Taking The Mystery Out Of NAMA by Annette J Dunlea
Published In The Carrigdhoun Newspaper 1st Oct 2011 p.11
NAMA’s Mission Statement is to manage acquired loans, efficiently, effectively and expeditiously and in the best interests of the Irish State. To attain the best achievable financial return subject to acceptable financial risk. To conduct it’s activities in a way which assists the property market to operate efficiently and in a way which achieves longer term sustainability while taking account of wider societal objectives.The background to NAMA has been well chronicled: a property price bubble fuelled by excessive and indiscriminate lending led to a banking crisis which escalated rapidly and had to be addressed urgently by Government in the latter part of 2008 and early 2009. Part of the Government’s policy response to the crisis was the establishment of an asset management agency to acquire bank property loans. The Government decision to set up NAMA was announced by the then Minister for Finance, the late Mr. Brian Lenihan TD, in the Supplementary Budget of April 2009. Following the enactment of legislation in November of that year, NAMA was formally established and the NAMA Board was appointed in late December 2009
They have now recruited over 190 staff with the specialist skills and experience required to manage a portfolio of property loans with balances in excess of €72 billion. They expect to have their full complement of 200 staff by the end of the year.By and large, the loan acquisitions have been completed apart from some €2.6 billion in loans which are the subject of consultation with the debtors involved.By the end of the year, they expect to have completed their review of the business plans of the largest 180 debtors and they expect also that the participating institutions, acting under their supervision, will have reviewed a substantial number of the business plans of the other 670 debtors, their expectation is that over 90% of the portfolio will have been evaluated.To date, they have approved the sale of an estimated €4.6 billion in property assets held by debtors and the proceeds are being used to pay down debts either to us or to non-NAMA banks which had co-lent on developments. They have also approved over €900m in new money advances which will enable unfinished developments to be completed or which will otherwise enhance the value of assets. Regrettably, they have also had to approve the appointment of receivers in 84 cases , it is important to note that a receiver may be appointed to some debtor entities within a connection but not necessarily to a whole connection.
In terms of what they need to do, there are formidable challenges ahead. 60% of the loans they have acquired are secured by commercial or residential property and 40% by undeveloped land or by properties under development. Over 90% of the loans are secured by property in Ireland and the UK, with almost €18 billion of underlying property assets in Ireland. As the Irish economy regains momentum over the coming years and as investor confidence grows, they expect that demand for commercial property will improve.As 40% of the assets are outside Ireland, for the coming year or two, this represents their best prospect of generating the sales that their debtors need in order to meet their repayment targets.A significant proportion of the underlying property is located in the south-east of England and this is attracting strong interest from international investors. Some of this interest is from investors who expect to pick up property at fire sale prices and in off-market transactions without any element of competitive bidding. They are not interested in doing business on that basis. Whether they sell loans or approve the sale of property, their interest is best served by ensuring that they achieve the best attainable price and that requires the participation of a number of genuine bidders.
NAMA is one of a number of responses to the economic and financial crises which Ireland has had to confront in recent years. It is unrealistic to expect that these crises can be resolved swiftly. What they can say, across a number of fronts the Exchequer finances, the banking system, NAMA , is that the crises are being addressed in a considered and comprehensive manner, as has been acknowledged by the EU, the ECB, the IMF and the OECD. NAMA, will play their part in an energetic and committed manner. They will also be creative and resourceful in their approach because to succeed, they have no choice but to be creative and resourceful. They are not merely a debt collection agency. They are in the business of recovering for the taxpayer what the taxpayer is due and they make no apologies for that. I don’t think the taxpayer would be too impressed if they told their debtors that they could repay us at a time of their own choosing. A balance has to be struck to meet competing objectives set by NAMA and set for NAMA. However, if they were to take the view that their job was only to collect debt, they would indeed fail. With so much property indirectly under their stewardship, they are acutely aware of the potential impact of their decisions on businesses and communities. Their job is to strike the appropriate balance between meeting their commercial mandate and accommodating also various public and social objectives. Their door is open to all of those who may have fresh or innovative ideas or those with capital to deploy. It is their intention that NAMA will be a creative and dynamic force in the property market and, more generally, that it will contribute significantly to the economic resurgence of Ireland in the years ahead.
