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Archive for August, 2011

(Click to enlarge – extract of new property added in the second edition of NAMA’s Enforcement List published today)

Sooner than expected, NAMA has this afternoon published its second so-called “Enforcement List” – real estate properties subject to NAMA loans to which receivers have been appointed. The list is available as a non-searchable PDF here – hopefully a more manipulable format will be available here later today. I have extracted here the new property added in the second edition. The list is supposed to be accurate as at 31st July, 2011. (UPDATE: 31st August, 2011. It seems that the new property added – approximately 40 in total – mostly represents Sean Dunne’s, Paddy Kelly’s  and the Grehan brothers’ assets)

In summary there are 887 properties on the list, up from 857 last month. The list is supposed to encompass all NAMA foreclosed property, inIreland,Northern Ireland,Great Britainand the rest of world. Remember that is just includes real estate property – you won’t find planes, helicopters, speedboats, cars, art, wine, investment portfolios here.

The list is of intense interest as many of properties are likely to be for sale, though you should note the caveat in the introduction to the list that some properties may not be for sale. NAMA publishes on its website a list of terms and conditions that accompany the Enforcement List.

In the first instance, queries or expressions of interest should be forwarded to the receivers whose website addresses are shown alongside the relevant property. If you think there are errors on the list then you should contact NAMA by sending a message to properties@nama.ie

NAMA published the first edition of the Enforcement List on 28th July, 2011 and there is an entry here which examined that list.

Some frequently asked questions about the list

Q. NAMA has said it has 83 hotels inIreland in its portfolio, why are there so few hotels on this list

A. This list only contains real estate property subject to NAMA loans, to which receivers have been appointed. Most hotels subject to NAMA loans inIreland continue to be operated by the original developers/borrowers.

Q. Why is the list so short. Is this all the property assets in NAMA?

A. NAMA has said that its loans encompass over 16,000 properties so this list represents a small fraction of that total. Most property remains in the hands of the original developer.

Q. I contacted the receivers and they say the property is not for sale.

A.  I understand most of the property on the list is for sale, but the role of the receiver is to maximise the return to NAMA, so some property may potentially be developed, rented, managed, mothballed or even demolished.

Q. I contacted the receivers and there has not been any response, or they referred me to an estate agent that has not responded to my enquiries?

A. NAMA is interested in monitoring the performance of its receivers and their agents, but remember this list generates a lot of interest – the first edition was downloaded over 10,000 times from the NAMA website, and over 5.400 times from the NAMAwinelake blog. So receivers and agents are likely to be burdened with spikes in enquiries. Ultimately if you are not getting satisfaction from the receiver, then NAMA may be interested in hearing from you.

Q. Is this all the property associated with NAMA that is for sale?

A. No, developers who still own property subject to NAMA loans may also sell their own property directly – under NAMA’s auspices of course. There is no comprehensive public list of this property.

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You really have to hand it to institutions in this country. Last week RTE unmasked what it claimed was a Garda informant – it gave his name, his age and his address. And yesterday RTE reported that a prisoner had absconded from the Mid-Western Regional hospital. Did RTE bother to reveal the prisoner’s name, description or photograph? Of course not, why would the national broadcaster want to do something as helpful as that. It reminds me of the comedy sketch where someone being interviewed who wants to have their identity protected, and should therefore have their face pixilated, ends up being presented with the face perfectly visible and identifiable and the background pixilated.

And this morning the Central Bank of Ireland (CBI) released its monthly statistics for banks operating in Ireland. Not only that but the CBI also produces a veritable cornucopia of information on deposits and loans. Twenty spreadsheets – count them here – with myriad numbers. But the one number we all want – the value of deposits by Irish households and normal Irish businesses in Irish state-guaranteed banks – well, those numbers, almost only possible numbers, the CBI doesn’t produce. The reason we want those numbers is that it will indicate if ordinary households and businesses have yet regained confidence in Irish banks, and that confidence will be needed if we are to rebuild a sustainable banking sector. You really do have to hand it to CBI.

In terms of what the numbers released this morning do reveal, private sector deposits in the State –guaranteed banks fell by €973m during the month of July from €103.5bn in June to end up at €102.6bn in July, and that represents a €25.3bn decline from a year ago, July 2010. So the decline is continuing but at a slower pace than previously.

