OPINION: The need for Nama to offer non-construction credit facilities has not been legislated for, writes DERMOT BYRNE

THE NATIONAL Asset Management Agency (Nama) was established to buy loan facilities from the banks for liquid funds, thus recapitalising the banks, at least in part. Nama is an asset recovery vehicle – it is not a fully operating commercial bank. It will not provide credit facilities to those borrowers whose assets (“eligible bank assets” in Nama-speak) are being transferred to the State agency other than perhaps in the form of working capital that will improve an asset and allow it to be sold for value.

The non-availability of credit from Nama is based on the fact that the agency is empowered in legislation only to make loans for this purpose. It may not have been envisaged that there would be the need for other credit facilities.

Nama may also acquire non-eligible bank assets where there is common security given for all credit facilities.

A major concern for bank customers arises where all credit facilities are travelling to Nama and those non-eligible bank assets include credit facilities for performing businesses (other than construction or land development) that may involve employees.

The case is possibly best demonstrated by way of example.

A company has a number of businesses operated through subsidiaries, one of which is involved in construction and development.

Another is a successful food business which has 50 staff and a further 50 indirect employees.

The company has loans of more than €100 million, half of which relate to the development business and the rest to the other businesses. All loans are performing.

The loans are secured mostly on land, which was valuable at the peak of the market and more than acceptable by the bank as security for all loans across the group. Using security in one business to borrow for the start-up or continuance of another was a common feature in Irish banking.

Obviously, at a time when land and property values were high, the assets in this business were accepted by the banks as being very strong security for any loans which the group needed to secure.

The food business is fully performing and continuing to make a positive contribution towards fixed costs but requires working capital credit for day-to-day operations and needs to replace plant and machinery to maintain the business in the future.

This business has no assets other than its stocks and a leased premises. It has operated on an overdraft at certain times due to the seasonality of the business.

Nama may acquire all credit facilities of this group, including the credit facilities of the food business, because the security for all the loans are the land assets.

Questions arise as to how Nama will deal with this business and continue to maintain credit for the non-construction businesses.

How can the agency do this when it is not a commercial bank but an asset recovery vehicle and does not have the personnel to deal with these demands?

Customers in non-construction businesses who have been intertwined for years with construction businesses and are now caught in Nama need to make ongoing decisions for cash flows over the next 12 to 24 months as is normal prudent business practice.

How can this be achieved with Nama when customers who have not transferred to Nama have no contact with Nama other than through their existing banks?

The food business in our example may wish to enter a contract for replacement plant and machinery. It needs to know there will be a bank there to support this.

The normal practice is that a customer would discuss these matters in advance with their bank and have the comfort of a decision on such matters. That comfort is not available to customers as they will not meet Nama until their loans are transferred. This is not workable and creates gridlock for businesses that must make decisions for their future.

Should Nama decide not to acquire loans for the non-land and construction businesses and leave these with the banks, there will have to be some consideration given to how security is shared between the bank and Nama. Otherwise Nama will have all the security for the loans and the banks will be unsecured. The bank is obviously not going to accept this.

As for the bank’s role while loans are awaiting transfer to Nama, it is quite evident from all my dealings with Nama cases that a bank’s objective is to limit any new facilities to the customer and reduce existing facilities which have been extended to customers. This includes overdraft facilities.

The banks have no interest in a continuing relationship with customers if they are bound for Nama. The bank’s priority in these cases is to secure the best price from Nama for the loans.

In these scenarios the non-construction performing business is the loser. It can’t plan its business for the future as it has no bank.

As it can’t operate without credit facilities, it does the honourable thing, pays down all debts, makes employees redundant and winds down its operations – another 100 jobs gone because of the Nama-bank quagmire.

Dermot Byrne is a tax consultant in Dublin