The National Asset Management Agency has defended its decision to sanction salaries of up to €200,000 for developers who owe in excess of €1 billion to taxpayers.Top executives at NAMA defended the salaries on the basis that developers were best-placed to recover the maximum amount of debt owed to the state. A key measure of success is to shrink their balance sheet, having recouped at a minimum all of the expenditure incurred by NAMA on loans, working capital advances and costs. This is clearly in keeping with the purpose of obtaining the best achievable return for the State as laid down in the NAMA Act.Another measure of success for NAMA is the contribution they have made, and will continue to make, to fixing their banking system. It is generally acknowledged that there is some way to go on this yet but, through the State’s collective efforts, they are getting there.At its most practical level, they have taken almost all of the land and development and associated loans off the books of the banks and paid them €30.5 billion in redeemable securities so that they can access liquidity and get back to normal banking business.There has been considerable commentary about whether the consideration they paid for acquired loans €30.5 billion should have been higher or lower or whether it should have been paid earlier.It should not be forgotten that NAMA had to be devised, legislated for and built from scratch and it had to be done quickly. On a superficial level, it might have been easier for all of us NAMA, bankers,regulators and debtors if the acquired portfolio could have been valued and transferred quickly.However, there was too much at stake for all parties not least the taxpayer who is paying for it all to have taken any shortcuts.Given the truly enormous figures involved, their loan pricing had to be comprehensively and rigorously determined.
Engaging with debtors their focus in NAMA in 2010 was very much on building the organisation and on acquiring the loans from the participating institutions. Since the final quarter of 2010, most of their attention has shifted to engaging with debtors with the aim of maximising repayment of their liabilities so that they meet the debt repayment targets outlined in their July 2010 Business Plan. So far, they have made good progress towards that end and they are working well with the majority of debtors as they analyse their business plans and work with them on day-to-day business transactions.Debt repayment is one of the key headline figures that will show the progress of NAMA towards its goals. It is encouraging to note they have reduced their debt by over €1 billion. They have redeemed €750m in NAMA Bonds and repaid €299m of advances received from the Minister for Finance. While achieving this significant level of debt reduction in a little over a year,they have also been able to approve working and development capital advances of over €800m. In addition, they currently have retained cash balances of close to €1 billion which will allow for further capital advances as necessary in the coming months.
NAMA’s purposes are to contribute to the achievement of the purposes of the NAMA Act by:
(a) acquiring bank assets from PIs;
(b) dealing expeditiously with the acquired assets; and
(c) protecting and enhancing the value of assets acquired by it in the interests of the State.
Section 11 of the Act lists its functions which include the following:
1. acquire eligible bank assets from PIs,
2. hold, manage and realise assets,
3. perform such other functions, related to the management or realisation of the acquired assets, as are directed by the Minister
4. take all steps necessary or expedient to protect, enhance or realise the value of acquired assets Including the disposal of loans for the best achievable price, securitising or refinancing portfolios
of loans and holding, realising and disposing of security.Section 12 of the Act outlines the powers which have been granted to NAMA to enable it to achieve its purposes and to perform its functions.
Five institutions (and their subsidiaries) applied to join the NAMA scheme and were designated by the Minister as participating institutions in February 2010. They are Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Nationwide Building Society and EBS Building Society.The laws of the European Union prohibit the provision of any state aid which could have the effect of giving favourable treatment to certain entities and thereby distorting competition throughout the Union. Among the exemptions to the prohibition is aid designed to remedy a serious disturbance in the economy of a Member State; however, any aid contemplated under this exemption must first be given advance approval by the European Commission.In February 2009, the Commission issued guidance about the design and implementation of asset relief schemes. This guidance informed discussions which took place with the Commission throughout much of 2009 and in the early part of and in the early part of 2010 about the design of the NAMA scheme and the level of state aid permissible under State Aid rules. The Commission evaluated the scheme and its implications in great detail and suggested changes to proposals in order to calibrate the level of state aid which it considered to be permissible. On 26 February 2010, the Commission gave its formal approval to the NAMA scheme, following which, in early March 2010, the Minister for Finance published revised valuation regulations which gave effect to the valuation methodology which had been approved by the Commission. The first tranche of loans
was acquired by NAMA later in the same month.In line with financial reporting rules under International Accounting Standards, NAMA was required to conduct an impairment review of its acquired loan portfolio as it stood at 31st December 2010.
It is also important to note that, under the same accounting rules, potential gains on increases in the value of property for the overseas element of NAMA’s portfolio cannot be taken into account as an offset until they are actually realised. Expected losses must be recognised immediately. Accordingly,while the 2010 impairment figure is large at €1.485 billion, they believe that it is prudent in that it reflects the continued deterioration in property values, primarily in Ireland, during 2010. It goes without saying that they will be working assiduously to minimise any real losses as the portfolio is realised and to maximise the return on their portfolio.