Two other points of note: Firstly, deposits overall in the State-covered banks fell by €18bn in July 2011, but that was mostly attributable to the Government transferring bailout funds which had been previously received from our IMF/EU chums out of deposit accounts and used to recapitalize the banks. Secondly deposits in the State-guaranteed banks from non-Irish residents rose for the first time in over a year – by €1bn in total to €71bn.

Plainly in August 2011, the perceived risk of sovereign default byIrelandreceded in the mind of the bond market with the decline in 10 year yields from the 14%  peak in July to 8.6% today. Might we see more non-Irish deposits returning in August? And might that be a precursor to growing domestic confidence?

The CBI and ECB continue to provide substitute funding for Irish banks which replaces the flight of deposits and Irish banks continue to provide extensive State-backed guarantees on deposits.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating in Ireland including those based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS – Anglo and INBS have now been merged to form the Irish Banking Resolution Corporation, IBRC)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank of Ireland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outside Europe)

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We might have to wait for another next week to ten days before NAMA issues its second edition of its famous “enforcement list” – properties to which it has appointed receivers and which are potentially up for sale. Of course the list is only of property to which NAMA has appointed receivers, and there will be additional property under NAMA’s control which may be sold directly by the developers themselves. Without citing sources, a London freesheet and online news portal, City AM claims that two major properties are to come onto the market “next month”, which I guess starts from tomorrow. Neither property is apparently shown on NAMA’s first enforcement list.

The two properties which the newspaper claims will come on the market will be 107 Cheapside in the City of London (pictured here in the project brochure), a 183,000 sq ft office/retail development owned by Menolly, Seamus Ross’s company – CB Richard Ellis are shown as the agents for the development; and Senator House at 85 Queen Victoria Street also in the City of London (pictured here), 100,000 sq ft office development owned by Avestus, with which Derek Quinlan was associated – Drivers Jonas Deloitte was a letting agent for the development. The location of both properties is shown on the map below – click to enlarge.

City AM says that Senator House might fetch GBP 77m (€87m). The reporting at City AM then breaks down – it is not clear if there is a third unidentified property for sale but the article does refer to a “GBP 65m residential tower in Hoxton”, which was reported here yesterday (and which was first reported by Britain’s Estates Gazette last week – not available online without subscription). The City AM article does say that overall the property for sale might be worth GBP 250m but it is unclear if that is for four properties including the “Hoxton” residential tower, and if there is a third unidentified building.

It is however clear that NAMA is active in the London market, but there is a lack of transparency with what is available for sale (the enforcement list is but a subset of NAMA’s assets, though the remainder are loans which have not yet been foreclosed). There has been speculation that receiver sales in the UK, particularly London, may not have resulted in optimum prices. Given the wealth of information available in the UK, sooner or later that speculation will be tested.

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London’s Evening Standard is reporting that NAMA is selling a partly complete 27-storey mixed used development in Hackney, east London that was formerly part of John McCabe’s empire. The property is at 159 City Road, London EC1 V 1JH (pictured here on McCabe UK’s website and here at Skyscraper News which carries the planning and development history of the site together with present-day photographs).

The development which the Evening Standard says is in Hoxton – I would have said just north of Moorgate just beyond the City ofLondon - is a 27-storey tower containing 300 flats, a supermarket, gym, shops and offices. McCabe say on their website that the development is worth GBP 58m (€65m).

McCabe Builders is most associated with John McCabe of Anglo Golden Circle repute and has an extensive range of developments in Ireland and the UK including the Abington Estate in Malahide, north Dublin (former home to Anglo’s David Drumm and Boyzone’s Ronan Keating), the Marriott Hotel in Ashbourne and the Heritage Centre in the PhoenixPark. Two weeks ago on here, it was exclusively reported on here that a McCabe site onArlington Street, St James’s,London was being sold for GBP 20m (€23m).

According to the Evening Standard the property is being sold by Cushman and Wakefield. There is no evidence of the property on C&W’s website and at time of writing, C&W had not responded to a query from here. The property is not apparently listed on the NAMA enforcement list of property published last month – I am advised that the next issue of the enforcement list is likely to be published in the next week to 10 days.

