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Nama: the nuts and bolts
21 March 2010 By Richard Curran
As the National Asset Management Agency (Nama) outlines what it will pay for the first tranche of developer loans from Irish banks, one of the biggest financial gambles in the country’s history is ready to begin.
The agency will take ownership of its first batch of loans in the coming weeks following an initial 28-day period in which errors in the paperwork and other potential problems can be rectified. Nama is expected to purchase €80 billion of loans over the next 12 months and then work out, sell and manage that enormous portfolio over the next ten years. It will have a commercial mandate, which means it must try to get back as much money for the exchequer as possible from the whole exercise.
It would be an understatement to describe the initiative as controversial, but the debate around how to solve the banking crisis has few workable alternatives. Bu t how will the agency operate and what will it mean for the key stakeholders in the property bust crisis?
The agency
There has been a lot of confusion about what exactly Nama will be. Its primary function will be to purchase loans from banks.So the developer customer who owes the bank €100 million will owe Nama €100 million. In reality, Nama will purchase that loan, for let’s say €70 million, but try to collect as much of the €100 million as possible.Two thirds of the €80 billion of loans it buys will be in land and development. The remaining one third will be loans on existing buildings that are paying rent.
The first thing the agency will do is hear business proposals from the 100 largest borrowers as to how they plan to get out of their current mess, what they want to do with the properties and how much further borrowing they will need to do this. Nama will assess these proposals and decide which projects are worth finishing, which ones should be levelled and which ones should be sold.
Where developers fail to pay their debts (and many are deeply in arrears) Nama may decide to go to court and seek possession of the properties behind the loans, just as a bank might do.A sizeable portion of the loans are on properties abroad (around one third). These loan books may be sold off quickly to bring in some ready cash. They will include €15.9 billion of loans on projects in Britain, a further €4.8 billion in the North, €2 billion in the US and €1 billion in Germany. Where Nama decides to work with developers on projects, things may get very complicated.
F or example, if the agency agrees to lend a developer funds to complete a project, it will require a whole new agreement and shareholding structure. This will probably have to include some financial incentive for developers to finish out the work.They will have to be given a slice of the upside as an incentive. Similarly, if Nama decides that the developer is simply bust, it may decide to work with a different developer on a specific project.The rules governing these relationships have not been spelt out. We don’t know what developers will be prohibited from getting involved on other projects.
The clients
In total, Nama is expected to buy up to 2,000 loans belonging to hundreds of developers. The bigger clients will deal directly with Nama.The smaller ones will continue to have the administration of their loans carried out by the bank on Nama’s behalf. But Nama will make the key decisions for all of them. Developers will deal with Nama on good, performing loans as well as bad ones.
So far, many of the developers who are in deep trouble have been kept ‘‘alive’’ by their bankers, who have been waiting to sell on the loans to Nama. There was no point in foreclosing on some developers, seizing their assets and then trying to sell them, when they could sell the developers’ loans to Nama. The agency will inherit these problems. For example, where a developer has some properties generating rental income and others completely stranded, their banks have been collecting the money coming in and deciding how much to let the developer keep.
Where developers are technically insolvent, their banks have been deciding how much they can pay themselves. Nama will have to continue to make those decisions. It will also have to decide whether to pursue developers’ personal assets, including their homes, on foot of personal guarantees they have given. Smaller developers are nervous that they will be treated more harshly by Nama than clients with massive exposures of hundreds of millions of euro. They fear they may be pursued more readily, because the amounts involved are smaller and Nama has less to lose by closing in on them. Time will tell if these fears are justified.
Developers are already in so much trouble that Nama will in her it over €9 billion of rolled-up interest from the banks on these loans. It is difficult to see how the agency will get this money back.
The banks
Banks will be relieved to get these loans off their books. At a time when there is widespread scepticism about whether they will lend again, the only sector guaranteed to get an injection of new credit is commercial property, because Nama will have at least €5 billion to lend to complete projects. Once Nama starts selling actual properties, the banks will be able to get back into lending for property again because they will have to provide funds for developers who want to buy assets fromthe agency. The banks’ balance sheets will shrink dramatically when they sell off the assets, but they will get cash from the European Central Bank (ECB) in return for the bonds they receive from Nama.
The taxpayer
The big question is how much we will get back.Nama is likely to pay up to €50 billion for the loans. It may avail of a pick-up in property values in Britain and the US to sell off assets there quite quickly. It will have to pay an interest rate, or coupon, each year to the banks on foot of the bonds it issues. This will have to be funded from its cashflows.
It will begin by paying up to €7 billion more than the current market value for the loans. When combined with the €9 billion of rolled-up interest, the agency is off to a shaky start. The original draft business plan suggested, somewhat optimistically, that the agency could make €5 billion in ten years.
Most people expect it to lose a substantial sum, which will be borne by the taxpayer, but spread out over several years.
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