paid to the banks in excess of the loan market values. The board agreed in 2014 on a target EROI value of 20%. The final surplus of €3 billion projected by the board as at the end of 2016 would result in an EROI of 33%, that is 1.6 times the target.

The key shortcoming of NAMA’s EROI as a performance measure is that it ignores the time value of money, which relates to how long it will take to receive the return. A better, and market-standard, performance metric for property related investments is the internal rate of return, or IRR. However, NAMA has not set targets in that regard. Based on what NAMA paid for its loans and its projected cashflows as at the end of 2016 for each of its loans, the examination team estimated NAMA’s projected IRR on all loans to be around 6.2%. This is the estimated return available to cover NAMA’s expenses, including annual interest payments on its borrowing, which were in the range 1.5% to 2.25% between 2010 and 2016, as well as its other operating costs.

A key objective set by the NAMA board was that, by the time the agency was due to be wound up in 2020, it would have generated enough cash to redeem all of the €30.2 billion of senior debt issued. The board also set intermediate targets for redemption of debt. NAMA significantly exceeded the intermediate targets and all the senior debt was redeemed by October 2017.

The only debt outstanding at end 2017 was subordinated debt of €1.59 billion.

The NAMA board adopted two secondary objectives in 2014 in respect of facilitation of the delivery of residential units and office accommodation in the Dublin docklands strategic development zone, SDZ. NAMA initially committed to delivering 4,500 new residential units to service the Dublin market over the three years to the end of 2016. In 2015, that initial target was replaced with a national target of 20,000 units to be delivered up to the end of 2020. NAMA has reported that by the end of 2016, it had delivered 4,647 units nationally, including just under 3,400 in Dublin. It was forecasting the delivery of 3,500 units in 2017 and a further 14,000 units between 2018 and 2020. With regard to the docklands SDZ, the board approved initial strategies for the NAMA-controlled sites in 2014. NAMA has reported that by the end of 2016, construction had commenced on projects in the SDZ comprising some 166,000 sq. m of commercial and office space and 231 residential units. There is considerably more detail in the report which I am happy to outline further if the committee requires.