UPDATE: 28th March, 2012. Property Week is now reporting that Barratt Developments has placed the above property under offer and is now in “exlusive talks” with NAMA and McCabe. The British property magazine also says that a client of a US investment fund has also been pursuing the development property.

UPDATE: 6th July, 2012. Property Week today reports that the above property has now been sold to residential developer Mount Anvil for GBP 51m (€65m).

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This morning has seen the publication of the fifth CSO residential property price indices forIreland. The inaugural series was published by the CSO on 13th May 2011 and covered the period from January 2005 to March 2011. This morning’s release covers the month of July 2011. Here’s the summary showing the index at its peak, November 2009 (the NAMA valuation date), July 2010 (12 months ago), December 2010 (end of year, start of this year) and June 2011.

Now that the Permanent TSB/ESRI has abandoned its quarterly house price index, the CSO isIreland’s premier index for mortgage-based transactions. Mortgage transactions at eight financial institutions are analysed : Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank ofIrelandgroup), the Educational Building Society, Permanent TSB, Belgian-owned KBC, Danish-owned National Irish Bank and Irish Nationwide Building Society. The index is hedonic in the sense it firstly groups transactions on a like-for-like basis (location, property type, floor area, number of bedrooms, new or old and first

time buyer or not) and then assigns weightings to each group dependent on their value to the total value of all transactions. The index is an average of three-month rolling transactions.

As for the key questions:

How much does property now cost in Ireland? The CSO deliberately don’t produce average prices. The former PTSB/ESRI index did and claimed the average price of a property nationally at peak in February 2007 was €313,998, in Dublin at peak in April 2007 was €431,016 and outside Dublin at peak in January 2007 was €267,987. If, and it is a big “if”, you were to take PTSB/ESRI figures as sound and comparable to the CSO series, then the average today

Nationally, would be €180,699 (peak €313,998)

In Dublin, would be €221,437 (peak €431,016)

Outside Dublin, would be €161,874 (peak €267,987)

I don’t think the CSO would be happy with this approach but it seems to me that the PTSB/ESRI series as represented by its historical indices closely matches the performance of the CSO indices.

What’s surprising about the latest release? After recording an increase of 0.3% in May 2011, houses inDublin declined by 2.4% in the month of June 2011 alone and have bucked the trend today by rising by 0.3% in July 2011 when all other categories declined. Nationally apartments fell by 3% in the month of July 2011.

Are prices still falling? Yes, though the 0.8% drop in July 2011 was less than the 2.1% decline in June 2011.

How far off the peak are we? Nationally 42.5%. Interestingly, as revealed here three months ago,Northern Ireland is some 44% from peak. Are forbearance by mortgage lenders, a draconian bankruptcy regime and NAMA’s (in)actions distorting the market? Or are cash transactions which are not captured by the CSO index so significant today that if they were captured, the decline in the Republic would be even greater?

How much further will prices drop? Indeed, will prices continue to drop? Who knows, I would say the general consensus is that prices will continue to drop. This is what I believe to be a comprehensive list of forecasts and projections for Irish residential property, drop me a line if you think there are any omissions.

What does this morning’s news mean for NAMA? The CSO index is used to calculate the NWL Index shown at the top of this page which aims to provide a composite reflection of price movements in NAMA’s key markets since 30th November 2009, the NAMA valuation date. Residential prices are now down 20.0% from November, 2009.  The latest results from the CSO bring the index to 855 (16.9%) meaning that NAMA will need see a blended average increase of 16.9% in its various property markets to break even at a gross profit level.

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This morning, the Financial Regulator Matthew Elderfield has finally released data on mortgage arrears, repossessions and restructured mortgages for the second quarter of 2011; the press release is here, the statistics are here. The data paints a disturbing picture of the deteriorating state of mortgage arrears. Total mortgages in arrears for more than 90 days are 55,763, up 12.4% or 6,154 from Q1, 2011 and up 53% or 19,325 from Q2, 2010, a year ago.

