Making sense of the NAMA appearance before the Oireachtas

If Brendan McDonagh is ever looking for a new career, he might consider being the auctioneer in our local mart. Such was the pace of delivery of his opening statement to the Oireachtas Joint Committee on Finance and the Public Service. Along with John Corrigan from the NTMA, the duo were grilled for three hours by a cross party group of deputies and senators and after the opening statements, it was clear that the NAMA CEO’s confidence grew. You can see the rough draft of what was said here. The full transcript of the hearing is now available from the Oireachtas website.

In terms of froth, we got to hear Arthur Morgan asking when NAMA was going to tell the banks, who are delaying in providing documentation, to “piss off”. To which the surprising answer was that NAMA had already issued a formal direction in respect of the second tranche. It was also hilarious to see Joan Burton mix up the effect of the rate on NAMA’s bonds (6 month Euribor) and think NAMA were now paying more on these bonds. Liam Twomey’s wife apparently bought a hairdressers during the boom and it was now worth less than 50% and Liam wanted to know if NAMA was overpaying for assets. There were a few hooks cast by the Opposition fishing for a story on salaries or conflicts of interest or developers disposing of assets to avoid repayments.

However, once the froth is blown off, the main points to arise from the hearing in respect of NAMA were:

1. NAMA will not produce a business plan until June 2010 and was not even willing to speculate on what the intelligence gathered from the first tranche or the last 6 months would mean for that business plan. Although increasingly pressed for overall numbers, the NAMA CEO was not yielding. That is a worry and the vacuum will be filled by speculation.

2. In terms of the first tranche the rolled-up interest was €2.4bn approx (15%) included in the €16bn total. Anglo is not disproportionately affected by rolled-up interest and NAMA will not allow developers to defer judgement day by continuing to roll up interest unless it is in the loan contract.

3. NAMA will spend in the order of €43bn compared with €54bn in the draft business plan (referred to as being “for illustrative purposes” by the NAMA CEO).

4. In respect of the first tranche 33% of loans are performing in respect to paying interest cf 40% in the draft plan. 25% of the first tranche valuations by the banks’ valuers were rejected by NAMA (what does that say about the duty of the banks’ valuers to NAMA?)

5. NAMA is containing costs within the draft plan parameters, significantly so in the first year.

6. NAMA was continually referred to as a 7-10 year project, compared with the 15 years talked about by Brian Lenihan last week.

7. There will be 15 tranches and 3 of the 5 institutions should be complete by Q3, 2010.

8. The difference between LEV Property and consideration in the first tranche is the 5% enforcement and 0.25% due diligence and the NAMA discount rate referred to in the NAMA LEV Regs plus the risk premium calculation. Consideration paid = LEV of the loan. This area is still confused and a worked example would have helped.

9. NAMA will carefully consider spending the €5bn. However it appears that NAMA will be a match-maker between borrowers and investors and in some cases there may be shotgun marriages.

10. The language used by the NAMA CEO was tough in respect of the banks and the developers. Time will tell whether it translates into constructive management of the project.

The NAMA/NTMA roadshow will be in Belfast in May 2010 at the Belfast Chamber of Commerce though apparently the event is sold out. Many people will welcome the briefing from NAMA but a few of the questions that remained unanswered.

1. Have any first tranche valuations been referred to the “long” dispute procedure? Has the EU agreed the first tranche?

2. How is the 5% subordinated debt consideration working?

3. If NAMA is paying the banks 6 months Euribor on its bonds and receiving 6 month Euribor plus an average of 2% on loans transferred and 80% of loans will be repaid in full then why does the draft business plan show interest receivable at €12bn and interest payable at €16bn?

4. Although it might not be of interest what the banks are doing with the NAMA bonds from the NAMA CEO’s point of view, it should be of importance to the NTMA. Are they being exchanged and used for lending to homes and businesses?

5. Can NAMA change the valuation date for future tranches? They have set it at 30 November 2009 when the market was clearly still diving.

6. What is NAMA doing to stop leaks to selective media outlets?

7. Does NAMA consider the constraint of being prevented from using data from sources post 10^th January, 2010 to be hampering it in producing accurate property LEVs.?

8. Does NAMA consider population projections from the DoEHLG and CSO from 2009 and 2008 respectively to be realistic?

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NAMA to appear before Oireachtas Joint Committee today..

The full transcript of the hearing is now available from the Oireachtas website.

