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NAMA’s valuation model
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Hot on the heels of the NAMA board, Brian Lenihan is delivering his Christmas pressies ahead of schedule with the valuation regulations for NAMA. Before we get into a potentially key detail, have your calculators ready for the following. Let’s suppose that you are an ordinary decent developer with a project that has revenue of 0 in 2010 due to the miserable economy and all, 500 euro in 2011 as you get it up and running, and 1000 euro for each year between 2012 and 2020 inclusive. What should someone pay you for that project today?
Well, we could start by saying that the sum of cash flows is 9500 euro. But of course that’s not right as today’s value because you could do a lot of other things with that 9500 euro if you had it today. The right answer is that the project is worth the present value of the cash flows — what they would be worth if each year’s flow was converted back into current euros using the “appropriate” interest rate. That rate is called the discount rate. Here are the NAMA regulations –
“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;
The Irish government is currently selling 10 year bonds at about 4.7%. Add the 0.8 percent and that’s 5.5%. Put those numbers into your favourite present value function and it says that the value is about 7000 euro. But here’s the thing. This is probably a highly risky project. Riskier projects should have a higher return and thus lower present value (to compensate you for the extra risk). At 10 percent return, which is not bad for property, the present value is just 5700 euro.
If 10 percent is the right return, Brian Lenihan’s NAMA regulations have just handed you 1300 euro. Scale up the numbers, years, and risk, and that’s an idea of the NAMA handout just through this one regulation. Where on earth did the Department of Finance get their 0.8 percent adjustment over government bonds as their risk premium?
Your quick calculation gives a haircut of 40% on the value … somehow I don’t think its going to work out that well for us!
Oisin, it doesn’t help that the document uses very confusing terminology. There is another place in the document where they appear to set the discount rate at 3% which would even crazier but on 2nd reading I decided that is a “haircut” they apply to whatever answer that LTEV comes up with to cover some of their own costs.
But to spring this on 23 December is amazing.
P O’Neill, I’m sure the document is full of archaic terminology, the fact that its come from the Dept. of Finance on the 23rd is a testament to their attempt to bury the story even further, not to mention the barrier to decode what it actually says.
I expect nothing more from a Government who would only allow 120hours of debate on the NAMA legislation in Dáil Éireann.