Credit risk is the risk of incurring financial loss, taking account of collateral pledged as security that would arise from the failure of a debtor or market counterparty of the Group to fulfill its contractual obligations to the Group. NAMA's main credit risk arises from the performance of its debtors, and related assets held as security.

The Group's debtor-related exposures arose in the first place from the acquisition of a substantial portfolio of property related loans, mostly in the commercial and residential property sector in Ireland and the UK, and to a lesser extent in the USA and the rest of the world. Credit risk also arises in relation to the Group's lending activities, which are undertaken in order to preserve or enhance value with the aim of achieving the maximum financial return for the State subject to acceptable risk. Financial instruments, such as undrawn loan commitments and guarantees, also create credit risk.

Credit risk is the most significant risk to the Group's business. The Group therefore carefully manages its exposure to credit risk. The credit risk arising from the original acquisition of the loan portfolio was mitigated by the completion of an intensive property and legal due diligence process. This was designed to ensure that loans were properly valued in accordance with the statutory scheme that provided for their acquisition by the Group. The credit risk arising from the Group's ongoing lending and credit risk management activities is mitigated by the Group's Asset Recovery/Asset Management Policy and Procedures Framework.

NAMA Asset Recovery

The NAMA Asset Recovery function is responsible for:

• Supporting the Board in setting Asset Recovery's credit risk tolerance and policies;
• Developing and implementing the Asset Recovery Policy and Procedures Framework;
• Developing and implementing credit risk management policies and procedures within the overall framework; and
• Analysing, monitoring and reporting credit and general risk management information within Asset Recovery to present a consolidated view of the Group's risk exposures to the senior management team, the Risk Management Committee and the Board.

Asset Recovery Policy and Procedures Framework

The overall objective of the Asset Recovery Policy and Procedures Framework is to safeguard the Group by protecting and enhancing the value of loans acquired.

Ultimate responsibility for the management of credit risk in the Group rests with the NAMA Board. Credit risk management and control is centralised in the Asset Recovery function. Credit risk is reported to the NAMA Board and Credit Committee on a regular basis and the Framework is subject to a formal annual review.

The Group is responsible for managing loans, which are acquired under the provisions of the Act. Loans acquired from Participating Institutions are grouped together and managed by debtor connection.

Debtors fall into two categories:

NAMA managed debtors: In this category key credit decisions, and relationship management, is undertaken by the Group. Loan administration is carried out by Participating Institutions.

Participating Institution managed debtors: In this category debtor management and loan administration is carried out by the Participating Institutions. Credit decisions are taken by Participating Institutions under a Delegated Authority and are subject to a Policy and Procedures Framework mandated by the Group, together with ongoing 'on the ground' involvement from the NAMA Participating Institutions Team and oversight by the Group Audit and Risk function.

The Group is required to make various credit decisions, which may involve; new lending, the restructuring of loans and receivables or the taking of enforcement action. Specifically, a credit decision can arise out of any event that could materially change the underlying risk profile of an exposure or debtor, including:

• An application for credit by a debtor;
• Approval of asset sales;
• A proposal by a debtor which may involve pragmatic/commercial compromises or incentives in order to maximise NAMA's overall position;
• An application for finance;
• A proposed debtor strategy;
• A proposed extension of terms for any or all of a debtor's exposures;
• A proposal to initiate insolvency action;
• An action by a third party concerning a common debtor, for example, non participating institution.

Credit risk is measured, assessed and controlled for all transactions or credit events that arise from the Group's acquisition of loans, and from the ongoing management of those loans.

22.1 Credit risk measurement

The Group applies the following measures of exposure:

Loan Portfolio - Credit exposure measurement

• Par debt exposure - the gross amount owed by the debtor, i.e the total amounts due in accordance with the original contractual terms of acquired loans. The total Par debt acquired by the Group was €74 billion.
• NAMA debt exposure - the acquisition amount paid by the Group (plus any new money lent by the Group and interest charge added, less cash payments received). The total consideration paid for loans and related derivatives acquired was €31.8 billion.

