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Archive for July 12th, 2010

There will be a brief review of the five NAMA Codes of Practice which were published on 6th July, 2010. The first is the code dealing with the Disposal of Bank Assets. Like most of the codes, it appears to have been put together by NAMA’s Head of Legal and Tax, Aideen O’Reilly who joined NAMA in February, 2010 having acted as a Senior Legal Adviser to the NTMA since 2002. She might use a spell-checker on future published documents.

The Code itself is a very brief four pages with one header page and four additional pages of Glossary.

Bank assets are of course the loans – NOT the assets underpinning the loans (see below). So NAMA will sell loans on to third parties which was of course referred to in the NAMA Act (section 35(1)(d)) though I think many people thought this referred to the sale of the underlying property and not the loans themselves. As regards this Code, it merely says that the NAMA Board will develop a strategy for selling loans and these may be sold directly by NAMA or through intermediaries, at all times observing the main objective of maximising the return to the taxpayer. If the loans have a value below €100m then one independent adviser must provide a valuation and above that level or for “complex” loans, two valuations are required.

NAMA are observing the Code of Practice for the Governance of State Agencies 2009 as regards the sale of the underlying property and this will probably be of more interest to many people. How NAMA can dispose of assets to local authorities within this framework is unclear, and again will disposing of property at advantageous prices to local authorities weaken NAMA’s ability to pursue borrowers who may turn around and defend themselves in court by saying NAMA failed in their duty to get the best price for the property? The relevant section of this Code is “Disposal of State Assets and Access to Assets by Third Parties” which states

18.1 The disposal of assets of State bodies or the granting of access to property or infrastructure for commercial arrangements e.g. joint ventures with third parties, with an anticipated value at or above a threshold level of €150,000 should be by auction or competitive tendering process, other than in exceptional circumstances (such as a sale to a charitable body). The method used should be both transparent and likely to achieve a fair market-related price. The anticipated value may be determined either by a reserve price recorded in advance in the State body’s records or by a formal sign-off by the Board on the advice of the Chief Financial Officer (CFO) or, if delegated by the Board, sign-off by the CFO or the Board Audit Committee, that, in its view, the anticipated value is likely to be less or greater than €150,000. In determining market value, regard should be had to accounting standards best practice in Ireland. Compliance with use of Auction or Tendering Requirements

18.2 If an auction or competitive tendering process takes place and the highest  bid is not the bid accepted, then specific Board approval is required before the disposal of the asset or granting of access to property or infrastructure for commercial arrangements with third parties can be completed. For reasons of transparency, such approval together with the reason why a lower bid was permitted to be accepted should be noted in the minutes of the Board.

18.3 Where an auction or  competitive tendering process is not used and the agreed price is €150,000 or more, then specific Board approval is required before negotiations start and also before the disposal of the asset or granting of access to property or infrastructure for commercial joint-venture arrangements with third parties can be completed.

18.4 No disposal of an asset or grant of access to property or infrastructure for commercial arrangements with third parties should be completed until the officer authorising the disposal or grant of access has certified formally that (i) Board approval is not necessary, with the reasons therefore, or (ii) Board approval, where necessary, has been obtained.

Directors and their Families

18.5 Disposal of assets to Directors, employees or their families or connected persons, should, as with all disposals, be at a fair market-related price. Where the Board is considering a proposal for any such disposal, the Director connected to the potential purchase should absent him or herself from the Board deliberations on the issue. A record of all such disposals to such persons (to include details of the asset disposed of, price paid and name of the buyer) should be noted in a register kept for this purpose (minor disposals below €5,000, or a threshold approved by the Board may be omitted from the register). This register should be available for inspection, if requested, by the Board or by any Director. The Board may specify that any disposal above an approved threshold should be formally endorsed by the Board who may impose specific restrictions with regard to any such disposal.

Reporting of Disposals

18.6 Details of all disposals of assets or grants of access to property or infrastructure for commercial arrangements with third parties (save for connected third parties which is dealt with in paragraph 18.5) below the threshold value of €150,000 without auction or competitive tendering process should be formally reported to the Board, including the paid price and the name of the buyer, on an annual basis.

18.7 Details of and explanations for the disposals of assets or grants of access to property or infrastructure for commercial arrangements with third parties above the threshold of €150,000 which have not been subject to auction or competitive tendering process should be included in the Chairperson’s annual report to the relevant Minister (see paragraph 13.1).

