John Compton assesses the implications of the National Asset Management Agency's loan purchase strategy both north ans south of the border
From McDonald’s to Claridge’s, the ambitions of Ireland’s favourite eatery and London’s upmarket sleepery are both being frustrated by a four-letter word — NAMA.
The National Asset Management Agency got the official EU nod of approval in February as the Irish government’s ‘bad bank’ to decontaminate Ireland’s toxic-loan dump.
Up to €80bn of loans — most relating to property and development land — will eventually end up with NAMA, with around €3.9bn (£3.3bn) of this secured on assets in Northern Ireland. That local total comprises €2.4bn (£2bn) of undeveloped land, €1.2bn (£1bn) of investments and €400m (£350m) of property and land under development.
But Peter Stewart, chairman of NAMA's Northern Ireland Advisory Committee, is not offering much comfort for developers, claiming that, as most of the Northern Ireland debt involves undeveloped land, that’s exactly how it might stay. “It is likely that we will see what was previously viewed as potential development land being sold to go back to farm land,” he said.
Conceived in mid-2009 as a pragmatic solution to Ireland’s financial crisis, the NAMA acquires the toxic land and development loans, heavily discounted, from the five participating Irish financial institutions.
In consideration for offloading the debt, the five — Bank of Ireland, Allied Irish Bank, Anglo Irish Bank, Irish Nationwide and the EBS building society — are paid with government-backed bonds issued by a NAMA special-purpose vehicle.
This lets the banks borrow from the European Central Bank, using the NAMA bonds as collateral, thus facilitating financial institutions to return to profitable — if more prudent — lending to help drive Irish economic recovery.
So far, NAMA’s special-purpose vehicle has issued €13bn in bonds and, by the time all transactions are completed, the Irish Department of Finance estimates that NAMA will acquire €77bn of loans from the five participating lenders, for around €54bn.
Over time and with hopefully minimal market distortion, it is planned that NAMA will dispose of the loans, or realise the asset values. But it also assumes the legal responsibility for pursuing debtors for any shortfall between the original loan amount and the sum realised.
That’s the theory, but the practice has not been quite that simple.
There has been shock at the discount at which NAMA is acquiring the loans with the original estimate of around 30% turning out to be wildly optimistic. By the end of August 2010, €27bn had been transferred at an average discount of 52%.
But the last tranche of €6.75bn from the ill-fated Anglo Irish Bank came across at an eye-watering discount of 62%, with the skyrocketing discounts reflecting loan-to-value ratios much higher than the banks had originally indicated.
Initial estimates assumed loan-to-value ratios of more than 75%, but NAMA officials uncovered a raft of deals where borrowers had provided no equity at all. Many were funded 100% by debt, with some loans even exceeding the land or property value to provide developers with working capital to finance planning applications.
And that’s putting even more pressure on the developers, whose loans the banks are offloading to NAMA.
Developers, unhappy with the deep discounts offered for the loans, are turning to the courts to challenge NAMA’s right to take over the debt. And with around €50bn owed by a mere 100 Irish developers, it’s no wonder they worry.
And so they might.
NAMA’s chief executive Brendan McDonagh recently told a Dáil committee that NAMA was
prepared to get tough with its newly acquired clients.
In October, NAMA won its first significant legal victory when Dublin’s Commercial Court ordered three developers to make multi-million euro settlements in respect of guarantees issued to one of the participating banks.
A further 12 cases are pending.
But while NAMA initially acquires the developers’ loans, it takes direct control of the assets once the developer defaults, and in that respect, NAMA now finds itself owning around 35 hotels in Ireland alone.
It is already engaged in a legal challenge over loans to the Maybourne Group, owners of swish London hotels the Connaught, Berkeley and Claridge’s — where the latter is hoping to add a further 40 rooms to the five-star establishment.
And at the other end of the scale, McDonald’s Ireland has warned that NAMA’s cautious approach to development finance is slowing down businesses’ plans to expand and create jobs.
As it heads towards the end of year one of its 10-year life, NAMA has made significant progress, with around half the overall loan transfers completed, a discount structure established and some early successes in the courts.
The organisation’s draft business plan even suggests that it could make a profit of around €4.8bn by the time it is due to be wound up in 2020.
The impact on Northern Ireland is expected to be minimal, with Stewart confirming that NAMA was acutely aware of the particular sensitivities of the Northern Ireland economy.
But speaking recently in Belfast, Stewart had a message for those developers with investments in the North that were headed NAMA’s way.
“For those builders, developers and also land traders and speculators who got caught up in the frenzy, unfortunately there is going to be financial pain.”