NAMA may only have concluded one deal so far where its new staple finance initiative has featured, but the Agency has announced that it ultimately intends making €2bn available to buyers of its commercial property. And in a market the size of Ireland’s and in an economic climate where there is precious little credit available from traditional sources, NAMA’s staple finance scheme is likely to be a game-changer. The European Commission has today confirmed that NAMA has not received approval for its staple finance scheme and that there is no documentation to show that NAMA sought approval for the scheme.
Staple finance, or vendor finance is where NAMA will convert part of the sale price of one of its assets into a loan to be paid by the buyer after a period of years. For example, if NAMA or one of its developers has an office block for sale at €30m and you want to buy the office block, then NAMA will take perhaps 30% in cash from you today – so you need to find a €9m deposit – and the remaining 70%, or €21m will be due from you in five years. And for the next five years, you must pay NAMA 3.5% per annum interest on the €21m loan. In five years, you hope to sell the property or refinance the €21m loan with a traditional lender and in that way, NAMA gets its €21m “loan” repaid. And if, for some reason, you don’t pay the €21m, then NAMA takes the property back from you and keeps your deposit and any interest payments.
When NAMA was planning the introduction of another scheme – its “negative equity mortgage” or as NAMA calls it, the “80:20 Deferred Payment Initiative” – it delayed the launch for several months so as to secure European Commission approval. And yet the negative equity mortgage product might apply to 750 homes – 115 in the pilot launched in May 2012 – and even if the typical home costs €300,000 then the value of the scheme for 750 homes is “only” €225m or one tenth of NAMA’s staple finance initiative.
The Minister for Finance, Michael Noonan has recently said that NAMA doesn’t have a standard template of terms for its staple finance initiative, and indeed he has refused to provide details on the parameters of the initiative. NAMA’s cost of funding is theoretically the 6-month Euribor interest rate – currently 0.8% per annum, though NAMA does hedge its interest rate which adds some cost to that. But still, with a cost of funds at around 1%, NAMA is in a very special position to be able to provide loans to buyers of its property. Ulster Bank and Certus can’t be too happy as they sell similar assets in the same marketplace but without the apparent wherewithal to provide financing, and even if they could, with a cost of funds that is likely to be 3%-plus, that they can’t provide staple financing at the same interest rates as NAMA.
NAMA was asked for a comment on its contact with the European Commission in respect of its staple finance initiative, and specifically if it has considered the potential for it to distort the marketplace and set itself at a competitive advantage. Any response will be posted here as an update.