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Archive for January 25th, 2011

Not that developers can expect any great outpouring of sympathy but in recent days there have been suggestions (for example here and here) that NAMA is actively sharing information with the Revenue Commissioners to “identify any tax implications arising”, according to Neil Callanan at the Sunday Tribune.

It should be remembered that NAMA is effectively a bank and when granting approval to the NAMA scheme, the European Commission was careful to consider NAMA’s position with respect to other banks to ensure there was no distortion of competition. The EC specifically considered a proposal originally made for the NAMA project, that NAMA would be able to access records from the Revenue Commissioners on developers. NAMA’s powers in this area were set out under section 204 (3) of the  NAMA Act:

“Notwithstanding any other enactment, the Revenue Commissioners shall disclose to NAMA information in relation to a named relevant person that, in the opinion of the Revenue Commissioners or of NAMA, is required by NAMA for the purposes of the performance of its functions under this Act, and that is in the possession of the Revenue Commissioners, or of which the Revenue Commissioners have knowledge.”

The Commission acknowledged the undertaking given by “the Irish authorities” that this provision of the NAMA Act would not be used. The Commission had nothing to say on the preceding sub-section of the NAMA Act, section 204 (2):

“Notwithstanding any provision of this Act or any other enactment—
(a) the Revenue Commissioners may, for the purposes of the performance of their functions under Part 42 of the Taxes Consolidation Act 1997 and any regulations made under that Part, seek from NAMA information in the possession of NAMA, or which NAMA has knowledge of, in relation to a named relevant person, and
(b) where NAMA is in possession of, or has knowledge of, the information referred to in paragraph (a), NAMA shall provide it to the Revenue Commissioners.”

You would now have to ask if NAMA is engineering a subversion of s 204(3). The Sunday Tribune refer to the significant fact that NAMA’s chairman is former chairman of the Revenue Commissioners, Frank Daly and a casual observer might infer that there was a two-way exchange between the Revenue Commissioners and NAMA which effectively gives NAMA the ability to question a developer’s business plan by reference to tax records  through the effective use of the Revenue Commissioners to investigate the contents of the developer’s business plan .

It would however be difficult to defend a developer in such circumstances – after all if the developer has not been honest in disclosing assets then most people would expect the most draconian investigations and penalties. However it seems that NAMA is stealing an advantage over non-NAMA banks operating in the State. Will the Revenue Commissioners actively engage with National Irish Bank, Ulster Bank, KBC, ACC or Rabobank and others with a view to assisting those banks maximise recovery of debts?

UPDATE: 21st April, 2011. The Revenue Commissioners report for 2010 is now available. Reporting today states that so far, the Revenue has “received data” on 108 cases from NAMA.

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Well until recently you won’t have been too surprised to have received a notification letter from NAMA. After all, you will have had €20m+ exposures with AIB or Bank of Ireland and/or €5m+ exposures at Anglo or any land and development loan exposures at INBS and EBS. And for the first 170 borrowers you will have had €50m+ total exposures. With NAMA about to take over all €0-20m land and development exposures at AIB and BoI and there being rumour that they will take over all eligible exposures at Anglo, there might be some surprises when the letter from NAMA lands on the doormat.

At its presentation to Chartered Accountants Ireland last week, one of NAMA’s portfolio managers, Kevin Nowlan set out the general process in NAMA for first contact with newly absorbed borrowers. The presentation, jointly given with Michael Flynn from Deloitte (one of the 40-odd companies appointed by NAMA to a panel to provide NAMA with business plan analysis services), concluded with NAMA’s stated aim “Getting Debtors and NAMA working together towards debt reduction quicker and more cost-effectively – understanding each others objectives” which is probably a more realistic assessment than the “taking the stick to them” approach outlined in NAMA presentations to different audiences.

NAMA has recently changed the format of business plans required from developers, with NAMA claiming the new requirements build on the experience of the first few engagements but also being better tailored to smaller-scale developers that comprise the later tranches. The Independent recently reported that NAMA has spent €150-200,000 per business plan on reviews by its panel but that presumably only applied to the larger business plans (the first 30 NAMA developers had an average exposure of €900m and a total of €27bn at par value). The key changes according to NAMA are:

(a) A 10-year timeframe is now envisaged. This is interesting in light of the McInerney examinership presently before the High Court – you might recall that the banks in the McInerney case preferred a 11-year receivership to the scheme of arrangement proposed by McInerney’s examiner. Given that the banks’ loans are NAMA-bound and NAMA had a lifespan that terminates in 2020 but in practice was demanding plans to liquidate loans in 3-5 years, there was a contradiction in the banks’ position and NAMA’s intention. Regardless, if you’re a developer that is NAMA-bound today, NAMA is looking for your projections over 10 years.

(b) You will be required to sign an undertaking as to the accuracy of the information you have provided. So if you are later found to have undeclared assets you may well find yourself in legal hot water.

(c) A focus on unencumbered assets and asset transfers and examination of how these might be used to pay down debts.

