Archive for April 12th, 2011

NAMA chairman, Frank Daly delivered a speech this morning to the newly formed Society of Chartered Surveyors in Ireland (the body representing the merger of the old SCS and the IAVI). The speech will be remembered for placing in the public arena firmly for the first time a commitment for NAMA to provide funding to potential buyers. There are enormous competition, policy, economic and political ramifications from this commitment.

There will be further analysis later of the speech which is available here (and an accompanying press release from NAMA is here)

UPDATE: April 12th, 2011 NAMA’s announcement that it will act as a source of liquidity to potential buyers is understandable but troubling. NAMA might have done itself some favours by providing more detail because the average punter in the street might think “hang on! We got into this mess by allowing unfettered availability of credit to create a property bubble”. NAMA probably – and this is speculation on my part – is thinking of buyers of large commercial assets rather than a terraced 3-bedroom with a builder’s finish on a ghost estate in Leitrim, though NAMA didn’t provide any information to dispel that notion.

It is the case that there are very few lenders to buyers of property in Ireland at present. In such cases NAMA can sell to cash buyers or vultures, effectively one and the same and suffer fire sale losses on the assets or it can provide finance which might yield a better price, get some cash into NAMA in terms of the equity that a buyer would advance but the agency would be taking a risk on the resulting loan. So consider the following hypothetical NAMA commercial property

Nominal value of loan – €100m

Price paid by NAMA – €50m

“Cash” offers from vultures today  – €30m

Price available at 8% yield – €45m

If a buyer can offer €45m and can fund €15m of that in cash, then should NAMA advance the remainder as a 3-5 year loan? NAMA might say that the market is close to the bottom and that if the rent available was a market rent (as opposed to an Upward Only Rent Review rent) then the interest payments could certainly be covered together with small capital repayments (say €1m per year). And if the outlook is that the property and banking sectors stabilize and the general economy improves then is it better for NAMA to sell to a buyer today who might require some “liquidity assistance” or to sell to a vulture or sit on the asset?

I can see where NAMA might be coming from in the above example. But there is a difficult distinction between providing liquidity to avoid fire sales and providing liquidity to maintain prices at unrealistic levels. And I can see issues for NAMA in how it implements this new approach.

With respect to the remainder of the speech the following was of interest on here

(1) Frank Daly uses his speech to publicly shoot across the bows of developers, telling them that he knows in some instances that they are playing for time and with respect to the 145 developers beyond the 30 in Tranches 1 and 2, and who have loans of €34bn (average €235m), if they don’t submit plans by the end of April, then Frank will have no hesitation in taking foreclosure action. I must say that there is a sense of widespread lack of co-operation from NAMA developers and a sense of desperation on NAMA’s part as what to do next with those developers.

(2) “quite a number of properties will be going on the market over the rest of this year and into next year”

(3) With respect to the funding of purchases, the NAMA chairman used a term that might be new to many : “staple financing”. This isn’t anything to do with buying office supplies but is a term borrowed from investment banking and means the seller finances the purchase by the buyer. The financing initiative is intended for the commercial market but NAMA is also exploring options “on the residential front”. Curiously NAMA suggests working with the two Pillar Banks (AIB/EBS and Bank of Ireland) to “move things along in this area”

(4) You have to admire the courage of Frank with talking up the property market – we are now back at commercial prices level suggested by long term correlation with GDP, office vacancy rates in Dublin are stabilizing, and office and retail yields are back at levels seen in the pre-Boom 1990s. On commercial property he concludes “without wishing to assume the precarious mantle of forecaster, I would suggest that there is limited downside for the commercial property market from current levels” which sounds a little like “a day like today is not a day for sound bites but I feel the hand of history upon our shoulders” On the residential side, he repeats the claim that in November 2009, prices were already down 50% and he wheels out the old line that the recovery will be patchy and certain areas will recover first – namely, certain parts of Dublin (where co-incidentally NAMA has a massive stock). His view is that most of the fall in residential property has already taken place. As that good-time girl, Mandy Rice Davies might have said “He would say that, wouldn’t he”. He concludes by saying that there is certain property which can only be sold for what you can get for it – code for “fire sales”

(5) It is now “high time” to get on with a register for both commercial and residential property transactions.

(6) Whilst stressing that he “is not commenting on Government policy”, Frank advocates a speedy resolution to the Upward Only Rent Review changes presently being discussed. Frank is also concerned about the effect consequent litigation might have on the property market. Frank didn’t mention the fact that commercial property in NAMA’s portfolio might drop 20%-plus in value if the changes are enacted.

(7) Frank refers to the fact that NAMA has actually introduced an innovation to property in Ireland by creating property receivers which are cheaper than corporate receivers. How well the new arrangements will work remains to be seen but from first sight, it seems like a surgical way of dealing with the problems of distressed property loans in a cost-efficient way. I don’t think NAMA has received much credit for this innovation which is a shame.

