Archive for May 23rd, 2010

There is a lot of confusion about the scope of the loans that NAMA will take over from the banks and it is worth re-visiting the NAMA Act (particularly section 69) and also the NAMA (designation of eligible assets) Regulation.

The average man in the street will tell you that the NAMA loans are all property-backed. However it is far more specific and as today’s article in the Independent demonstrates, some property-backed loans will not be going to NAMA.

So here is a simple guide to the criteria for the loans going to NAMA.

1. The loans are on the books of the five participating financial institutions (BoI, AIB, INBS, EBS and Anglo).

2. The loans originated on or before 31 December 2008.

Section 69(5) of the NAMA Act states “A class of bank asset prescribed under subsection (1) shall be taken not to include a credit facility that entered a participating institution’s balance sheet after 31 December 2008. For the avoidance of doubt, where a credit facility entered a participating institution’s

balance sheet on or before 31 December 2008, but security was taken for the credit facility after that date, and the credit facility is otherwise an eligible bank asset, the credit facility is an eligible bank asset.”

What would happen to a loan originated before 31 December, 2008 but which was added to subsequently? Would the additional facility on the same loan be eligible for NAMA? That is left to NAMA’s discretion

Section 69(6) of the NAMA Act states “Notwithstanding subsection (5), a bank asset in a prescribed class is an eligible bank asset if, in the opinion of NAMA, the related credit facility entered a participating institution’s balance sheet on or before that date even if renegotiated or refinanced after that date. For the purposes of determining  whether a credit facility entered a participating institution’s balance sheet on or before 31 December 2008, NAMA may take into account the terms of any renegotiation, restructuring or refinancing of a credit facility effected after 31 December 2008.”

3. The loans relate to development land.

“Section 69 (1)(a) (i) for the purpose, whether direct or indirect and whether in whole or in part, of purchasing, exploiting or developing development land,

(ii) where the security connected with the credit facility is or includes development land,

(iii) where the security connected with the credit facility is or includes an interest in a company engaged in

purchasing, exploiting or developing development land”

Furthermore under s4(1) of the NAMA Act which sets out interpretations and definitions

“development land” means land wherever situated (regardless of its zoning or its status under the Planning and Development Acts 2000 to 2007 or any other enactment or applicable law)—

(a) in, on, over or under which works or structures were or are to be constructed, or

(b) where it was intended to make a material change in the use of the land,

that was intended to be sold or otherwise exploited;”

4. What about loans for anything other than development land? The Minister for Finance is given wide discretion to designate other loans as NAMA-eligible loans by virtue of

Section 69(2)(b) “(b) credit facilities and classes of credit facilities (other than credit facilities referred to in paragraph (a)) relating to  debtors or associated debtors of participating institutions (or classes of debtors or as sociated debtors of participating  institutions) where the total amount of indebtedness in respect of such facilities is such that, in the opinion of the Minister, acquisition by NAMA is necessary for the purposes of this Act”

5. Development land? Then what about ghost estates ie houses on development land? These would be captured as the “exploiting or developing development land” (69(1)(a)(i).Ditto newly-built hotels and shopping centres.

6. Development land? Then what about Claridges and the Connaught which are long-established hotels. If a developer obtained a loan for the purposes of developing land but pledged other assets as security then those assets may come to NAMA.

7. What is the difference between development land (exploited or not) and investment property?  In simple terms, investment property is not to be developed. It is purchased to yield an ongoing return (eg through rental) or speculatively because it will appreciate in value. However given NAMA’s intended role as a property asset manager it is unclear why investment property is excluded from NAMA’s scope, particularly given that €5.5bn of the €8.5bn in the first tranche consideration was for investment property securities.

8. Are all of the loans toxic? Not at all. The five participating institutions must hand over all the loans which met the criteria regardless of whether they are performing or not. They can’t cherry-pick. Indeed NAMA will be auditing the financial institutions to ensure they have transferred all loans which meet the criteria.

However there may be a gap in the NAMA system. Loans which originated before December 2008 may avoid NAMA if they are repaid and indeed that appears to have happened in some instances. NAMA should carefully examine the circumstances of the redemptions. NAMA’s purpose might be frustrated if banks allowed the redemption of a loan because the redeemer was offering more than NAMA. Given these loans may well be of superior quality and would have had a strong chance of recovery by NAMA in full, then it is unclear how NAMA’s interests are legislatively protected.

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