The emerging picture from the NAMA acquisition process is that developers that engage constructively with the agency gain advantage. From my own review of the information required it would appear to me that many developers should seek professional advice in completing the business plan template – that would be the natural move with larger-scale developers but with NAMA now hoovering up smaller-scale developers the instinct might be to minimize expense which mighn’t be the best tactic at this stage. Given that NAMA has snaffled 40-odd mostly accounting firms you may find yourself depending on smaller outfits for advice. NAMA has limited funds available as a result of some asset sales and some repayments by existing developers and those funds might be applied to constructive business plans presented by borrowers who actively engage with the agency.

 

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Emmet Oliver in today’s Irish Independent is claiming that the NAMA (Amendment) Bill which only three days in the Taoiseach’s resignation speech was highlighted as one of the two vital pieces of remaining legislation (alongside the Finance Bill) that needed be enacted before the dissolution of the current Dail, will not now be enacted in the current Dail. With a late February 2011 election expected and the merry dance that usually accompanies the post-election formation of a coalition (Ireland hasn’t had a one-party majority government since 1977-1981), it is likely to be late March or April 2011 that the Amendment will be enacted.

As regards the contents of the NAMA (Amendment) Bill, I am only aware of the Chief Whip’s announcements on 11th January 2011 which indicated that the Amendment was to enable NAMA to absorb sub-€20m exposures at AIB and Bank of Ireland. This looked odd to me as there is no mention of thresholds in the NAMA legislation (NAMA itself can absorb any eligible loans which are not defined by quantum, though it said in September 2009 that it would apply a minimum threshold of €5m to Anglo, AIB and BoI which was increased in September 2010 to €20m for AIB and BoI before being reduced to €0 for AIB and BoI after the IMF intervention in November 2010).

The suspicion on here was that the amendment was intended to significantly change NAMA’s remit, for example by forcing the agency to absorb other categories of lending (vanilla commercial property and mortgage lending perhaps which is excluded from NAMA’s remit which is primarily aimed at “land and development”). Interestingly the Independent today is now claiming that the delay with enacting the Amendment may jeopardise the banks’ recapitalisation plans.

UPDATE: 26th January, 2011. RTE is reporting that the NAMA (Amendment) Bill will be published later today. Whilst there is no time available in the present Dail session to agree this Bill, it is likely tol be a top priority for the incoming administration in March 2011 (on the basis that the Taoiseach said last Saturday during his resignation speech that alongside the Finance Bill, this NAMA amendment was a critical piece of legislation). The main changes, according to RTE, are:

(1) Change in the mix of NAMA consideration for loans. As presently constituted NAMA pays for loans using two instruments – (1) NAMA bonds which pay 1-2% interest per annum, the bonds comprise 95% of consideration and (2) subordinated debt bonds which pay the yield on the 10-year bond, presently 9% plus a premium of 0.75% however this subordinated debt is not honoured by NAMA in 2010 unless NAMA has broken even. One of NAMA’s great advantages, we were told, was that by holding back 5% of the consideration for the loans from the banks, we bought an insurance against NAMA making a loss. In practice if NAMA is paying out 10% per annum in interest on these subordinated debt bonds which constitute just 5% of consideration, then frankly the loss to the banks will be minimal over a 10 year period even if the bonds are not honoured by NAMA.

The proposed change is to change the mix of NAMA bonds and subordinated debt in NAMA’s consideration for loan exposures between €5-20m at AIB and BoI. RTE is saying the mix will now be 90.1%/9.9% bonds/subordinated debt.

(2) Provision for NAMA to absorb €5-20m loan exposures. As previously commented on here, this provision looks suspicious because similar provisions have not previously been needed to change thresholds which in any event are not referenced in NAMA legislation anyway.

UPDATE (2): 26th January, 2011. The Irish Times seems to add some more flesh to the bones of what is proposed for NAMA. It seems that the amendment with respect to sub-€20m loan exposures has less (if anything) to do with thresholds but more to do with the valuation method. What appears to be proposed is a batch valuation based on NAMA averages up to the point of acquisition. This would appear to be at odds with the EC approval given last February, 2010 so the amendment might need to go to Senor Almunia for approval.

UPDATE (3): 26th January, 2011. The Department of Finance has just published the NAMA (Amendment) Bill 2011. An initial glance shows that the Bill allows banks to decide within 15 days of the Amendment coming into force whether they wish to participate in the the transfer of lower value loans (<€20m) which will be valued according to the experience gleaned from larger loans and NAMA will pay for the loans using more subordinated debt than previously. NAMA is to p[ay for sub-€20m loans with 90.1% NAMA bonds and 9.9% subordinated debt which might not necessarily carry the same terms as the subordinated debt used to pay for larger loans.  On the face of it these new provisions apply to all NAMA Participating Institutions (AIB, Anglo, BoI, INBS and EBS). There will be further analysis and comment once the Bill is studied in detail.

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