The total arrears are divided between those 90-180 days in arrears and those over 180 days in arrears. The latter category is widely considered to be so underwater that default of some sort is likely. The number of mortgages in arrears over 180 days rose to 40,040 in Q2, 2011, up 4,699 or 13.3% from Q1, 2011 and up 61.5% or 15,243 from Q2, 2010, a year ago.

Repossessions are also climbing are were 173 for the quarter, up from 140 in Q2, and up from the general average of less than 100 since records began.

You might be interested in the comparison between the condition and treatment of Irish and UK mortgages here on Saturday. There is a review of the previous quarter’s data, Q1 2011, here.

Analysis and comment here later today.

[The above table is taken from this Google docs spreadsheet which also shows a comparison of the condition and treatment of Irish and UK mortgages]

UPDATE: 29th August, 2011. Repossessions are up 73% year on year, this despite there being what is considered a moratorium on repossessions through the introduction of a new code on mortgage arrears.

Arrears are increasing, and increasing at a faster rate –illustrated here.

Oddly enough, the rate of increase is below that recorded at the start of 2010, which could indicate strategic default, that is, people deliberately going into arrears to take advantage of any imminent debt forgiveness program. Although that is a possibility, I think the rate of increase is more to do with cuts to income, be that employers cutting gross salaries, or cutting back overtime, or putting employees on short time. The overall unemployment rate remains elevated but has remained more or less flat in the past twelve months, though there is some evidence (eg through the quarterly national household survey) that emigration might be taking some of the strain. Borrowers might have been using savings/redundancy payments to service the mortgage and these are now exhausted. As a society that traditionally frowns on indebtedness and bad debts, it’s perhaps the case that opinions are changing as the reporting of the scale of indebtedness and difficulties with repaying debt, becomes so commonplace.

Despite the gloom and doom surrounding these figures today, it is still the case that the vast majority of mortgage payers are repaying their mortgages as agreed each month. As pointed out by Seamus Coffey on irisheconomy.ie, some €5bn of principal is expected to be repaid on €116bn of mortgages this year and perhaps a similar amount of interest. So the repayment of mortgage debt in Ireland has not stopped by any means, but there are very obvious difficulties.

Trends should depend on

(a) unemployment – currently at 14.3%, the recent trend is as follows

Most forecasters see a slight easing in the rate this year. For example Ulster Bank this morning indicated that the rate will average 14.1% for 2011 which would indicate an end of year rate of below 14%. However, the Government is set to reduce employment in the public sector as part of its €3.6bn – possibly more – budget adjustment in 2012. It may also cut capital programmes which results in further unemployment, particularly in the construction sector.

(b) house prices – currently 42.5% below peak, the trend is downwards. Most commentators had been predicting a bottoming of prices in 2012, but it is unclear when predictions are suggesting prices would rise again.

(c) disposable income – set to be reduced with new taxes (for example,the €100 property tax) and in all likelihood the reduction in income tax bands and the elimination of some tax reliefs. The outlook for inflation is not at all good which is surprising given the collapse in incomes and the fact that in Ireland, an apparently representative basket of goods and services is still 18% more expensive than the European average. Energy is set to rise by 15% in September 2011, and standard variable interest rates continue to trend upwards. Even food basics are increasing by 1.1% per annum, and inflation overall is presently running at nearly 3% per annum.

So will the rate of arrears rise? Difficult to say, but none of the underlying influences would appear to have a positive outlook in the short term.

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Take a look at the above table which compares residential mortgages in Ireland and the UK. Arrears over 90 days in the UK are less than one third the level ofIreland, and yet the repossession rate in the UK is nearly six times that of Ireland. What an incredible difference between two neighbouring countries whose housing and banking sectors have traditionally displayed much similarity to each other.

We were expecting figures from the Financial Regulator, Matthew Elderfield, last week on mortgage arrears, repossessions and restructuring in respect of the second quarter of 2011. Perhaps because of the intense debate on mortgage forgiveness, re-ignited by Professor Morgan Kelly in his presentation to the Irish Society of New Economists on 18th August, the Financial Regulator thought the figures would inflame what is already a vexed issue.

