The final part of the three-part review of NAMA in 2012 will be published on here tomorrow, but in this blogpost, we remove the wraps from the crystal ball and gaze into the year ahead for the Agency. NAMA is now decidedly in its asset management phase having largely completed its acquisition of €74bn of loans from five Irish banks. As NAMA told us previously, asset management of underlying property consists of (1) disposals (2) renting (3) mothballing (4) development (5) demolition – of course if NAMA was a true asset manager, there would be a sixth option of co-development and seeking third party development risk finance.
Here’s a look ahead at ten areas in 2013.
Legal problems for NAMA. We appear to be still waiting for the Attorney General, Maire Whelan to respond to the request from Judge Charleton in the High Court in October 2012 to examine section 101 of the NAMA Act for compatibility with the Constitution. This section 101 allows NAMA to disregard assurances given by the original banks to borrowers if NAMA claims it wasn’t aware of such assurances when it acquired the loans. Judge Charleton is unhappy with the section, and it reminds us that the NAMA Act 2009 is relatively new and has not been extensively tested in the courts. Separately, but related, was the surprising success of Treasury Holdings in its judicial review proceedings with NAMA, success which was swiped away by a technicality but as the law stands, developers are entitled to be consulted about their loans before NAMA forecloses and NAMA’s procedures and actual behavior must be fair. In truth, many developers are deeply underwater with their loans because the underlying property is worth a fraction of its original cost, interest charges have mounted and the economy is still in the doldrums, so few developers have the wherewithal or need to challenge NAMA. But there are 15-20% of NAMA loans which are performing and not all developers are in distress. So don’t be surprised if NAMA faces more legal challenges. In the US, NAMA faces an uphill battle with the feisty Gayle Killilea-Dunne and her husband Sean as NAMA tries to show that certain transfers from the heavily-indebted Dunner to his wife took place so as to bilk creditors.
Enda Farrell. NAMA and Minister for Finance Michael Noonan would like to draw a line under the two strands of the Enda Farrell affair, the purchase of a property from a developer whilst employed at the Agency and the alleged removal of confidential data which was then widely disseminated. The first strand won’t disappear until NAMA shows us the evidence that there was an independent valuation, because since the Sunday Times broke the story in August 2012, the Agency has been downgrading the valuation that was obtained and as it now stands, it was no more than an opinion, and at this rate, it might have been some estate agent asked if €410,000 was in any way defensible and the response was “whatever”. On the second strand, several developers including Sean Dunne are unhappy that their confidential data might be the subject of tittle-tattle by every agent and their receptionist in Dublin, and NAMA’s claim that the Agency hasn’t suffered damage from the alleged leaking just doesn’t stack up. The Garda investigation of the matter is still ongoing apparently, and Enda faces up to five years in prison and a fine of up to €5m or both should he be convicted of offences under the NAMA Act. There is also an investigation by the Data Protection Commissioner ongoing. And there is the small matter of costs in the High Court case taken by NAMA against Enda and his wife Alison Kramer (or Alice Kramer) and there is hearing scheduled for January 2013 where it seems Alison is resisting any liability for costs as she merely passed emails on without knowing their contents, she claims. Stepping back from the individual Enda Farrell affair, you have to be impressed that NAMA with 227 staff and a further 400 approximately working at the Participating Institutions hasn’t suffered more scandal and it seems that the claim Brendan McDonagh spends considerable time interviewing and selecting staff is more than just executive PR. NAMA was coy over its disciplinary actions in 2012, and there has been speculation that Enda Farrell isn’t the only employee in hot water, but NAMA and Minister Noonan refuse to comment on such speculation.
