ANALYSIS:The State loans agency is embarking on a new, more challenging phase in its life
THE NATIONAL Asset Management Agency, one of the most controversial public bodies established in the State, celebrates its second birthday this month, a landmark that coincides with its move to a more challenging phase in its life.
As the final tranche of the €74.2 billion in loans transferred from five banks to Nama – €1.9 billion – was completed in October, the State loans agency now embarks on “working out” and disposing of assets.
Minister for Finance Michael Noonan said in his budget speech that a review of Nama carried out by former HSBC chief executive Michael Geoghegan was “generally positive”. However, arising from the report, the Minister said he was setting up an advisory group to advise on “Nama’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets”.
Nama is just a fifth of the way through its projected 10-year life. The continuing credit drought, coupled with greater uncertainty about the future of the economy and the euro crisis, mean itss success could well be judged not on whether it makes a profit or breaks even but on whether it can avoid further losses for the State due to reckless bank lending.
THE BANKS
Nama’s acquisition of the loans from the five institutions – Anglo Irish Bank, Allied Irish Banks, Bank of Ireland, Irish Nationwide Building Society and EBS – was completed in October.
As Nama finalises the due diligence on loans moved in the fast-tracked exercise following the EU-IMF bailout, the average discount is set to fall to 57 per cent from 58 per cent. This is as a result of a smaller discount applied to Anglo Irish Bank loans – 61 per cent instead of 62 per cent.
This will create a saving of €740 million for the State on the promissory notes or IOUs which are being used to fund the €29.3 billion bailout of Anglo. The discounts applied to AIB and Bank of Ireland remain unchanged.
THE LOANS
Nama manages 190 borrowers or debtors, while a further 610 are managed by the participating institutions which originally provided the loans.
Geoghegan advised Nama to consider doubling its staff, with another 200 people at a cost of €25 million. They would replace 500 staff at the banks, who manage the 610 debtors.
Failure to do so in the next six months might result in Nama missing its debt repayment targets, he said.
THE BORROWERS
Today marks the completion of Nama’s review of business plans for the 190 most indebted borrowers it manages directly.
The agency has assigned the debtors to three categories: developers who will sell or develop properties to repay debts; developers who will be able to refinance with other lenders; and developers with no viable future in business who face enforcement action.
In the case of developers whose plans have been approved and who are co-operating, Nama is working with them.
One such case relates to one of the top 10 developers, the Cosgrave brothers in Dublin, who are progressing with the development of the old Dún Laoghaire golf club, for example.
Nama has approved overheads, including pay, for 41 debtors.
The average salary for a developer is €100,000, though two are being paid €200,000 a year.
Nama has estimated that a third of the top 190 debtors fall into the enforcement category. For these, Nama will appoint receivers to their businesses and properties.
Nama has been advised to appoint receivers in the cases of 136 debtors but has moved in 93 cases. The highest-profile enforcement actions among the top 190 borrowers have been against Bernard McNamara, Liam Carroll, Paddy Kelly, Derek Quinlan, Ray and Danny Grehan, Jim Mansfield, Seán Dunne and John Fleming.
Rejecting suggestions that Nama was seeking retribution, the agency has said it wants to step into the banks’ shoes and to encourage developers to “come out the other side” if their business prospects are viable and they co-operate.
But for some the scale of the debts is staggering, smothering any chances of survival.
Nama has found it extraordinary that the top 190 debtors do not just have €61 billion of loans at the domestic banks but also account for most of the €30 billion in property loans at the non-Nama banks, including Ulster Bank, Bank of Scotland (Ireland), National Irish Bank and ACCBank.
Where Nama believes developers are hiding assets, it is hiring forensic accountants, including investigation firm Kroll, to carry out worldwide asset searches. Brendan McDonagh, the chief executive of Nama, has said it has found “no pot of gold” in its trawls. It has, however, managed to reverse the transfer of about €500 million of assets to spouses and other relatives, some of which was voluntarily disclosed.
THE ASSETS
Nama has concentrated largely on the buoyant British market to generate sales so it can raise cash to fund itself, finance the completion of developments and, most crucially, pay off debts.
The agency set itself an internal target to shave €7.5 billion off its €30 billion debt pile by the end of 2013 in its business plan. The troika of the European Commission, International Monetary Fund and European Central Bank took this deadline and included it among the conditions of the bailout.
The ECB has pressed for Nama to continue repaying the bonds to the banks so they can in turn use the cash to reduce their loans at the European and Irish Central Banks, which stood at about €119 billion at the end of October.
Deals such as the sale of €800 million of debt on the Maybourne hotels in London for their full value have helped Nama fill its coffers with cash. “Is Nama selling some of its crown jewels? Probably,” says a source familiar with its inner workings. “But you have the ECB screaming for their money back so Nama doesn’t have the luxury of sitting on these assets.”
