Whilst Minister for Finance, Brian Lenihan continues to exhibit signs of schizophrenia with his stance on the cost of our bailout funds from the EU/IMF (5.8-6%), telling Opposition politicians only last week that it was not possible to renegotiate the interest rate of the EU element and then later claiming that it was possible, there is seemingly a scandal going unnoticed with NAMA developers being advanced funds at rates significantly below the rate that we, the nation, must bear.
Last Friday, Britain’s Property Week reported that Paddy McKillen’s Maybourne Group had been given an extension of two years to repay GBP £660m (€784m). The loan was reportedly due to be repaid by the end of last year and indeed it seemed as if the second part of last year was one long scramble by Maybourne to find a financing partner – Deutsche Bank, Westbrook Partners, Northwood were all reported to have had talks with the luxury hotels group about refinancing the loans that were due for redemption to banks which include Bank of Ireland and Anglo Irish Banks. If the Property Week story is correct then it was NAMA that recently green-lighted the extension of the loan for two years.
This is on some levels a curious development as Paddy McKillen has been locked in a bitter legal dispute with NAMA for the past six months – a dispute which Paddy comprehensively lost in Dublin’s High Court but which is presently awaiting the outcome of an appeal to the Supreme Court which was held before Christmas. The curiosity is that Paddy seems to be dependent on the grace of an organisation which he is litigating against. It seems that NAMA has not yet absorbed Paddy’s loans pending the outcome of the Supreme Court appeal.
What was not disclosed by Property Week was the interest rate payable by Paddy on the GBP £660m of borrowings. However NAMA CEO Brendan McDonagh has previously stated (“those loans would typically be priced at a six month EURIBOR rate plus a margin, typically 2% approximately”) that NAMA developers were typically paying interest at ECB + 2% (that is 3% at today’s rates). If, and to stress we do not know in the present case, the interest rate charged to Paddy on the best part of a €1bn facility is 3% and on the other hand Ireland must pay 5.8-6% to the IMF/EU for the funds to bailout Anglo in particular and potentially Bank of Ireland, which is flouncing around at the moment ahead of its deadline in 40 days to raise €1.5bn (not to mention pay the NPRF €214m interest on its preference shares “investment”), then is it not scandalous that, going forward, the nation subsidises this developer to the tune of €22m per year (5.8% – 3% * €784m).
NAMA of course was intending to raise up to €5bn to fund developments and working capital. However its funding plans were apparently put on hold following the freeze-out of the State in raising finance late last year. It is not presently clear how NAMA will raise this development funding and the agency seems to be relying at present on some loan repayments from borrowers to enable it make new advances to selected borrowers. What rate is NAMA charging on these additional advances and does it mean that if NAMA (which is effectively state-owned) is charging less that the State is paying to the IMF/EU that we are again subsidising developers?
Arguably variable rate mortgage lenders paying less than 4% at present are also being subsidised, though it seems likely that lenders will start raising their standard variable rate in the near future with Permanent TSB being the first tipped to raise their rates by 0.5% from 4.19% to 4.69% with others expected to follow suit. There are some 792,000 mortgages in the State with some 271,000 standard variable rate (407,000 trackers and 113,000 fixed). So standard variable rate mortgage holders might also be receiving a subsidy which is apparently fast reducing but that still leaves well over 80% of the population not receiving any subsidy.
It seems that we should have sent Mr McKillen in to negotiate our interest rate with the EU/IMF rather than our Minister for Finance. He was completely out of his depth. Nothing new in that though.
In any case, NAMA is funding very little and word emanating from its offices is that, following instructions from the IMF, the immediate focus will be on disposals not development.
From the last business plan(from Nama) that I saw, Nama was charging a margin of 4% on any new funds for completing unfinished developments.
This would equate to a total cost of funds of 5% if you add the current 3 month euribor of circa. 1%.
Nama was also charging a huge fee of over 20m+ (on a 180m debt)as the PD worked down the loans over the life of the business plan. Sounds like the old days of Anglo !
The new Government will have a mandate to try to reduce the interest rates on the IMF/EU package. Should the Irish state hit close to the budgetary targets over the next three years as promised, the IMF/EU should reduce the interest rates on the bailout package.
Note if PD’s had to insert an interest rate of 5.8% in their
business plans there would be no capital repayments by
anyone, ever.
The only reason capital repayments can be made on the few
developments in Ireland are because of commercial buildings that are vastly over rented with low interest margins on their loans.
When rents have to be reduced(see IMF/EU memo) and the ECB raise rates, we will be lucky to cover 50% of the interest on the loans. This is part of the ongoing cover up and lies by Nama.
If the mark-up was 4% over euribor with a big fee, why wasn’t Deutsche Bank, Westbrook or Northwood jumping at it?
Since Maybourne could not get refinancing anywhere, what’s the point of keeping them in the equation. They didn’t payback the £660 on time, they defaulted, No? Why give them a free option? Why is this acceptable to taxpayers?
Gossip ex NAMA reports that the next major push is on UK disposals and disposals of “white” development land that has no income, no immediate potential and is costing money. A more leisurely pace will be adopted with income producing assets and many of these will be kept under wraps until there is a return to a more “normal” market.
[…] # Is it right that the State must pay 5.8% on bailout funds whilst NAMA is lending billions to develop… […]