UPDATE: 13th April, 2011. Of all the newspaper articles carrying the “NAMA to provide property finance” stories in today’s Irish media, Barry O’Halloran’s article in the Irish Times seems to provide most details though his reporting of NAMA’s loans in general is rubbish – he claims the agency has acquired €88bn of loans for €37bn is just plain wrong, NAMA has acquired €72bn of loans for €31bn. Barry seems to have information that was not provided via the speech or press release by NAMA yesterday, namely that NAMA is intending to provide finance to banks who can then lend on to borrowers, that banks have a liquidity problem while at the same time NAMA has a cash mountain of €1bn, NAMA’s funds might allow banks reduce LTV requirements for mortgage borrowers which would mean a smaller deposit was required and that the plans are unlikely to be finalised before the end of the summer and would require Government approval.

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It was 3rd February, 2011 when the Supreme Court in Dublin handed down its partial judgment in the Paddy McKillen appeal. You may recall that Paddy has objected to his €2.1bn of loans transferring to NAMA and had originally battled NAMA in the High Court last year where he comprehensively lost. He appealed to the Supreme Court and the appeal was heard just before Christmas 2010. In February, 2011 the Supreme Court held that NAMA had not made a legally effective decision to acquire Paddy’s loans because the decision, such as it was, was made prior to NAMA coming into legal existence in December 2009. This was a major setback for NAMA in relation to Paddy’s loans and NAMA seemed to have gone away in a sulk saying that it would consider whether or not to make a fresh decision to acquire Paddy’s loans. The Supreme Court said that it would not wait for NAMA to make its decision and that it (the Supreme Court) would issue its judgment on the remaining parts of the appeal in due course. This is what we got this morning, the remainder.

In brief, Paddy seems to have partially won. The judgment is not yet online but will be linked to here shortly. It has been ruled that Paddy has the right to make representations before his loans are acquired. And whilst Paddy might be unusual (he has huge debts backing assets that seem not to have suffered as much as most and he is servicing the interest on his loans), it seems that ALL borrowers have the right to make representations. On the other hand there doesn’t seem to be anything which would prevent NAMA from acquiring the loans as long as it extends some consultation framework but given the provisions of the NAMA Act and the overarching provision that loans can be acquired if NAMA with the Minister for Finance deems them eligible, it is probably a hollow victory.

The analogy used on here with the February 2011 partial judgment was that Paddy was akin to the condemned man facing the firing squad at NAMA. NAMA had missed with their first shot in that they failed to make a legally effective decision. But all NAMA needs do is re-load and shoot again. And that still seems to be the case.

So it would seem that the way is now cleared for NAMA to acquire Paddy’s loans. That said, Paddy seems to have partially won the case and NAMA may face some meaty legal expenses. There will be further updates as the full decision is analysed.

Remember, you will find all the background, key personalities/companies, dates, arguments and updates in the Paddy McKillen case under the “Paddy McKillen v NAMA” tab here.

UPDATE: 12th April, 2011. The judgment, in four parts from different judges, is available here (am still awaiting the Chief Justice’s judgment and summary UPDATE: The seven documents below should be the comprehensive set from today’s judgment)

Part 1

Part 2

Part 3

Part 4

Part 5 (Summary and Introduction)

Part 6

Part 7

UPDATE (2): 12th April, 2011. NAMA has responded to the judgment today and is predictably pleased that the NAMA Act is judged constitutional. It notes the judgment’s requirement that there be consultation with Paddy before absorbing his loans. There is nothing rom NAMA as to its intentions now with Paddy’s loans. The Government has cleared the way for NAMA to absorb the loans though there has plainly been much activity on Paddy’s part to re-finance the loans. NAMA was to have had a special board meeting in February, 2011 after the first part of the Supreme Court decision, to decide whether or not to absorb Paddy’s loans. We are still none the wiser. However it must be said that today has been a good day for NAMA – if it was a listed company, its stock price would have received a boost. That said when we find out in May how much this action will have cost the State, the public might be less pleased with NAMA.

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AIB has this morning unveiled its results for full-year 2010 with the full annual accounts available here. The headlines are that the company, which is now 92.8% owned by the State following the conversion last week of the Convertible Non Voting shares to ordinary shares, reports a full year loss before tax of €12.1bn, of which €7bn is attributable to losses on loans transferred to NAMA. After a tax credit of €1.7bn, courtesy of the Irish state mostly, the bank reports a net loss after tax of €10.4bn. The bank, in its announcement, appears to have given up on transferring sub-€20m loan exposures to NAMA and now merely says that it has a further €2bn of loans to transfer to the agency which presumably represent Paddy McKillen and some other objector developer exposures – its full accounts however provide a glossary definition for NAMA 2 as “other loans that may transfer to NAMA in 2011”. The bank has also announced at least 2,000 job losses. Customer deposits fell from €84bn in 2009 to €63bn in 2010, a 25% drop. There will be further analysis here later today.

As noted on here a couple of weeks ago, AIB is now in the same league as Anglo yet seems to have escaped much of the opprobrium heaped on that bank and its former chiefs, Sean Fitzpatrick, David Drumm and Willie McAteer. And whereas Anglo will be remembered for being the zombiest of zombie banks, AIB is to be a “pillar”. Which is practically as wondrous as the notion that preserving AIB will somehow deliver a competitive banking sector, when the AIB/Bank of Ireland duopoly failed to do any such thing between 1921 and the late 1990s.

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