18.8 The Chairperson, in the annual report to the relevant Minister (see Paragraph 13.1), should affirm that the disposal procedures, as outlined above, have been complied with.

Code of Practice

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In the past four days there have been three newspaper articles about the activities of the NAMA banks in respect of some NAMA-bound loans. There is growing unease at rumours that banks are not transferring some better quality loans to NAMA, and are instead allowing them to be redeemed with consequent damage to NAMA’s cashflow. This entry examines the current reporting, recalls entries on this blog some months ago which dealt with the same or similar issues and looks again at the rules at NAMA to deal with the situation if the rumours are indeed true.

Firstly the reporting kicked off on Friday last with Simon Carswell in the Irish Times who was examining the NAMA plan but drew our attention to banks offloading loans before they came to NAMA and speculates this could be the reason NAMA’s “performing” loan rate has dropped from 40% to 25%.“The level of income-generating loans may also have fallen as a result of the sales of properties, according to banking sources. Financial institutions have also taken advantage of an uplift in the UK property market and pressed borrowers to refinance or repay loans by selling the underlying properties in advance of the transfer of the loans to Nama. For example, one institution said it had valued a property backing a Nama-bound loan for €70 million last November when loan values were assessed for the agency. The same property is now worth €110 million and the lender has said it is pushing for a sale before the loan moves to Nama. Before the Nama loan transfers began last March, a large number of loans at Bank of Ireland earmarked for transfer were repaid, sold to third parties or refinanced to other lenders, many of which were investment property loans generating interest income. Nama had initially planned to buy about €16 billion in loans from Bank of Ireland last September and this has since fallen to €12.2 billion. This would also have contributed to the lower level of income-generating loans being purchased than first estimated.”

Next up we had Ian Kehoe in the Sunday Business Post who reported that NAMA was now taking action to stop all this redeeming. “Borrowers are being instructed to seek buyers for the assets, prior to the loans going to Nama. Banks have argued that it is in the best interest of the financial institution and the borrower to get the best possible price for the asset. The agency, however, is against the moves, and said it had agreed to buy both distressed and performing loans from the six covered lenders.”

And today we have a follow-up from the John McManus in the Irish Times who says “It now appears one of the reasons why the actual number of performing loans transferred to Nama was less than predicted was that the banks had effectively liquidated any loans where the value of the underlying property exceeded the amount owing.”

The concern expressed on here however goes beyond NAMA-covered financial institutions allowing the redemption of NAMA-bound loans at *full* value. The concern expressed here was that banks were selling loans at below their nominal value but above what they expected NAMA to pay them. The issue was examined twice on here before, in respect of Derek Quinlan’s loans in March 2010 and in respect of a property sale on Baker Street in April 2010. It is one thing for NAMA-bound loans to be redeemed at their nominal value even though this might negatively impact NAMA’s cashflow (having a good loan generating ECB + 2% is valuable to NAMA’s cashflow) – it is quite another thing for banks to be selling loans (possibly back to the borrower or related parties) at values below the nominal value of the loan. Not only does that damage NAMA’s cashflow by being deprived of a better quality loan but it drives a coach and four through the NAMA principle (expressed in section 172 of the NAMA Act) that loans or their asset backing will not be sold back to the borrowers.

So what are the rules for banks? Section 69 of the NAMA Act sets out in broad terms the types of loans to be taken over by NAMA and importantly states that only loans entered into before 31 December 2008 are to go to NAMA. The Designation of Eligible Assets Regulations puts further flesh on the definition of loans to be transferred. There would however, appear to be gaps in the NAMA legislation.

What are the gaps?

  1. Under what circumstances can loans, that otherwise would go to NAMA, be redeemed by borrowers. Presumably there would no issue with loans redeemed in accordance with the original loan agreement schedule and most loan agreements would allow early redemption of loans though there might be some penalty payable to the bank.
  2. Under what circumstances can banks take recovery action on eligible loans. NAMA banks have appointed receivers to assets owned by NAMA-bound developers. What happens to these loans and these assets.
  3. Can the terms of NAMA-bound loans be renegotiated by banks without reference to NAMA
  4. Can banks sell NAMA-bound loans to third parties
  5. Can banks allow the redemption of loans at less than the outstanding value of the loan
  6. What are the penalties if banks act in bad faith

Although it was reported in the Sunday Business Post that NAMA have stopped certain redemptions, it is to be hoped that the above gaps are being urgently addressed.

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