In accordance with Section 10 of the Act, NAMA is required to obtain the best achievable financial return for the State having regard to Par debt, acquisition cost, any costs as a result of dealing with the assets, its cost of capital and other costs. These are the fundamental measures upon which credit and case strategy decisions will be made. They are also the basis for determining the appropriate Delegated Authority level for credit decisions made by the Group or Participating Institutions. NAMA monitors Par and NAMA debt exposure in parallel and uses them in support of all credit decisions.

Derivative Portfolio - Credit exposure measurement

In addition to the loans that were acquired by the Group, a number of derivative financial instruments were acquired which were attached to debtors' loans acquired from the Participating Institutions.

At any time, the Group's credit risk exposure is limited to the positive fair value of these derivative instruments (i.e. assets with a positive mark-to-market value). This mark-to-market value is usually only a small fraction of the contract value (or notional value of the outstanding instruments).

22.2 Credit risk assessment

Credit risk assessment focuses on debtor repayment capacity and all credit enhancements available, including security. Loans and advances to debtors are collateralised principally by charges over real estate assets, other assets, liens on cash deposits, and are supplemented in many cases by personal guarantees.

The Group relies initially on the valuations placed on existing security and recourse attached to loans acquired as part of the acquisition process. However the Group seeks to ensure that an appropriate, up-to-date, valuation of any additional forms of security or recourse are included in any debtor's new credit proposal. Existing security may also be revalued as part of that process.

A key consideration in advancing new money is whether or not the debtor's credit proposal is value enhancing. In advancing new money or undertaking any new credit decision, the Group will seek to obtain additional security or recourse from the debtor where it is necessary to protect its interests.

In determining additional or alternative forms of security or recourse, the Group may commission personal asset assessments of a debtor to identify any security or recourse that may be available to protect the Group's interests.

22.3 Credit risk control

Credit risk policy, as determined by the Group, applies to both NAMA managed, and Participating Institution managed loans. The Group has defined an Asset Recovery/Asset Management Policies and Procedures Framework for the Group and for Participating Institutions. This sets out authority levels for permitted credit decisions and credit limits, as well as credit risk monitoring and reporting to be carried out by the Group and Participating Institutions.

The Asset Recovery/Asset Management Policy and Procedures Framework sets out the permitted decision making and credit limits, for example:

• The approval of Debtor Business Plans and Strategic Credit Reviews;
• The approval of new lending;
• Loan restructuring or renegotiation where no new money is lent;
• Enforcement action being taken by the Group;
• Sales of assets / loans;
• Property and asset management requirements.

The level of approval required for each of these credit decisions is determined by reference to the size of the debtor's outstanding balance. Credit decisions are approved by one or more of the following within a cascading level of approved delegated authority:

• Asset Recovery/Asset Management Panel A or Panel B Delegated Authority Policy holders;
• Senior Divisional Manager Asset Recovery/Asset Management;
• Head of Asset Recovery/Asset Management;
• CEO and Head of or Deputy Head of Asset Recovery;
• Credit Committee;
• Board.

All credit decisions for Participating Institution managed loans, within Group approved limits, are required to be approved by the Participating Institution Credit Committee and/or Head/Deputy Head/Senior Manager of Credit in the NAMA unit of the Participating Institution.

Oversight of the compliance with the Delegated Authority Policy is performed by the Quality Assurance Team, and by the internal audit function.

Specific control and mitigation measures adopted by the Group are outlined below:

(a) Cash Management

Management of cash within a debtor connection is a key control with the aim of ensuring that overheads, working capital or development capital expenditure payments are appropriate and verified so that potential cash leakage is eliminated. The full visibility of all rental/trading income is also required.

(b) Collateral

Loans and advances to debtors are collateralised principally by charges over real estate assets, other assets, liens on cash deposits, and are supplemented in many cases by personal guarantees.

The Group employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of first fixed charge security for any working or development capital advanced.

The principal collateral types acceptable for credit risk mitigation of loans and receivables are:

• Mortgages over various land and properties;
• Floating charges over business assets such as premises, inventory and accounts receivable;
• Charges over financial instruments such as debt securities and equities;
• Charges over bank deposits.

