“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.