Given its scale and prominence, it is not enough of course that NAMA should be doing a good job; they must be seen to be doing a good job. A major challenge that they face is the extent to which they can be open and transparent about their activities.From the beginning,the Board has adopted a policy of being as transparent as they can and they have not stinted in being accessible to public representatives, the media, interest groups and representative organisations. They are using this first Annual Report to provide as much information as they can to all their stakeholders. They do however face difficulties in providing the level of detail that people quite understandably would like to have. These difficulties include the reality of legal constraints in the NAMA and Data Protection Acts and banking confidentiality. These difficulties also include the fact that they are essentially a commercial organisation operating in the open market and, not unreasonably, they are reluctant to disclose information which could be of advantage to their competitors. Detail which is to the advantage of their competitors is ultimately to the disadvantage of taxpayers.A further dimension to openness is, of course, accountability, and in that regard NAMA faces intensive parliamentary scrutiny.
Expectations for NAMA have always been high. Some believed that NAMA could have delivered a total solution, that they could somehow have fixed the banks on their own, that they could have repaired the property market and that they could have prevented at least some of the economic downturn. For a period it may have been reasonable to hope for some of these outcomes but the reality is different.As evidenced by the recent PCAR2 exercise performed by the Central Bank, the problems were much larger than those covered by NAMA’s remit and indeed the true scale of the banks’ problems banking, property and economic problems that have beset their country.
The first six months of 2011 has seen a significant increase in the number of debtors with whom they are in detailed discussion. By the end of the year, they expect to have completed their review of the business plans of the largest 180 debtors and they expect also that the participating institutions, acting under their supervision, will have reviewed a substantial number of the business plans of the other 670 debtors. It should be noted that having a debtor’s business plan reviewed by NAMA or a by a participating institution does not prevent day-to-day business activity and decisions from being made: currently about 400 decisions are being determined each month by NAMA and the participating institutions with respect to debtor requests, including applications for additional working or development capital, lease approvals and sales approvals.To make the appropriate adjustments to their lifestyles and commitments. On behalf of the taxpayer, they aim to be tough but fair in their dealings with debtors.
Costs are a significant issue and it is the responsibility of its CEO to ensure that they are managed and kept to the absolute minimum and that value for money is achieved. However, given a portfolio of NAMA’s complexity and size, with €30.5 billion at stake for the taxpayer, it is important that it is managed properly and that the Board is appropriately and professionally advised so it can make well-informed decisions that are in the best interests of the State. Their costs for 2010 at €46m, were 0.15% of the consideration they paid for the loans. This reflects the gradual build-up of a new organisation. As NAMA achieves steady state, they expect that about half of their annual costs in future years will constitute payment for they want to help debtors to survive but only if they are realistic and willing to make the appropriate adjustments to their lifestyles and commitments. On behalf of the taxpayer, they aim to be tough but fair in their dealings with debtors.
Progress in 2010 Milestones:
1. EU Commission approval was given to NAMA at end February 2010.
2. Commencing at end March 2010, by end-2010 NAMA had acquired €71.2bn in nominal loan balances (consisting of 11,500 loans of 850 debtors) for a consideration of €30.2bn, a discount of 58%.
3. The European Commission issued its approval for the Tranche
1 and Tranche 2 valuations.
4. Strategic policy decisions of the Board were agreed in June 2010 and the NAMA Business Plan, which incorporates these decisions, was agreed by the Board and published in July 2010.The Business Plan projected, under its central scenario, that the Agency would return a profit to the taxpayer of €1.0 billion in Net Present Value (NPV) terms over its lifetime (expected to be about ten years).
5. 30 Debtor Business Plans (€31bn nominal, representing 44% of the
portfolio that had been acquired by end-2010) were reviewed by
the Credit Committee and the Board, as appropriate.
6. 934 individual credit applications were processed and decisions made in the nine months after loans were first acquired (Q2-Q4 of 2010).
7. Asset sales of €1.9bn were approved in 2010.
8. New funding of €406m was approved for working and development capital.
9. 23 enforcement actions were initiated and/or approved by end-2010.
10. NAMA ended 2010 with cash balances of €836m having repaid €250m of a loan provided by the Minister for Finance as working capital earlier in the year.
11. NAMA made an operating profit, before impairment charges, of €305m for the period to 31 December 2010. After impairment charges of €1,485m, NAMA recorded an overall loss of €1,180m.
Operational Details Include:
1. Beginning the year with a staff of seven, NAMA had recruited
104 staff by year-end. This had increased to 140 by end-May 2011.
2. 27 meetings of the Board were held in 2010. Six committees of
the Board were established and met on 99 occasions during
the year.
3. The NAMA Special Purpose Vehicle (SPV) structure was put in
place and private investment of €51m was secured.
4. An infrastructure for property valuation, legal due diligence
review and loan valuation, including audit, was created in order
to support the acquisition process.