(c) Derivatives

The security for derivatives acquired is from the collateral acquired with the loan, and is reflected in the loan acquisition price paid. The Group also transacted derivatives with the NTMA to hedge interest rate and foreign currency exposures.

The credit exposure of derivatives acquired, together with potential exposures arising from market movements, is managed as part of the overall debtors exposure management.

With respect to derivatives entered into by the Group, the sole counterparty is the NTMA.

22.4 Maximum exposure to credit risk - before collateral held or other credit enhancements

The table below sets out the maximum exposure to credit risk for financial assets with credit risk (net of impairment) at 31 December 2012, taking no account of collateral or other credit enhancements held. Exposures are based on the net carrying amounts as reported in the Group's Statement of financial position.

Group	Maximum exposure 2012 €'000	Maximum exposure 2011 €'000
Cash and cash equivalents	2,235,822	3,346,986
Cash placed as collateral with the NTMA	1,150,000	-
Available for sale financial assets	257,932	499,747
Amounts due from Participating Institutions	78,953	409,143
Derivative financial instruments	350,706	448,539
Loans and receivables
Land and development	6,571,379	9,484,026
Investment property	19,468,305	18,874,629
Impairment	(3,263,422)	(2,751,266)
Loans and receivables (net of impairment)	22,776,262	25,607,389
Other assets	33,490	43,438
Total assets	26,883,165	30,355,242
Loan commitments (Note 23.4)	495,510	235,932
Total maximum exposure	27,378,675	30,591,174

Agency	Maximum exposure 2012 €'000	Maximum exposure 2011 €'000
Cash	1,268	1,623
Other assets	9,306	3,381
Total maximum exposure	10,574	5,004

22.5 Information regarding the credit quality of loans and receivables

(a) Loans and receivables neither past due nor impaired

The Group has implemented a grading policy to provide a risk profile of NAMA's portfolio and which applies to all debtors. NAMA's credit grade scale seeks to assign a measure of the risk to the recovery of a financial asset and is based on two dimensions with nine possible grades expressed as a combination of a number and letter 1A, 3B etc.

• The first dimension (scale 1, 2, 3) measures the quality of the underlying assets acquired and the expectation for debt recovery relative to the NAMA debt. This first dimension ranges from instances where recovery is expected to exceed the NAMA debt to situations where a shortfall on NAMA debt is anticipated and an impairment provision has been marked against the exposure.
• The second dimension (scale A, B, C) rates the level of debtor performance by measuring the achievement of financial and non-financial milestones that have been agreed through the debtor engagement process.

The 9 possible grade outcomes can be summarised into the following categories:-

• Satisfactory: Capacity to meet financial commitments and low likelihood of expected loss.
• Watch: Requires closer monitoring but demonstrates capacity to meet financial commitments.
• Impaired: Exposures require varying degrees of close attention and active portfolio management and loss expectations is a concern.

The distribution of grades for loans and receivables neither past due nor impaired

Group	2012 €'000	2011 €'000
Satisfactory	7,135,672	7,815,435
Watch	787,301	1,229,386
Loans and receivables neither past due nor impaired	7,922,973	9,044,821

The Participating Institution managed portfolio is collectively assessed for impairment and is therefore included in the impaired category.

All the assets of the Agency are inter-group assets and are current.

(b) Loans and receivables past due not impaired

The disclosure required by paragraph 37(a) of IFRS 7 regarding the aged analysis of loans and receivables that are 'past due but not impaired' is not being provided. Current ageing analysis is based on the original contractual terms of loans acquired from Participating Institutions, and is not reflective of loan performance compared to loan acquisition value.

All of the Agency's receivables are due from related entities and are current. None are past due or impaired.

(c) Loans and receivables individually assessed for impairment

Loans and associated derivatives which were determined to be impaired as a result of the individual impairment review had a carrying value of €14.3 billion (2011: €14.4 billion) (see following table).

