PRINCIPAL RISKS AND UNCERTAINTIES

NAMA is exposed to a wide variety of risks which have the potential to affect the financial and operational performance of the Agency. The NAMA Risk Management Policy that is approved by the Board has an integrated approach designed to ensure that all material classes of risk are identified so that business strategy and execution are aligned to minimise the risk to the achievement of NAMA’s Strategic Plan. The Risk Management Framework establishes the processes to identify, assess, evaluate, measure, report and mitigate risk. NAMA has identified the following principal risks and uncertainties which may adversely affect the achievement of its objectives.

1. Macro-economic and property risk

Risk that a domestic or international financial or macroeconomic shock causes an inability to meet NAMA’s Senior Bond obligations. If the economy and property market in Ireland fail to fully and sustainably recover or the market in other locations in which NAMA has an exposure, principally the UK, deteriorates from present levels, cash flows realised by NAMA assets could be lower than projected.

2. Strategic risk

If the pace of deleveraging/disposals activity is incorrectly calibrated (i.e. it is too fast or too slow), NAMA may not achieve the Section 10 NAMA Act ('the Act') statutory requirement to obtain the “best achievable financial return for the State”. The risk represents the potential opportunity cost associated with sell versus hold decisions for NAMA assets.

3. Human capital risk

If there is a material loss of human capital from NAMA it will not achieve its objectives. A failure to attract, motivate and retain key staff with requisite experience and expertise would result in institutional corporate knowledge loss, capacity constraints on the delivery of assets for sale or potential lower asset realisation values.

4. Reputation risk

This is the risk that negative public, political or industry opinion may adversely impact NAMA’s core business activities and financial prospects and undermine the Agency’s ability to achieve its objectives. Negative opinions can arise from how NAMA conducts its operations or is perceived to conduct its operations or from false or misleading claims arising externally to NAMA. NAMA’s reputation could also be damaged if it were unsuccessful in a number of significant legal cases, incurred a material loss event or if it experienced a significant information security breach.

5. Dublin Docklands SDZ and Residential Development risks

This is the risk that NAMA fails to deliver on its target completion of 4,500 residential units in the Dublin area by end-2016 and on its plans for the Dublin Docklands SDZ. NAMA may fail to achieve its objectives if affected by delays in planning permission, delivery of supporting infrastructure and competing market supply.

The principal risks are routinely monitored by the Risk Management Committee and any changes in the risk profile or significant updates are contemporaneously reported to the Board. Subject matter experts are invited to present at the Risk Management Committee on a regular basis to ensure all aspects of these risks are appropriately considered.

NAMA has robust risk processes in place to manage risk related to its business so as to reduce the potential for significant unexpected losses, and to minimise the impact of losses experienced in the normal course of business. Risks identified by management are prioritised according to probability and impact and the risk status and management’s response and control action plans are reviewed by the Risk Management Committee and the Board on a regular basis. Management is challenged to consider risks not already considered. NAMA’s response strategies to each risk are designed to ensure that NAMA operates within a defined risk tolerance by avoiding the risk, transferring the risk where possible, reducing the likelihood and/or impact of the risk or accepting the risk subject to ongoing review. The Risk Management Committee recommends to the Board the adoption of new policies or changes to existing policies, the adoption of hedging strategies to manage certain balance sheet risks and recommendations for the deleveraging of the balance sheet through bond redemptions in response to changing internal and external influences and circumstances.

The uncertainties surrounding the risks associated with the composition of the NAMA balance sheet and operational model continue to reduce as the strategy to monetise the NAMA loan portfolio is implemented. The risk profile of NAMA has been continually changing from the start-up phase into maturity as the core processes and systems have become established and embedded within the core organisational operational activities.