This present Financial Regulator is responsible for having introduced the quarterly reports on the condition of residential mortgages. But he is also the Financial Regulator who has played a pivotal role in the present approach towards mortgage arrears, as he has overseen the introduction of a new code of practice by lenders. The code, available here, was seen by some as kicking the can down the road by allowing some in mortgage distress to delay foreclosure for up to four years. It is also seen as a protocol which is increasingly causing misery as unemployment remains elevated, inflation is increasing – fuel prices are set to increase by 15% from next month, for example – and take-home pay is reducing and there are new taxes in prospect. On the other hand, the protocol was seen by others as a humane way to avoid large-scale repossessions by increasing forbearance whilst the housing and credit markets are still distressed.

In the UK, there will be an estimated 40,000 repossessions in 2011. There were 75,500 repossessions in the UK at the depth of their housing bust in 1991. There are currently 11.3m mortgages in the UK worth GBP 1.2tn, according to theUK’s Council of Mortgage Lenders, so in theUK there are approximately 354 repossessions per 100,000 mortgages. InIreland our repossession rate is approximately 64 per 100,000 mortgages. Figures specially provided by the CML to this bog show that there were at the end of Q2, 2011 234,400 mortgages in arrears of more than three months (they don’t do days in theUK but three months is approximately 90 days) which compares with 55,763 at the end of Q2, 2011 in Ireland. So the UK arrears rate per 100,000 mortgages is just 2,069 whereas in Ireland at the end of Q2, 2011 it was 7,177.

Unemployment and negative equity are the two most important drivers to repossession (that is, not being able to pay the mortgage and not being able to sell the property to repay the mortgage). Ireland’s unemployment rate is 14.3%; the UK’s is 7.7%. Our residential property has dropped 42% from peak according to the CSO. In the UK their property is down 9.3% from peak according to the Nationwide Building Society. Unless the UK is a particularly uncaring or economic illiterate state, then it seems obvious that we are deferring a major problem in Ireland. Whilst none of us has a crystal ball, the recent trend in house prices suggests that further falls are in prospect and we know there are new taxes looming, so the present arrears code may need urgent reform (by the way the position on here is that we reform personal bankruptcy laws before creating some novel innovation to deal specifically with mortgage arrears).

Oh, and why is Matthew Elderfield like Buzz Lightyear?

[The above blogpost has been updated to reflect the Q2, 2011 arrears and repossession data released by the Financial Regulator and analysed in this blogpost]

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As campaigns go, you have to admire the chutzpah and clarity of the one illustrated above. The photograph shows a banner unveiled today above Korky’s shoe-shop in Grafton Street in Dublin, a couple of hundred metres from Government buildings. The subject of the banner is one of the most vexed issues in Irish commercial property at present, the imminent introduction of legislation to allow commercial tenants to secure current market rents in leases which presently provide for Upward Only Rent Reviews (UORRs). The property industry is blaming the uncertainty over the new measures for the almost complete elimination of investment transactions at present, tenants are clamouring for the new legislation blaming existing rents, which can be benchmarked with boom-era rents, for threatening their livelihood and that of their employees and neighbourhoods, existing investors are nervous about the financial impact of any changes on the value of their assets and I am willing to bet the government is anything but sure-footed over the cost of the new provisions and the potential for constitutional and other legal challenge.

The latest news on the subject that has been reported, was an article in the Irish Sunday Times in July which claimed to preview the new legislation (the article is not available online without subscription but you can get most of the details in the update at the bottom of this blogpost). There was also a meeting between Minister for Justice and Equality, Alan Shatter and tenant representatives at the start of August, reported in the Sunday Business Post here. The Department of Justice did not offer any comment on the Sunday Times story, but the expectation is that a Bill will be unveiled at the end of September which will set out the proposed legislation. There will be a feature entry on here then.

There have been two extensive entries on the subject of UORRs on here previously (available here and here)

And if you didn’t know already, Ronan Keating of Boyzone fame was a one-time employee at Korky’s shoe-shop

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Developer Robert Butler’s 16,500 sq ft mansion in the grounds of Adare Manor, Limerick is up for sale through Sherry Fitzgerald for €2.9m (just €175 psf, the advertisement on DAFT.ie is here). Known as “Winterwood” the house is set on its own plot of 2.8 acres within the wider 840-acre hotel and golf resort; it boasts eight bedrooms, eight bathrooms and five reception rooms and a feature double staircase. Doesn’t look too shabby at all on the inside but a personal opinion is that its external architecture is typically bland – why is it that we can’t do high-end architecture in this country?