The agency is of the view that there is no point in sitting back if assets can be sold now. “If you are not going to get easy recoveries of loans early, you are not going to get them at all,” he says.
The agency believes it is important to maintain large cash reserves as it strengthens its negotiating position. Holding plenty of cash means it is not desperate to sell or to agree deals with the opportunistic purchasers seeking to “low-ball” the agency.
While strong demand for Nama’s €6.2 billion British investment properties gives flexibility up to 2013, the post-2013 debt reduction targets are more challenging.
After 2013, as Nama disposes of UK assets, the agency will be left with more Irish properties in a market that is struggling to attract buyers and where there is a severe shortage of credit.
About 83 per cent of Nama’s stock of apartments is in the cities or commuter belts around Dublin, Cork, Limerick and Galway, which offers a little hope.
The land and development assets pose the biggest drag, though €3 billion of Nama’s loans relate to 180 development sites around Dublin. Declining asset values since November 2009, when the loans were valued, forced Nama to write down its loans by €1.5 billion for 2010, leaving the agency with a loss of €1.1 billion for the year.
McDonagh has said there will be another bad loan charge for 2011, reflecting further falls in values.
THE MARKET
Planning for more strained times post-2013, Geoghegan recommended that entrepreneurial and property expertise be brought onto the board. This should enable it to focus on what to do with Irish assets in which there is little interest other than among bargain hunters.
McDonagh has said Nama was making profits of up to 15 per cent on UK asset sales but losses of up to 25 per cent on Irish residential property sales, representing sharp declines in the value of some loans since their November 2009 valuation.
But Nama views the activity as important given the state of the property market. “It’s about trying to generate activity and to find a market floor,” said one source.
The agency had 2,800 work-in-progress developments, but has reduced this to 1,900.
Nama has advanced about €1 billion in cash to developers to complete 900 projects in the first 10 months of this year.
Geoghegan said Nama should approve loans of at least €500 million to fund improvements to assets for sale in 2014 and beyond.
That will mean more lending by Nama and more joint-venture deals with property companies to complete half-built properties and improve investment properties.
At the commercial end of the market, Nama is already offering vendor or “staple” financing – loans of up to 70 per cent of the value of the property to encourage buyers to purchase some of the properties. This type of financing will increase next year.
Last week the agency’s first “staple financing” sale – on the One Warrington Place office block in Dublin city centre – attracted bids from six companies.
To generate residential sales, Nama will launch a pilot scheme on its deferred payment plan in January or February of next year.
The aim of the scheme is to ease fears about negative equity among prospective buyers. They can avoid paying up to 20 per cent of the purchase price if, after five years, the property falls in value.
Nama also wants to introduce mortgage real estate investment trusts (Reits) to shift more debt. This would involve Nama pooling mortgages into packages, in which they will sell shares to investors.
These initiatives are in response to a moribund market. There have been just four big- ticket commercial property deals this year, valued between them at about €170 million, and this included the €100 million sale of the Montevetro building to Google.
The residential market is faring no better. There will less than €2 billion of new mortgages advanced this year, compared with almost €40 billion at the peak of the boom, and the number of mortgages is likely to fall to levels last seen 40 years ago.
THE BUDGET
To generate activity, the Minister lowered the stamp duty rate on commercial, farmland and industrial property from 6 per cent to 2 per cent. This will reduce the cost of buying property.
The Minister is also offering buyers a capital gains tax exemption on properties bought between now and the end of 2013 if they are held for seven years.
The Government’s decision to scrap plans to abolish upward-only rent reviews on investment property leases will also end the uncertainty that had been keeping prospective buyers out of the market.
Nama believes a more sustainable average for the market is €1.5 billion worth of commercial property deals a year and between €5 billion and €7.5 billion of new residential mortgages a year.
The market therefore still has some way to recover to get there.
THE FUTURE
Geoghegan has said Nama must spend more time and money increasing the value of Irish assets. These are properties for which Nama must find buyers if it is to reduce its debts by a further €16.5 billion by 2017 and €7 billion by 2019.
Nama held a “strategy day” last April to “reorientate” the agency to look more at its operations post-2013. The agency has been developing strategies to deal with every type of asset on its books.
Alan McQuaid, chief economist at Bloxham, says Nama has, much like the bank guarantee, been questioned as to whether it was a good idea in hindsight.
“The banking situation is as bad as ever, particularly in Europe, so it’s going to be difficult to encourage property transactions,” he says.
“There are people out there looking for bargains. I am not saying Nama has an impossible task but it’s more difficult than people had expected.”
The Central Bank’s stress tests of the banks estimate that the property market will recover slowly over the next 10 years, the lifespan of Nama.
Further dislocation in the global economy and banking industry could knock more than just Nama’s plans off course.
“If Nama cannot meet its post-2013 target, then Ireland has bigger problems than Nama not being able to recover loans,” says a source familiar with the challenges facing Nama.