Disposals in Ireland. When Minister for Finance Michael Noonan or NAMA are asked about their plans for disposals, they go all coy and say revealing such information would undermine the Agency’s commercial remit. However, we learn from the IMF in December 2012 that NAMA apparently has €3bn of Irish disposals planned in 2013-4. We previously learned from the Comptroller and Auditor General that NAMA was to hold its hotel assets until after 2015, we know that NAMA had 13,000 of residences in the State of which about 1,000 have been sold and most of the rest are highly rentable in well-located areas. So, it seems that at long last, the floodgates are about to be opened on the disposal of NAMA’s commercial property portfolio which was acquired at a cost of €9.25bn by reference to November 2009 values but is worth about €6bn today. NAMA is also making €2bn of staple finance available, although it did previously say such funding would be available to top quality property with blue-chip tenants and reputable investors. NAMA is a latecomer to the mass disposal of Irish commercial property and Certus, Bank of Scotland/Lloyds, Ulster Bank and even AIB have already been disposing of loans and property. NAMA says that with effect from October 2011, it is marketing “nearly all” of its properties on the open market. The “nearly all” will come in for scrutiny in 2013 and the Fianna Fail senator, Mark Daly has warned that he will resurrect his NAMA transparency bill. NAMA can expect to be challenged on its monthly foreclosure list which seems to deliberately obstruct analysis of additions and deletions and which continues to be ridden with errors. Related to disposals is NAMA’s renting strategy and we will soon see if NAMA will roll-over rent abatements granted in 2012 which have cost NAMA and its developers €6m so far. NAMA demolished its first property in 2012 in Longford but indicated the demolition option would be pursued in a very limited instances. NAMA is taking an obviously more gentle approach in Northern Ireland where it is foreclosing on fewer developers and has now started investing on a larger scale; it previously committed to avoiding fire sales across the Border and the North’s finance minister Sammy Wilson appears to keep close tabs on the activities of the Dublin-based Agency.
Bond redemptions and cash balance. NAMA should meet its bond redemption target of €7.5bn by the end of 2013 with ease, it has already redeemed €4.75bn and the Agency has a healthy cash inflow as you would expect in its earlier years when it still has quality loans and property. That will change but NAMA should only really meet a cash flow challenge in 2017 when the majority of its bonds are repayable according to the internal NAMA schedule, though remember that internal schedule is not copperfastened into the Memorandum of Understanding. NAMA remains atop a cash mountain for the time being, and don’t be surprised if Minister Noonan directs – actually “Directs” with a capital “D”, which is something the Minister is allowed do under the NAMA Act – NAMA to temporarily fund the €3.1bn Anglo promissory note that falls due at the end of March 2013.
Paddy McKillen and developers generally. Paddy is really no longer in NAMA, but remember that Paddy ultimately failed in his appeal against the British courts’ judgment which practically upheld the manner in which NAMA sold €800m of loans in the Maybourne Hotel group to the Barclay brothers, because the British appeal courts didn’t see the point in spending more time on a matter which was peculiarly foreign – Irish courts might take a different view, and it wouldn’t be a total surprise if Paddy were to take his grievance to the Irish judiciary, it mightn’t affect the sale of the loans as regards the Barclays, but it might land NAMA with a colossal damages bill. Paddy is separately appealing the British judgment which didn’t see anything untoward in the Barclays’ acquisition of influence and control in the Maybourne group – that hearing is scheduled to start in February 2013 and you might expect some sparks to fly. On a general level, NAMA has foreclosed on loans belonging to well over 27% of its developers in the Republic of Ireland and there doesn’t appear to be any let-up in the pace of new receiverships. In 2012, NAMA launched nearly 40 applications in Dublin’s High Court and warned that it was about to refer one developer to the Gardai. On the other hand, Ballymore had some good things to say about NAMA, but as we move in 2013, there is still a generally distrustful and combative relationship between developers and the Agency. More than 20 Irish NAMA developers have been declared bankrupt in the UK and we can expect to see further bankruptcy bids in 2013, despite recent indications that the UK is tightening its application of bankruptcy jurisdiction rules.
