When the Comptroller and Auditor General published its special report on NAMA in May 2012, we learned quite a lot about NAMA’s operations. The above extract introduced many of us to the term “connection management agreements” which plainly provide for what most of us would commonly refer to as “debt forgiveness”.
By way of example to explain what we’re talking about – imagine you are Developer A and you have a company called “Developer A Limited”. Your company borrowed €100m from the bank to develop a site. The bank required you as Developer A to give a personal guarantee of €5m secured on your own house. The property sector collapses and your €100m loan is transferred to NAMA which wants its €100m back. Trouble is, the site for which you borrowed the €100m is now only worth €20m, so NAMA hasn’t a hope-in-Hell of getting its €100m back from that. And your personal guarantee of €5m won’t make a huge dent in the outstanding debt either, but you are on the hook for it. So NAMA says “right Developer A, if you manage your site which is worth €20m today so that we can sell it for €50m in three years time, we will not come after you for your personal guarantee”. Developer A really doesn’t have a choice – he either works with NAMA or loses his house now, so he says “yes”. And this agreement will then be written up and referred to as a “connection management agreement”.
However, citizens of this country will want to know more about these agreements. After all, developers whose debts crippled this country when the Government decided to guarantee the banks, will walk away from their loans without having to give us the assets pledged under personal guarantees. In the above example, it makes financial sense for NAMA to forgive these personal guarantees if, through the labour and sweat of the developer, the site appreciates in value from €20m to €50m in three years. NAMA gets an extra €30m and in return “pays” the developer just €5m in waiving their personal guarantee. So the above might be a sensible commercial decision.
It is political dynamite however, because every under-water mortgage-borrower in the country might rightly conclude that their asset is worth just 50% of the mortgage outstanding and their “other assets” – which the bank might have recourse to if it forecloses – are practically worthless, so why won’t the bank offer them a deal over three years as well. Why is there one rule for the developers and another rule for other borrowers?
That is presumably why Minister for Finance, Michael Noonan was apparently unwilling to give Sinn Fein’s finance spokesperson Pearse Doherty a straight answer on the matter in the Dail during the week when Minister Noonan cryptically said that “debt forgiveness has not formed part of these agreements”. The full exchange is here:
“Deputy Pearse Doherty: following the recent publication of a special report by the Comptroller and Auditor General, the number of connection management agreements the National Asset Management Agency entered into with debtors; and the amount of debt to be forgiven in such agreements. [27956/12]
Minister for Finance, Michael Noonan: I am advised by NAMA that two-thirds of all debtor cases are going forward on a consensual basis, with terms signed in 187 cases. Connection management agreements, to which the Deputy refers, are used only in very specific circumstances where significant restructuring is involved: NAMA advises that, to date, it has signed connection management agreements with two debtors, agreed terms with a further four debtors and is in negotiation with an additional two debtors. The most common form of agreement between NAMA and debtors is a Letter of Support. I am advised by NAMA that debt forgiveness has not formed part of these agreements.”
Those last two words in the exchange above – “these agreements” – ambiguously could refer to “Letters of Support” but the question asked was whether or not, connection management agreements provided for debt forgiveness, so you would expect a forthright answer to confirm or deny if debt forgiveness forms part of connection management agreements. And waiving a personal guarantee is, in the eyes of most people, debt forgiveness.
NAMA won’t want to confirm it is offering debt forgiveness. The Government won’t want to confirm it either. But the Comptroller and Auditor General has confirmed that “These agreements, known as Connection Management Agreements (CMA), set
out the incentivisation arrangements including arrangements in respect of personal guarantees that will apply if the debtor meets the targets agreed with NAMA and complies with any other terms set out in the agreement.”
Where are the “incentivisation arrangements” for the little people?