The Irish Independent reports on the sale today and says that it was worth €12m at the height of the boom, and today’s asking price represents a 76% discount.

The Irish Independent recently reported that companies associated with Robert Butler were now dealing with NAMA. Apparently loans from these companies transferred to NAMA in February 2011 and would therefore have been amongst the later tranches. A note to the accounts of Robert Butler Holdings said “NAMA has agreed to initially provide financial support to the company’s operation, in very specific terms, for a three-month period commencing May 20, 2011”

I see the advertisement on DAFT.ie is 22 days old. NAMA has said that as part of its approach to agreeing business plans with developers, the developers will be required to bring unencumbered assets to the table. It is not known if the sale of “Winterwood” is at the behest of NAMA.

Robert Butler has properties in the Shannon Free Zone and National Technology Park. He is possibly most associated today with what the Irish Independent claims is a €15m development on Henry Street in Limerick.

You might be tempted to compare the sale of the “Winterwood” mansion in Adare with the sale of Updown Court, “Britains Most Expensive House” to which NAMA appointed receivers this week. Set on 58 acres, the 50,000-sq ft, 24-bedroom pile has five swimming pools, stables, tennis and squash courts, a bowling alley, a helipad and garage space for eight cars. The property is in Surrey, about 30 miles from central London. The property has its own website here and its owner, developer Leslie Allen-Vercoe had been trying to flog it for six years before NAMA appointed CB Richard Ellis as receivers. It is not known how much NAMA want for the property but reporting has suggested that NAMA paid just GBP 20m (€23m) for the loan underpinning it, and given NAMA’s core objective of recouping its purchase price there is reason to suppose the price will be in that region.

UPDATE: 3rd March 2012. The property has now reportedly been sold for €1.9m equivalent to €115 psf.  According to David Raleigh at the Irish Times, the identity of the buyer has not been disclosed.

UPDATE: 5th March 2012. The sale of the above property was first reported by Anne Sheridan at the Limerick Leader on Friday last 2nd March, 2012.

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“There has been some comment that the consequence of this objective is that NAMA, having recovered its outlay, will then absolve borrowers of their further obligations. This is absolutely not the case. Borrowers, as both I and NAMA’s CEO Brendan McDonagh have already said on a number of occasions, will continue to be liable for the debts that they have incurred.” NAMA chairman Frank Daly speaking in June 2010.

The re-igniting of the personal debt forgiveness debate last week by  Professor Morgan Kelly, has led some to compare and contrast the predicament faced by ordinary people in shouldering unsustainable debt, with the perception of the light treatment of developers at NAMA. Professor Kelly indicated that €5-6bn of funding would solve many of problems faced by ordinary people in dealing with mortgage debt; it didn’t take long for the suggestion of blanket debt forgiveness to be shot down by ministers, first by junior minister Brian Hayes and then by the Tanaiste, Eamon Gilmore. In contrast last weekend, Ireland’s Sunday Times suggested that NAMA was in fact forgiving €37bn of developer debt. This understandably generated unease and in certain quarters, outrage – there seemed to be one standard for developers and another for ordinary people; the Government was apparently forgiving €37bn of 850 developers’ debts yet refusing to consider a relatively measly €6bn for tens of thousands of ordinary people. The sense of injustice is compounded by the recent, but unrelated, disclosure that NAMA is offering incentive payments to developers, and of course that comes on the back of reporting that NAMA is offering salaries of €200,000 a year to developers.

The accusations in the pages of the Sunday Times are not new; there was a feature entry on here last year which examined the issues, after Alan Ruddock’s last article for the Independent. This entry examines NAMA’s policies in dealing with debtors.

In overview NAMA has acquired approximately €72bn worth of loans at book value and paid €31bn for them. The book value of a loan is what was actually originally given to developers by the banks plus accumulated interest, less any interest and principal repayments. NAMA paid €31bn for these loans after a rigorous valuation and due diligence process. The difference between the €31bn and the €72bn book value was the discount, or haircut, imposed by NAMA. The banks incurred a simple loss on the loans of €41bn.