Mergers and acquisitions. There is no long term logic in maintaining a separate NAMA and IBRC. There is also the burning issue of the loss-making mortgages in the Irish banks, particularly Permanent TSB and Irish Nationwide Building Society. As regards cost control, NAMA appears to be far superior than its state-owned competitors and if you use accounting profit as a measure of performance, it is also a better managed organization delivering better results. So it might make sense for NAMA to merge with IBRC with NAMA taking on the dominant role. There would be savings in costs and a reduction in harmful competition for customers and resources. Minister Noonan isn’t keen for now, but the writing is on the wall – there won’t be 3-plus state-owned bank asset managers by 2020.
Investment. We learned recently from the IMF that NAMA was backloading its €2bn investment to the latter part of the four year period ending in 2016. When the State is on the floor with 14.6% unemployment and anaemic economic growth, this seems inexcusable. If Minister Noonan can issue a Direction to NAMA to provide a temporary digout to repay the Anglo promissory note then, Minister Noonan can certainly issue a Direction to frontload the investment. Don’t be surprised if NAMA funds a major office block in Spencer Dock, it is certainly spreading investment across the State in shopping centres from Ballincollig to Charlestown. Gerry Barrett seems delighted that NAMA is investing €20m in Scotch Hall in Louth.
Transparency. The ongoing High Court case between NAMA and the Information Commissioner continues and if NAMA is unsuccessful, then it will at last be exposed to environment information requests, but I seriously doubt such requests will yield much information. It is unclear if the Freedom of Information legislation will be extended to NAMA as indicated by An Taoiseach Enda Kenny in February 2012 when he then said “the Bill relating to freedom of information will be introduced later this year. A number of areas require discussion and analysis before the Minister can move on it” NAMA appeared before four Oireachtas committees in 2012 and the betting is that it will be similarly challenged in 2013. In the Dail, Minister Noonan can expect to continue to field parliamentary questions. We can hope that the Comptroller and Auditor General will undertake another specialized report into NAMA’s asset management. There are two requests from here to the European Commission for paperwork and documents associated with the NAMA deferred mortgage initiative and the staple financing scheme, both are still being progressed despite objections from the “Irish authorities” – Department of Finance, I assume.
Political Interference. Remember the conniptions poor old Willie O’Dea was suffering in 2010 when he wondered if he could contact NAMA to discuss a building site in his constituency which had become a hazard and magnet for anti-social behavior. Politicians have since become quite bold in their overtures to NAMA, and it seems the once fearsome NAMA anti-lobbying rules which then-Minister for Finance Brian Lenihan promised would mean only the debtor could lobby NAMA about their loans, have been over time exposed as toothless. NAMA even provides TDs and senators with a dedicated email address and has appointed a relationship manager – sorry, Head of Relationship Management, Martin Whelan seems to be building an empire. In 2012 Minister Reilly met with NAMA over primary care centres, though the Minister insists he did not discuss a specific site on Dublin Road in Balbriggan. Minister Bruton insists he did not lobby NAMA over the lease of part of Burlington Plaza to BSkyB. Minister Noonan Directed – with a capital “D” – NAMA to temporarily fund the Anglo promissory note payment that fell due in March 2012. A NAMA advisory board was appointed and even though it reports that NAMA is performing effectively, the board is being maintained. In 2013, there is a review of NAMA’s overall operations due as part of the NAMA Act and you can bet your bottom dollar that the review will be an opportunity for further political interference.
Financial performance. NAMA has reported a post-impairment profit of €222m for the first six months of 2012 and it looks as if the Agency is on course to beat its 2011 annual pre- tax profit of €12m. Despite the fact that NAMA’s year comes to an end in two day’s time, we don’t yet have a forecast of outturn for 2012. Given NAMA’s convoluted methodology for accounting for interest, its eight-year remaining lifespan to work out or claw back losses, and the artificiality of its accounting practices – all compliant with international standards, it should be stressed – we are likely to see profits in 2013 also. The crunch will come later if the Irish property market doesn’t stabilize and grow prices at a rate that exceeds the rate at which NAMA runs up interest and costs.