5. NAMA facilitated the restructuring of the banking system by
meeting the Minister’s end-year deadline for an accelerated
transfer of loans from the PIs. €38bn in loans were acquired
on a bulk transfer basis i.e. with due diligence and full loan
valuation carried out retrospectively.
6. The loans of 850 debtors were acquired. NAMA engaged actively with debtors whose loans were acquired as part of the first three tranches, including an extensive review of the major debtors. A template and methodology was developed for processing the business plans of debtors.
7. Foreign currency exposure in excess of €10 bn was successfully hedged into Euro in difficult market conditions.A portfolio of debtor derivatives (€14bn nominal) associated with loans was acquired and hedged, where necessary.
8. A €250m prudential liquidity buffer was put in place.
9. A €2.5bn ECP Programme was established and listed on the
Irish Stock Exchange.
10. Vendors for a Portfolio Management System (PMS) and a Document Management System were selected after thorough public procurement processes.
11. Capita Asset Services was appointed as Master Servicer to provide consolidated financial reporting based on data from the five participating institutions.
12. A direction under Section 131 of the Act, detailing NAMA’s debtor and loan management requirements, was drafted and issued to PIs. This was followed by detailed engagement with the PIs on the governance, operational and credit arrangements required for the management of NAMA loans.
13. NAMA is subject to national and EU public procurements processes and it undertook several tendering competitions during 2010 where it received close to 1,000 submissions which had to be evaluated.
The three investors owning 51% of the SPV were revealed by the Minister of Finance in April 2010, and in NAMA’s June 2010 business plan:Irish Life Investment Managers, a part of Irish Life and Permanent; New Ireland Assurance, a part of Bank of Ireland;
Clients of Allied Irish Banks Investment Managers, a part of Allied Irish Banks Each provided €17m for a total of €51m of NAMA’s initial capital of €100m. NAMA then geared up way above typical EU banking limits, taking on debt 35 times its paid-up capital. The reason given for this is that the loans are temporary; have bought other loans at a discount (see below); will be repaid on property sales; and are subject to continuous review. They are similar in function to bridging loans.
The purpose of NAMA’s quasi-independent legal status is to remove its debts from general Irish government debt. This is the position of the government, the International Monetary Fund and Eurostat.But, as the three private investors are bank-run pension fund managers, whose parent or major-shareholder companies had been all but nationalised by 2011, and as the 2010 Credit Institutions (Stabilisation) Act allows the government powers to apply to the courts to restructure any financial body in any way in secret at any time, and as a general guarantee to protect the parent banks remains in place (see the covered institutions below), the international rating agencies consider NAMA’s debts to be a part of Irish government debt.Besides, NAMA’s directors on the SPV board “will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish government.
NAMA published its 2010 accounts recently and summarised its more recent achievements in July 2011. In round figures it had acquired loans of €72 billion for €30 billion. To buy these it had issued bonds worth €30 billion that buyers could sell to the European Central Bank (ECB). The banks’ losses of €42 billion written off on these sales, and their other losses, were met by Irish government cash or loans that were advanced or ultimately guaranteed by the ECB. €3.9 billion-worth of sales both in and outside Ireland had been approved by NAMA in a difficult market, given the late-2000s recession.In that the main purpose of NAMA was to remove bad debts from the six banks and to recapitalize them, it was hard to see how it had made a difference in the short term. The plan relied upon an early worldwide recovery from recession, which did not occur. Government support for the banks continued separately from NAMA and had risen to 32% of GDP by September 2010. In November 2010 the Irish government was itself obliged to seek €67 billion net from the ECB and IMF and undertook in return that the sale of the six banks’ remaining assets outside NAMA would be “expedited”; part of the money was to cover future losses incurred by buyers of those assets. By early 2011 the six banks’ liquidity needs were being supported by a further €150 billion from the ECB.Despite all the efforts to save them, in April 2011 the six banks’ credit ratings were reduced to junk status by Moody’s.
In April 2011 NAMA announced that it will commence selling home mortgages to private investors on the basis that the investor pays equity of 30% of the asking price of the loan, with NAMA providing financing for the balance.They will shortly initiate High Court actions against several developers who had transferred assets to spouses. They are close to reaching agreement with the three main banks to introduce a deferred payments scheme for buyers of the 2,000 houses NAMA controls. They have acquired 11,500 loans worth €72.3bn from 850 individual debtors at a cost of €30.5bn and that 12 of these individuals had debts in excess of €1bn. They are , however, finding it difficult to find individual buyers for 8,000 apartments. Mr Daly also defended its decision to allow developers to retain a percentage of any money recovered in excess of what NAMA had paid to acquire their original loans and to pay them salaries from €75,000 to €200,000 to manage their portfolios.
The End
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