In an unusual move, the Department of Finance published a draft of the proposed NAMA legislation for public debate and discussion throughout the summer, in advance of it being formally debated in the Dáil in September after the summer break.
Whilst the legislation is long and complex, it is relatively light on hard facts, most notably in the glaring omission of any detail on how loan valuations are to be arrived at.
The Minister is to publish regulations at a later stage setting out the proposed basis for valuation, which is to take into account the current market value, adjusted as appropriate for the “long term economic value” of the loan or underlying property. This will result, it is expected, in significant write-downs on some assets; for instance, land acquired with an expectation of significant development maybe written back down to agricultural value if such expectation of development is not now a reasonable assumption.
On the other hand, we understand that a medium to long term view will be taken on other developments, taking into account future expectations of capital appreciation, demographics, future economic recovery and growth.
Which loans can be transferred?
Loans taken out with participating banks in the period up to 31 December 2008, including any top-ups, re-financings or rolled up interest since then can be transferred. New loans cannot.
How will loans be selected for transfer?
Firstly, the Government has acknowledged that the “riskiest” loans to the country’s top 50 borrowers will be taken over in the initial phases for the purposes of cleaning up the banks’ balance sheets and letting them get back to normal business. It is estimated that these amount to over €30 billion.
Each participating bank’s loan book is to be examined on a loan by loan basis to determine whether the loan is to transfer into NAMA and, if so, at what value. Criteria to be taken into account include, among other items, when the loan was taken out and the loan to value ratio.
The types of loans to be transferred in are those relating to undeveloped land banks, partially completed land banks and associated loans. Associated loans are those which are neither land nor development loans, but which are held by persons with land and/or development loans. These latter loans may be cross-collateralised with other loans. In this manner, NAMA expects that both performing (i.e. serviced ) loans and non-performing loans will transfer in.
The €90 billion in loans expected to transfer to NAMA are broken down as to €30 billion for undeveloped land, €30 billion for development loans and a further €30 billion on commercial properties, which may have been provided as security for impaired site or development loans.
If some loans are syndicated between both participating and non-participating banks, the Government expects — somewhat optimistically — that such loans will be sorted out using “a co-operative business like approach to resolving issues arising”. The loans to be transferred will relate to both Irish and foreign assets.
How NAMA will deal with those loans
The process is expected
to work as follows:
NAMA issues the participating bank with an acquisition schedule, setting out the loans it expects to take over.
The estimated value of those loans will be stated, along with the proposed date of acquisition of the loan.
Assuming no objections are lodged, the loan transfers to NAMA in exchange for the issue of Government securities and/or guaranteed securities to the value of the agreed valuation placed on the loan transferring.
NAMA then takes on the role of managing the loan, with a view to obtaining the best possible return from it for the taxpayer. It has a range of powers enabling it to collect the interest, sell, transfer, lease or otherwise deal with the property in any way that will maximise the amount it recoups from it.
Developers will be expected to service and repay the original amount borrowed, not just the revised valuation between NAMA and the lender, although whether this comes to pass is a matter for speculation.
The bank may object to the transfer of a loan to NAMA but only on the limited grounds that it is not an eligible bank asset.
The bank may also object to the value placed on the loan or the inclusion of a loan in the acquisition schedule. The objection will be transferred to NAMA’s valuation panel for review, who have 90 days to review a loan value and advise the Minister for Finance as to whether the valuation is correct or not. The Minister has the final say on valuations, but it is expected that this power may be reduced by the time the legislation is enacted. The review does not stop the transfer from going ahead. If a valuation is to be adjusted, the bank will be paid, or a refund will be received by NAMA, for any valuation adjustment that arises from the process.
The impact of the legislation on developers
NAMA will operate by certain agreed loans, or “eligible bank assets”, transferring from the participating banks to NAMA. The biggest omission from the draft legislation is the valuation or price to be paid for those loans. However, regardless of the price paid, the developer will continue to owe the current amount outstanding on the loan. For example, if a developer owes the bank €100m and NAMA takes over the loan for €70m, the developer will still owe NAMA €100m.
The Government has indicated that developers will be pursued for repayment of the loans in a more rigorous fashion than that which they may have experienced to date with their current lenders. However, it is difficult to imagine how someone’s repayment capacity will suddenly improve if NAMA becomes the lender.
