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Archive for July 22nd, 2010

It has been announced that Tourism Minister, Mary Hanafin, is to meet with NAMA soon to discuss NAMA’s involvement in the hotel sector. The Irish Times says that Mary has said “We need to ensure we don’t end up losing the viable hotels while we are awaiting decision about what is going to happen to those hotels that were never viable in the first place”. There was an entry here recently which examined the issues facing the hotel sector, foremost being overcapacity. So the bold Mary is to venture forth into a world which intimidates her party colleague Willie O’Dea who was struggling with his own quandary recently, whether he could contact NAMA about health and safety issues relating to a site in his constituency, without breaking NAMA’s anti-lobbying rules. Willie made reference to a “directive” issued by the Department of Finance to all deputies, apparently forbidding making representations to NAMA in respect of sites in NAMA’s control.

So how will Mary avoid breaking the law when she meets with NAMA? How can she discuss the hotel sector in a way which doesn’t have the effect of seeking to influence NAMA in its treatment of hotel assets? The NAMA anti-lobbying rules are contained in section 221 of the NAMA Act. Although Mary would presumably claim exemption on the basis that she is acting in the public interest, it is difficult to see how representations on behalf of existing (and in particular “family-held”) hotels would not lead Mary to run foul of the rules. If Willie O’Dea, a barrister, concludes that he is unable to ask NAMA to deal with health and safety issues on a site in his constituency and Willie makes that request public then isn’t Mary far more at risk?

NAMA’s first priority is to maximize returns from its operations to the taxpayer. That might mean that NAMA demolishes homes to place a floor under property prices and protects the larger part of the NAMA portfolio. That demolition option might be at odds with the wider economic need for competitiveness in the State. And that demolition dilemma illustrates how NAMA’s actions might be odds with the wider needs of the economy. What about other areas of the economy like hotels? Is it better for NAMA to build out hotels and operate them so that investors can reap tax benefits which enable them to repay other loans to NAMA even though these new hotels might force longer established hotels to close, and even though these new hotels might stop operating as hotels once the tax breaks are fully exploited? Is it any business of NAMA’s to consider the wider economy when deciding how it treats its assets?  If you’re one of the private investors in the NAMA SPV, how would you feel at government interference which might place your investment at risk? These are all unresolved issues in the NAMA project.

Meantime Mary is apparently going to put herself at risk of a 6 month jail sentence if she is convicted of lobbying. And no doubt there are some who will consider a complaint to the Gardai once her meeting with NAMA takes place.

UPDATE: 7th August,2010. Whilst it is unclear if Mary has now met with NAMA, it seems she is able to hold forth on NAMA’s immediate plans for hotels. NAMA will be examining their hotel loan portfolio by the end of this year. Given NAMA’s previous statements about oversupply of hotels within a particular location, it may be that some NAMA hotels are closed which might bring some cheer to  “traditional and long-established” hotels. However what Mary says in the Irish Times article about tax-breaks and enforcing clawbacks would tend to suggest the “traditional and long-established” hotels shouldn’t be celebrating prematurely.

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FG Deputy, Leo Varadkar last night addressed the MacGill Summer School in Glenties with a speech which might be remembered for a) not criticising Enda Kenny, even obliquely and b) calling for Long Term Economic Value to be abandoned in future tranches and for banks to be paid for NAMA-bound loans according to current market values.  His speech can be found here.

Deputy Varadkar makes another point in respect of the forthcoming application for a judicial review of NAMA by Paddy McKillen. Deputy Varadkar says “And the possibility that NAMA will have to be bailed out by the taxpayer also needs to be considered. In October, the Courts will hear Paddy McKillen’s challenge to NAMA. He argues that his companies’ loans are performing and that he should have to go into NAMA. The same case could be made by the 20% or so of developers whose loans are also performing. In the early years of its business plan NAMA will rely on income from these performing loans to cover much of its running costs. If the McKillen case is successful and performing loans are taken out of NAMA, we have to consider the possibility that the state may even have to bailout NAMA itself sometime next year.”

Of course NAMA has thus far needed €250m as an advance for a working capital buffer. The overall priority for NAMA is that it makes a profit which might require some short term advances but NAMA needing a bailout to fund shortfalls between the interest NAMA must pay on its bonds and subordinated debt and what it receives from the developers will certainly dent if not undermine confidence in the project.

For the background and all the latest news on the Paddy McKillen application for a judicial review, see the Paddy McKillen v NAMA tab.

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100% Loan to Values,  rolled-up interest, no personal guarantees, “assurances” as to planning permission, 90% haircut by NAMA in one instance and INBS signalling that it “may” need more than the €2.7bn State injection already made – some of the details reported by Simon Carswell in the Irish Times today citing “a source familiar with the building society’s lending”. Apparently tranche 2 for INBS didn’t relate to loans in the UK which have performed better than Ireland in recent times. Whether tranche 2 was just Ireland or included loans on assets in the Rest of the World (7% of the NAMA total according to the draft Business Plan) is unclear. Tranche 3 of INBS’s NAMA-bound loans will relate to UK assets with the implication that they will suffer a lower haircut than the 72.4% of tranche 2.

As to INBS’s capital needs below is the history of the NAMA loans starting with the 2009 accounts. INBS will need have a capital base for its non-NAMA business but let’s assume there is no non-NAMA business. Unless the overall future haircut on INBS’s NAMA-bound loans is less than 47% then INBS is likely to need more capital and possibly substantially more. Simon Carswell’s article concludes with saying “A well-placed source said it was premature to say whether the capital bill at the building society would rise as the discount was likely to change on the remaining €7.5 billion loans to be acquired.”  Premature?

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