The Group has availed of the exemption under IFRS 7 not to disclose the fair value of collateral held as security against the loans, as it would be impractical to do so.

Loans and receivables individually assessed for impairment Group	2012 €'000	2011 €'000
Gross loans and associated derivatives	22,251,673	23,493,876
Individually impaired loans and associated derivatives	(14,328,700)	(14,449,055)
Loans and associated derivatives not individually impaired	7,922,973	9,044,821

None of the assets exposed to credit risk in the Agency are individually impaired.

(d) Loans and advances renegotiated

Certain loans are in the course of being renegotiated and restructured through the debtor engagement process.

Restructuring activities may include extended payment arrangements, modification and/or deferral of payments. Restructuring polices are set out in the NAMA Pricing and Restructuring Policy included in the Asset Recovery/Asset Management Policy and Procedures Framework. Each loan is restructured based on the most appropriate strategy to achieve repayment of all outstanding debt obligations, taking into account structures, guarantees, tax issues and sales strategies. The details of each proposed restructuring plan including any deviations from policy are reviewed and approved by the Delegated Authority/Credit Committee and, where relevant, the Board.

The restructuring of debtors in 2012 involved in the majority of cases the restructuring of loans into a reduced number of interest bearing facilities for easier engagement and debtor management. The total carrying value of loans subject to restructure of this nature in 2012 was €2.0 billion (2011: €0.8 billion).

None of the assets exposed to credit risk of the Agency were renegotiated in the period.

22.6 Geographical sectors

The following table analyses the Group's main credit exposures at their carrying amounts, based on the location of collateral securing loans and receivables.

Geographical sector 31 December 2012 Group	Ireland excluding Northern Ireland €'000	UK including Northern Ireland €'000	Rest of World €'000	Loan impairment €'000	Total €'000
Loans and receivables
− Land and development	4,160,284	1,919,898	491,197	-	6,571,379
− Investment property	12,333,793	5,434,711	1,699,801	-	19,468,305
Impairment of loans and receivables	-	-	-	(3,263,422)	(3,263,422)
Total loans and receivables	16,494,077	7,354,609	2,190,998	(3,263,422)	22,776,262
Cash and cash equivalents	2,235,822	-	-	-	2,235,822
Cash placed as collateral with the NTMA	1,150,000	-	-	-	1,150,000
Financial assets available for sale	257,932	-	-	-	257,932
Derivative financial instruments	117,605	226,800	6,301	-	350,706
Amounts due from Participating Institutions	78,953	-	-	-	78,953
Deferred tax asset	337,288	-	-	-	337,288
Inventories	6,758	-	-	-	6,758
Other assets	33,490	-	-	-	33,490
Property, plant and equipment	831	-	-	-	831
Total assets	20,712,756	7,581,409	2,197,299	(3,263,422)	27,228,042

Geographical sector 31 December 2011 Group	Ireland excluding Northern Ireland €'000	UK including Northern Ireland €'000	Rest of World €'000	Loan impairment €'000	Total €'000
Loans and receivables
− Land and development	6,218,324	2,615,501	650,201	-	9,484,026
− Investment property	11,340,494	6,073,674	1,460,461	-	18,874,629
Impairment of loans and receivables	-	-	-	(2,751,266)	(2,751,266)
Total loans and receivables	17,558,818	8,689,175	2,110,662	(2,751,266)	25,607,389
Cash and cash equivalents	3,346,986	-	-	-	3,346,986
Financial assets available for sale	499,747	-	-	-	499,747
Derivative financial instruments	189,789	253,786	4,964	-	448,539
Amounts due from Participating Institutions	409,143	-	-	-	409,143
Deferred tax asset	305,654	-	-	-	305,654
Inventories	6,850	-	-	-	6,850
Other assets	43,438	-	-	-	43,438
Property, plant and equipment	906	-	-	-	906
Total assets	22,361,331	8,942,96	2,115,626	(2,751,266)	30,668,652

The Agency statement of financial position, comprises inter-group assets in respect of the reimbursement of administration expenses from the Group, therefore all of the assets exposed to credit risk in the Agency are located in Ireland.