The impact on the taxpayer
The Government has claimed to have limited the exposure to the taxpayer, by hinting that a levy will be imposed on the banks to recoup NAMA losses and by implying that the next budget will include provisions restricting the banks from writing their current NAMA-imposed losses off against their tax liabilities. They state that up to 50 per cent of the loans in question are performing and that the interest from these should be sufficient to service the cost of the newly issued bonds.
There may also be opportunities in the scheme for the Government to acquire strategically important land banks at knock-down prices, which may be required for certain infrastructure projects.
The legislation attempts to limit the possible legal challenges to the process, and thereby avoid it becoming bogged down in expensive, lengthy litigation, by limiting borrowers’ dealings in property, even where not covered by NAMA, and rendering void any dealings in assets before NAMA is up and running which could be regarded as an attempt to frustrate the NAMA process. The agency would also have CPO powers to acquire so-called “ransom” sites, which are tracts of land not covered by NAMA that may be required to sell NAMA-covered land.
Aggrieved borrowers may have to look for damages rather than injunctions as legal remedy if they feel their rights have been infringed. Injunctions have the habit of delaying process and will only be granted in the event that an injustice would arise if not granted.
However, there is no limit specified in the legislation on the amount of loans that will be taken over by NAMA. There is no time limit on NAMA’s existence: past experience, through ICI, has shown that the fallout from such measures can stay with us for many decades. The Government has stated that a review will occur after five years but that the process may take up to 10.
The methodology for valuing the loans has not been published and it will be June 2010 before we know exactly how much we are paying for, and how much of a discount has been agreed on these toxic loans. An estimate is to be issued in September 2009. We cannot currently quantify what our exposure is going to be and for how long. As a nation of only two million taxpayers, it may take a very long time and high tax rates before the full amount is repaid.
The expected impact on the economy generally
Without doubt, there is a massive gamble being taken on the appropriateness of this strategy. There is a large risk that the prices agreed with the banks to take over the loans are excessive or that the non-performing loans continue to be just that, with permanent losses incurred as a result.
As the price to be paid for the loans is not agreed, it is difficult to assess with any certainty what the long term impact of NAMA will be for us. There is no disputing the fact that the Irish Government will soon become the world’s largest property holder, taking on exposure for debts of up to €90 billion, with a dwindling workforce expected to help service the debt.
The Government is awaiting a final decision from Eurostat, the EU statistical body, on whether the bonds issued to the banks in exchange for the loan assets will be taken into account in calculating the country’s national debt. A negative outcome would have significant implications for the country’s access to finance on the world market, the price paid for such finance and the country’s international credit rating. The arguments that (1 ) assets are being acquired in exchange for the increased debt so one cancels the other out, and (2 ) NAMA is a step removed from the Government itself, are being put forward as bases for not including the NAMA loans on the country’s balance sheet.
The purpose of NAMA is stated to be to deal with “the negative impact on the economy from deficiencies in the asset quality in the banking system” with a view to addressing “the health and stability of our banking system — to ensure that the credit required by the economy is provided and that people’s savings are protected.” (ref: Minister for Finance statement on NAMA legislation draft paper ). However, most businesses these days are experiencing difficulties in accessing credit from their lenders and the establishment of NAMA will not suddenly result in this position reversing. The injection of Government securities into the banks will not mean this will automatically be paid out to “normal” borrowers. In fact, depending on the Tier 1 capital base of the banks post-NAMA, a further injection of Government funds by way of equity subscription — estimated to be in the region of €6 billion — may be required.
Whilst it is helpful that the draft legislation has been published, it is regrettable that its impact is limited by the exclusion of the key aspect: The valuation methodology. It is not possible to draw any clear conclusions on the scope, effectiveness, impact or appropriateness of the legislation without this information.
Recent appointments of receivers to the assets of high profile property developers and recent High Court refusals to place large developments in examinership, possibly forcing fire-sales of existing stock, will not help the situation and will certainly place NAMA and the prices it ends up paying for loans under intense scrutiny as current values will very likely be a fraction of the long term valuation being proposed under the NAMA model.
What is clear is that the valuation method is going to assume a future uplift in property values and the timing and extent of this will determine the cost to the taxpayer in the long run.