Amazingly, it appears to be the case that most loans in NAMA have some form of personal guarantee attached. It’s almost a joke in NAMA that developers went to the trouble of creating elaborate corporate structures with offshore embellishments thrown in, all to limit liability and then the same developers turned around and gave personal guarantees to the banks, rendering the elaborate corporate structures largely useless. So much of the lending, even if to a limited company, is backed by personal guarantees though NAMA has not disclosed the value of personal guarantees – the total might be €5bn, €30bn or €72bn, we don’t know.

To go back to when NAMA was created in 2009, a concern on the part of many was that NAMA would be a bailout for developers. At its worst, the concern was that politically-connected insider developers would have their debts written off (or more accurately paid off by ordinary people) and that developers would escape with their wealth, the Bentleys and private planes and, using their insider connections, buy back their property for a song at a later date. These notions understandably inspired suspicion and antipathy towards NAMA, and I think it is fair to say the agency has had a continuous public relations battle to disprove these notions.

From the start, the official claim was that NAMA would pursue developers for every red cent owed, not just the price NAMA paid for the loans, but the full book value of the loans. So a developer who owed €100m to the banks would be pursued for that sum, even if NAMA bought the loan for €40m from the bank.

What muddied the water were statements from NAMA itself, where the chairman and CEO separately and on several occasions referred to NAMA’s “core objective” of recovering what NAMA paid for the loan, plus any new advances made by NAMA. This was interpreted to mean that NAMA was writing off or forgiving the difference between what NAMA paid and the book value. Those from the accounting profession noted that NAMA was not apparently accounting in its financial statements for the book value of the loans, but the price NAMA paid for the loans. So suspicions arose about blanket debt forgiveness, and in the end, the NAMA chairman was forced to make it clear that NAMA was pursuing the book value, and not just the price paid for the loans.

Before dealing with NAMA’s approach to developers, it is worth reminding ourselves of the difference between limited company debts and personal debts. In this country, as in all other developed countries I know, we allow companies with limited liability to operate. The “limited liability” refers to the fact that if you are a shareholder in such a company, your liability is limited to what you paid for the shares. So for example, bondholders in Anglo Irish Bank can’t pursue individual shareholders for debts and equally NAMA can’t legally pursue shareholders in developer limited liability companies beyond what assets are actually in the company. The above isn’t meant to be patronising to readers on here, it’s just that we sometimes seem to forget that some debts mightn’t be recoverable from individuals because the debts were not incurred by the individuals themselves, but by a limited liability company. So let’s say Developer A borrowed all his loans through a limited company, A Limited, and he now owes €100m but the value of the company’s assets is only €40m, then that €40m is all NAMA can legally recover. NAMA is not “forgiving” A Limited €60m, it will pursue it to the maximum extent feasible but if A Limited doesn’t have any more assets, then you can’t get blood out of a stone. There was an entry here last year which highlighted the problems NAMA would have with recovering such loans.

Having said the above in respect of limited companies, it may be the case that some limited companies have a portfolio of assets and projects, and some may not be as impaired as the NAMA assets so NAMA will pursue the other assets in the company to help offset losses.

But aside from company liability, developers can have personal liability. This might be because they gave personal guarantees or maybe they borrowed in their capacity as individuals or as part of an unlimited partnership. Now this personal liability places developers in pretty much the same boat as ordinary people. So how does the treatment by NAMA of this personal liability on the part of developers compare with the treatment by banks of ordinary people who can’t pay their mortgages?

For ordinary people, it should be said that there are very few personal bankruptcies in this country – just nine in 2005, 17 in 2009 and 30 in 2010. For a developed country with a population of 4.6m, we practically don’t do personal bankruptcy; either deals are cut between creditor and debtor, or as generally happens there is a kicking of the can down the road, so the creditor doesn’t enforce or forgive. NAMA says that it will pursue debts in certain cases, on a cost/benefit analysis basis, up to and including making a developer bankrupt.

