UK: NAMA Was Created On 21 December 2009 Following The Global Financial Crisis, As Part Of A Solution To Stabilise The Irish Credit Institutions, Protect The State's Interests, Create Liquidity And Restore Confidence In The Irish Banking Sector

The numbers

To achieve its aims NAMA (National Asset Management Agency) has acquired €81bn of loans and associated assets from the participating institutions at a discount, and manages those assets for the benefit of the Irish taxpayer over a seven to ten year lifetime.

There were widespread concerns that NAMA would pay too high a price for the assets it acquires, resulting potentially in a huge loss to the Irish taxpayer, but its objective is to break even as quickly as possible.

The participating institutions and the loans to be acquired from each are as follows.

NAMA funds the acquisition of loans in the form of government-backed securities, which the participating institutions can use to create liquidity through repo activities with the European Central Bank and the market. The discount applied to the nominal value of the acquired loans varies between the institutions and across asset types, with an average discount of circa 58% having been applied to the €72bn of loans acquired to date.

36% of the loans acquired by NAMA in the first two tranches related to assets based in Britain and the Channel Islands.

The NAMA operation

Transparency and confidentiality

In its short existence, NAMA has developed a great reputation for secrecy but it has to function within the confines of the legal framework under which it operates. For example, the way in which it has conducted the tender processes for each of its panels of professional advisers (including lawyers, valuers, enforcement and insolvency professionals) has been open and details of the appointments to each panel are available on the NAMA website (www.nama.ie). I am pleased to be able to say that Smith & Williamson have been admitted to the following panels:

• advisory work in connection with the review and evaluation of borrowers' business plans, and
• enforcement and insolvency services.

Dealing with debtors and assets

In relation to its dealing with debtors, the processes used are also quite well publicised. Debtors are required to produce a realistic business plan that recognises the scale of the problems and demonstrates that they are willing and can to do what is necessary to work their way out of difficulty.

If, however, debtors are unwilling to engage with NAMA, cannot do what is necessary to navigate a way through the difficulties or are unable to demonstrate long-term viability, NAMA has shown that it is prepared to take enforcement action. At 19 May 2011, NAMA had taken or approved enforcement action in 57 cases.

Where the reputation for secrecy primarily arises is, I think, in relation to the statutory requirement for NAMA and its officers to keep information relating to debtors (and associated assets) confidential. In reality, although this requirement is enshrined in statute, it is no less than each of us would expect from our own bank – that our affairs be kept confidential. Further, it would place NAMA at a commercial disadvantage and contradict its duty to obtain the best achievable financial outcome for the Irish taxpayer if it were to disclose, for instance, the amount it had paid for a debtor's loans.

To an extent, of course, these confidentiality restrictions do not apply to assets that are controlled by insolvency practitioners appointed by NAMA and in the near future the website will helpfully include a database of such assets.

Asset disposal strategies

NAMA's board has set targets for cumulative debt reduction over its expected life as follows.

With €77bn of debt at nominal value to be paid down by 2018, there seems little room for prevarication.

In keynote speeches given by NAMA Chairman Frank Daly and CEO Brendan McDonagh last month, we learned of the NAMA board's thoughts on strategy for maximising realisations in relation to commercial and residential assets.

They said that NAMA neither forces its debtors to "engage in a precipitative fire sale of assets" but nor does it "sit around in the hope that some fine day the current market hangover will cure itself", rather they seek a balance between these approaches. NAMA recognises itself as a significant player in the property market and acknowledges the responsibility it has to help lift the market out of its current stagnancy. It has approved the sale of circa €3.3bn in property assets since 1 March 2010, much of it in the UK.

Market drivers – supply, demand and liquidity

Naturally, in the context of the size of its property portfolio, NAMA does not consider that supply is going to be a problem for the market in Ireland in the short to medium term.

NAMA acknowledges however that purchasers need comfort that prices are at, or close to, bottom. For commercial property, it points to the long-term relationship between commercial property prices and economic growth and argues that prices have now been corrected (at 60% below their peak) to levels where they could have expected to have been had the bubble not occurred. We are told that NAMA has experienced considerable interest from (mainly foreign) investors in purchasing Irish commercial property.

NAMA admits that the outlook is less clear on the residential side, but maintains that it has received a substantial volume of enquiries from prospective individual buyers.

Regarding the key question of liquidity, NAMA has identified two initiatives through which prospective purchasers could have greater access to debt finance.

On the commercial property front, NAMA will consider making stapled debt available to the right purchaser, at suggested loan to value ratios of 70% to 75%.

Intriguingly, it has been announced that NAMA have held discussions with Allied Irish Banks and Bank of Ireland with a view to unveiling a product later this year that would provide some protection to purchasers against the risk of negative equity on residential property assets acquired out of the NAMA portfolio.

Unfortunately, given the restraints on credit that persist on this side of the Irish Sea, it seems unlikely that NAMA will extend these initiatives to purchasers of assets in the UK.

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