Archive for June 28th, 2010

“We go there and they come here” – so sang Christie Moore with “Lisdoonvarna” and succinctly summed up modern mass tourism. With news that the Top 10 NAMA developers have requested €1.5bn of funding to complete projects I wonder if it is time for NAMA to cast its net far and wide for third party (co-)developers and investors. After all NAMA has been referred to as the world’s biggest property fund with €81bn of property under management. So why not have a global approach to attracting funding? If Treasury China Trust can still throw shapes in the Chinese market, if Bernard McNamara can rustle up €20m deals in Qatar, if Avestus (formerly Quinlan Private) is developing a 100,000 sq ft shopping centre in St Petersburg and if Sean Mulryan’s Ballymore is developing the Embassy Quarter beside the Battersea Power Station site (property of Treasury), then what is NAMA doing to get developers and financiers from abroad to invest in NAMA assets, particularly the ones backing €55-60bn of loans here.

Of course you might say the Irish property market is moribund and not attractive to foreign investors. But remember that NAMA has paid a price for the loans reflecting the reality today and taking a prudent view of the long term economic values. So if NAMA has done its job correctly then there should be a relatively level playing field for attracting finance between Dublin, Doha, St Petersburg and Shanghai.

So how are NAMA courting international investors and developers? Whose job is it at NAMA to seek out these creatures? Who has that expertise or experience? Global property fund = global reach. And NAMA might find it gets more co-operation from NAMA developers if it is known that there are other suitors seeking to develop or invest in NAMA projects. Time for NAMA to engage with the Arab sheikhs, Hindu Sikhs, Jesus freaks?

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If the first tranche of NAMA loans which totalled €15.3bn gross (out of an estimated €81bn) is representative, then NAMA may find that it eventually faces requests for some €8bn of development funding if the Sunday Business Post is correct in its reporting that the first NAMA Top 10 developers have submitted business plans which required €1.5bn of NAMA funding.

NAMA of course required a €250m advance from the Department of Finance in May 2010 to provide a “working capital buffer” and that was in addition to its €100m of seed capital in the NAMA SPV and the advance payment of fees by financial institutions that may have been €2.3bn according to the first tranche NAMA press release.

The revelation of the size of the funding requirements is likely to attract substantial public unease though of course NAMA may decide to not satisfy this level of funding. NAMA should also have recourse to other funding:

1. From the developers themselves – as NAMA is no doubt finding out, many developers will have loans which are either non-recourse, have ringfenced liability to SPVs or are otherwise unlikely to threaten the overall wealth of the developer. Some developers will have substantial funds available to them. NAMA required developers to set out a comprehensive schedule of assets when presenting their business plans and if this has been honestly prepared it may provide a rich vein of funding.

2. From third party investors/developers – referred to by the NAMA CEO, Brendan McDonagh, at the Oireachtas Joint Committee on Finance and the Public Service in April 2010, NAMA will adopt a role of match-maker between “distressed” NAMA developer and other investors and developers. Some of these marriages won’t be welcomed by developers – egos and history may make some tie-ups unpalatable – but NAMA may have the final say in who provides funding. There is no shortage of potential funding partners eg Green Property and TPG Capital have signalled that there is €900m available for projects though that appears to be more geared towards purchasing as opposed to joint development. There are plenty of developers out there as well in funds.

3. From banksSavills organised a conference recently which heard “In terms of new lending, the most active players, according to Savills, included nine German banks, four UK institutions and two international lenders.” So the NAMA financial institutions mightn’t have an appetite to invest in this schemes but NAMA, together with the borrowers, may secure financing from other banks.

So once NAMA satisfies itself as to the content of the business plans, it will presumably then ask the NAMA borrowers to what extent these other funding sources can be tapped. NAMA has a finite €5bn for development (though the Minister for Finance can increase that, although he may need to come back to the Oireachtas for approval). Only 20% of the loans have transferred. NAMA needs to objectively prioritise development allocation according to commercial return. So committing 30% of its development fund (and the fund was also to be used to catch any other NAMA expense eg a difference between interest received and paid) with only 20% of the loans transferred mightn’t be the wisest move at this stage. And if NAMA does provide advances and development funding, it will be interesting to find out what Return on Investment % it is seeking, given the funding is probably not available elsewhere perhaps 20-25% per annum might be a good start.

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This will be a busy week for NAMA with the presumed publication of its Business Plan and its first Quarterly Report to the Minister for Finance. The Quarterly Report is a requirement on NAMA arising from the NAMA Act. Remember that the Report produced this week will be for the period ending 31 March 2010 when only a piddling amount of loans had transferred to NAMA (€370m out of the €7.7bn consideration for the first tranche was paid by 31 March). Also the NAMA CEO was questioned by the Oireachtas Joint Committee on Finance and the Public Service on April 13th, 2010 – so 13 days after the period to which the first Quarterly Report will refer, deputies and senators probably got as close to the activities as they’re likely to get. However here’s what I think we should be looking out for:

1. Conflicts of Interest – if a member of the NAMA Board has a material interest in a matter before the Board as set out under section 30(2) of the Act, then that interest must be advised to the Board. The Board must record the interest and may refer to the disclosure in the Quarterly Report. It is within the discretion of NAMA to refer to the disclosure and NAMA must juggle unhealthy public attention now with the consequences of the information eventually leaking out later.

2. Information about the loans taken over – this is likely to be limited to the INBS and EBS loans which were transferred to NAMA by 31st March, 2010 – AIB, BoI and Anglo came later. So €810m of gross loans for which €370m was paid by NAMA. Whether 1% of the NAMA estimated total loans (€81bn) will provide representative information is debatable but the Quarterly Report should set out the degree of impairment for this small sample.

3. Finance raised by NAMA – for the period ending 31st March 2010, this should be the €51m from the third party “independent” investors in the NAMA SPV and €49m from the government. However it might also show any income from reimbursement of costs by the financial institutions.

4. Operating expenses – under section 55 (6) (j) NAMA is required to produce a complete schedule of income and expenditure. Those great deals that NAMA said it negotiated may be put to the test if (and it’s a big “if”) there is sufficient detail.

5. Balance Sheet – not very interesting on the face of it but how NAMA recognises the difference between the face value of the loans and the price paid and the level of provision for bad debts may be interesting.

Hopefully the Quarterly Report will be made available later this week.

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