Brendan McDonagh, chief executive of NAMA and John Corrigan, chief executive of the NTMA are scheduled to appear before the Oireachtas’s Joint Committee on Finance and Public Service later today. Expect some newsworthy revelations in particular if Joan Burton and Richard Bruton are on form – Joan Burton has recently been out of sorts because she claimed she asked for a meeting with NAMA and was effectively snubbed. Comment and analysis will appear here later  …

A transcript will appear in coming days on the Oireachtas website so below is a draft of the key points. However they are subject to revision when the final transcript appears. Also this is really only concerned with NAMA. Practically all that John Corrigan had to say (and some of it was interesting for example in respect of recently devolved powers from DoF to NTMA)

Opening statements from the two witnesses, from Brendan McDonagh :  €5bn development pot will only be spent on commercially viable schemes, there will be demolition but not as the first option, the evidence uncovered with the first tranche was shocking in respect of lending practices. THE FULL OPENING STATEMENT FROM BRENDAN McDONAGH IS HERE.

Richard Bruton: Asked about NAMA’s two key business plan assumptions – 10% growth in asset prices in 10 years and 80% recovery rate – bond yields on NAMA bonds – pay and terms in NTMA/NAMA, will NAMA hold or dispose of assets – NAMA codes of practice – banking expertise in NAMA – why the reason for delay for Anglo – NAMA’s operating costs

Brendan McDonagh: Deflected questions on business plan saying it will be published by the end of June 2010. Anglo first tranche will be completed in 10 days. 3 of the 5 banks will be complete by Q3, the rest by the end of 2010. NAMA bonds at 6 months EURIBOR no margin – Anglo had more problems with documentation – NAMA’s op costs this year €100m versus budget of €160m and expected to be €160m from next year onwards – Head of Lending recuited from UK starting next Monday, codes of practice with DoF and will be published

Joan Burton – NAMA business plan, conflicts of interest re John Mulcahy as reported with his €2.3m shareholder in JLS, NAMA bond rates (she seems to have the wrong end of the stick as she thinks the rate relates to NAMA’s receivables and not payables)

Brendan McDonagh – NAMA business plan will need be approved by NAMA board and then MoF. Expects to be published in June 2010. He’s keeping firmly schtumm on this. John Mulcahy required to register interests. NAMA bonds priced at 6 Month Euribor currently 1%. Receivables from developers typically 6 month Euribor plus 2%. Issued €3.5bn of Bonds and doesn’t know if the financial institutions have redeemed them at the ECB as that’s beyond the scope of NAMA. 33% of Tranche 1 loans performing compared with 40% business plan. Interest roll-up by NAMA is going to be avoided unless contained in contract. No comment as to future tranches except the need for caution and prudence because of the problems uncovered in tranche 1. NAMA paid zero for personal guarantees and the banks didn’t like it. Borrowers will be pursued for personal guarantees, in some cases borrower assets may be less “than people think”. If people display obvious wealth and defy us, NAMA will go after them tooth and nail (sic).  Strong committment to go after people. Business plans from borrowers within 30 days of transfer. Face to face meeting have taken place and Business plans will be reviewed over 2-3 months. Moves against borrowers in September. Examples of abandonment of basic principles of lending : banks writing on loans so quickly and were relying on solicitors undertaking, charges not registered on time, banks thought they had first charges but that turned out not to be the case. Non-standard mortgages. Lack of clarity of what the bank was lending! Titles incorrectly described. Legal documentation not reflecting loan applications! 100% LTVs for example with speculative agricultural land. UK standard is 50% LTV. Banks taking “benign” look at the loanbook. These types of loans were being approved at all levels in the banks. The auditors etc had oversight but would have relied on letters from senior execs at the institutions.

Dan Boyle – cross securitisation, haircut and the33% performance, professional firms still operating with NAMA having hand in NAMA.

Kieran O’Donnell [probably asked the most detailed questions of the day and seemed to be the most prepared and briefed of all of those on the committee]: Asked in strong terms for details of the final business plan and questioned whether the original plan was just an illustration. With 20% of the loan book about to be transferred said it was incredible that a firmer fix of the final plan could not be obtained.  What was the LTV of the first tranche? What was the interest roll-up in the €16bn? What was the overall plan default rate based on information in tranche 1 and the last 6 months? What is the final figure for Anglo in tranche 1? How many of Anglo’s loans are non-recourse. Why was the LEV different to the consideration paid and how much does NAMA now expect to pay [in the draft business plan it was €54bn].