NAMA is cutting deals, entering into agreements with debtors for their personal liability to NAMA, and you might say there is some debt forgiveness implicit in these agreements.

NAMA will only reach agreement on personal debt where the debtor is “fully co-operating”. To prove the point, NAMA has already sought orders against Paddy Shovlin, Tony and Patrick Fitzpatrick, Ray and Danny Grehan and the directors of Capel Developments, Edward Keegan, John O’Connor and Liam Kelly. NAMA also secured an injunction against the Joyces in respect of the proceeds from a sale of a property on Kings Road in London (reported here in January 2011). So there is no blanket debt forgiveness for all developers and some developers may be bankrupted.

In terms of NAMA’s agreement with developers, any underlying property which secured the debt must be disposed of during the term of the agreement between NAMA and the developer. So if Developer A had secured the €100m loan on Property A, then Property A must be disposed of during the term of the agreement with NAMA. NAMA says this is to ensure the developer doesn’t benefit from an uplift in the market in the coming years. This may seem an odd position for NAMA to take, but the agency seems to be at pains to promote the fact that it is not bailing out developers.

The developer must use all their assets to “support their agreement” with NAMA. Or to put it another way, they have to sell the cars, helicopters, art collections. Or the wife must buy them, or more practically must give NAMA the money for the assets. Either way the value of the assets must be used to pay back the loan or work-out the asset. NAMA has claimed that it has already forced the sale of second homes, paintings, share portfolios and cars. In addition to surrendering existing assets, NAMA says that a contribution from the ongoing salary being paid to developers may be sought to support the workout. So part of the €200,000 may have to go back into the work-out of the loans.

In reaching an agreement with NAMA, developers are required to submit sworn affidavits in support of their disclosure of assets. NAMA says it has inserted additional clauses in to agreements, prohibiting debtors from engaging in certain activities; although NAMA has not specified what activities it has proscribed, they are understood to include the use of private helicopters and planes for personal use. So NAMA might claim that it is being more draconian than a creditor dealing with ordinary people. Ordinary people might say “Bah! We would never have the use of private helicopters and planes anyway” but I think NAMA is trying to clean up the image of some developers with which it has agreements, so those developers don’t continue to be portrayed as profligate hedonists benefiting from state help.

At the end of the agreement period, be that five or seven years or whatever, NAMA will assess compliance by the developer with the agreement and will only then “forgive” the outstanding personal guarantee or personal liability. If the developer is judged not to have delivered on their side, then NAMA may seek to enforce the guarantee or liability at the end of the agreement period.

So is there debt forgiveness at NAMA? Yes indeed, but only after the developer surrenders their personal assets (or the value thereof) and the developer may need contribute part of their ongoing salary to the loan work-out, and the developer must deliver on the agreement in the work-out of an asset. Otherwise the full personal liability may be pursued by NAMA. NAMA demands a sworn affidavit of personal assets and if a developer is found to have misled NAMA, there will be repercussions. The debt forgiveness is not universal and if a developer doesn’t co-operate with NAMA, then NAMA will pursue the developer for the debt, potentially to bankruptcy.

As described by NAMA, the approach above seems reasonable enough. With receivers costing more than €200 per hour, it seems economical to employ a developer at €200,000 a year, if they’re competent and they bring skills and experience to the job at hand. The possibility of part of the €200,000 being contributed by the developer to the repayment of the loan only enhances NAMA’s approach. The incentivisation plan makes sense if the incentive is appropriately pitched, in other words if the target is too low, then NAMA is gifting a benefit to developers and if it’s too high then developers will naturally focus on more lucrative projects.

The debt forgiveness process looks reasonable and indeed appears to be similar to the bankruptcy process (see table at the top). Like the bankruptcy process, it is open to all sorts of abuse. Will the developer make a full disclosure of assets? Will NAMA get the valuation of personal assets right? It will be for those who audit and oversee NAMA to ensure NAMA complies with its own procedures. The debt forgiveness process at NAMA is akin to a bankruptcy, and wouldn’t at all appear to be akin to the debt forgiveness called for by Professor Kelly last week. NAMA might give some thought to how it can promote the transparency of its processes with developers, to dispel the lingering suspicions.

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