Brendan McDonagh: non-performing % is a red herring re haircut. extensive cross-collaterisation and that was the nature of what was happening – “banks chasing the dragon”. Hiring of professionals were subject to public procurement and external process auditor and Maurice O’Connell who signed off on arms length and fair procurement. As long as the “usual suspects” met criteria, they were entitled to be considered. Not a legal or autioneering firm not involved in property boom. Clients of two finance institutions investing in SPV getting 4.5% annual return. Again defended publication of business plan in June 2010. Didn’t answer LTV of first tranche. Interest roll-up was 12.5-15%, later defined as of the €16bn so €2.4bn interest roll-up and €13.6bn original loan. Didn’t answer overall plan default rate. Didn’t answer Anglo final tranche 1 figs. Didn’t answer number of Anglo non-recourse loans. NAMA was now looking at paying around €43bn. LEV of property was calculated by NAMA and then 5.25% was taken off and then the premiums according to number of years held.

Arthur Morgan: Will the developers be living the jet set life during the summer if NAMA will only act against them in September? If the banks are delaying providing the necessary documentation on loans when will NAMA tell them to “piss off”? What about the social dividend of NAMA and the 100,000 people waiting for homes.

Brendan McDonagh: There have been face to face meetings with some developers. They have 30 days to produce business plans from when NAMA acquired their loans and those business plans will be considered over 2-3 months. Only then can a decision to foreclose and pursue the loan be made. NAMA has already issued a direction pursuant to section 6 (?) of the Act with respect to the 2^nd tranche so that the information is provided on time and to the standard required. The former county manager for Fingal would be assisting in assessing estates for demolition or other use.

Liam Twomey: Are NAMA valuations too high? Has NAMA uncovered fraud?

Brendan McDonagh: NAMA is valuing to 30 November 2009. Prices may well have fallen by 50% and more. There are instances where NAMA has valued at 90% off the valuations [assume at origination]. No fraud yet uncovered but if there had been, NAMA would have reported it to the relevant authorities.

Terence Flanagan: How many tranches will there be? Who will have the authority to write off loans?

Brendan McDonagh: There will be 15 tranches approx [interesting as this is up from 7 previously].  The Minister does not get involved in writing off loans – that has been delegated to NAMA who have a procedure which involves the Head of Credit Risk, the Credit Risk board and the overall board depending on the value of the write-off.

Terence Flanagan: Asked about providing working capital to developers.

Brendan McDonagh: Yes working capital had been advanced but it was “not huge amounts”. [It is unclear if NAMA are referring to the €5bn development pot or giving authority to banks to advance further lending]

Sean Barrett: Wanted to put on record the damning indictment in NAMA’s opening comments about financial institutions abandoning basic practice in lending operations or stress-testing loans. Was there conflict been NAMA and non-NAMA financial institutions.

Brendan McDonagh: The evidence so far uncovered is that the banks got into huge trouble and it happened under the stewardship of those individuals who came before the Committee to give assurances about stress-testing and those were the facts. No there wasn’t apparent conflict yet.

Paul Coghlan: Was there a conflict in that financial institutions were acting as agents for NAMA and some of the individuals in the banks might have been across the original loans and may have compromised judgement.

Brendan McDonagh: NAMA have issued a direction pursuant to section 131 of the NAMA Act specifying how and who should be dealing with the loans in the financial institutions. Assures that there is very little discretion on the banks’ parts (who act as agents to NAMA) in respect of the top 100 borrowers.

Joan Burton (follow-up) Could NAMA confirm the top 10 developers or confirm newspaper reporting of the top 10? What will NAMA do about transfers to spouses or other family or companies to avoid repaying NAMA? What is the definition of family home and can it refer to a portfolio of homes? Does the law need to be updated in this area of “family home”? Were bank officials effectively accessories to fraud by signing off on certain loan documentation? How much of the €5bn has been allocated?

Brendan McDonagh: Until and unless NAMA foreclose on loans, then the developers are entitled to the same confidentiality provided by banks. NAMA will consider applying to the courts to undo transactions if it considers it appropriate. The Family Home Protection Act sets out the definitions of family homes but it might be beneficial to NAMA if the law was changed for example in respect of trophy homes. Not sure if defects in loan documentation was fraud as much as incompetence.

Kieran O’ Donnell (follow-up). Of the €16bn first tranche, how much was the interest roll-up and how much of that was for Anglo? There was confusion about the Eligible Assets, could NAMA clarify what they were.

Brendan McDonagh: 15% of the €16bn, ie €2.4bn and Anglo was probably a proportionate part of that ie €10bn/€16.03bn. The phenomenon of interest roll-up was by no means limited to Anglo. Eligible Assets have been defined and the Financial Regulator together with the EU will conduct an audit later this year to ensure the financial institutions have accurately reported to NAMA. The CEOs of the financial institutions had to sign off on the eligible asset lists reported initially to NAMA.

Michael McGrath initially chaired and peppered excellent questions, the answers to which are shown above. Michael Ahern was in the chair at the end and oversaw the civilities of thanking everyone.

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