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Archive for September 13th, 2011

If nothing else, NAMA never ceases to surprise – Eimear Cotter at the Evening Herald reports that NAMA is to loan Fingal Council inDublin a total of €10m; the term of the loan isn’t reported but NAMA is to be paid interest at a fixed rate of 4.25% per annum. And the purpose of the loan? To help fund a €24m 4.4km link road between the N2 and N3 through Hollystown, Tyrrelstown, Littlepace and  Clonee – I don’t have the precise plan of the road so the map below should be viewed as an approximation and is intended to show where the road fits in around the capital.

Earlier this year, the decision by NAMA to redeem €750m of its bonds was criticised on here because NAMA is only paying the ECB (effectively) less than 2% per annum on the bonds it used to acquire loans from the banks (CLARIFICATION: NAMA of course pays the banks interest on NAMA bonds. The banks then pay the ECB for loans advanced on the security of NAMA bonds. That back to back relationship is regarded on here as effectively NAMA paying the ECB though of course in practice it is a more convoluted than that); and NAMA doesn’t have to redeem these bonds until 2020 – you can forget about the 25% or €7.5bn redemption by the end of 2013, that’s a NAMA self-imposed target and unless I have missed the document it is not a term of our bailout agreement with the IMF/ECB/EU, despite NAMA chairman Frank Daly asserting at the Oireachtas finance committee hearing last week that the 2013 target was “copper-fastened”. So what was criticised on here was the fact that NAMA couldn’t find a use for its cash that would pay the agency a better return than 2%.

So this loan by NAMA is to be welcomed in the sense that it will allow the construction of infrastructure. The infrastructure is not a Burke’s Folly and is justified on the basis that it will open vast tracts of Fingal to development. If NAMA gets 4.25% per annum then NAMA makes a profit of almost 2.5% per annum on the loan compared with what it has to pay the ECB (CLARIFICATION: NAMA of course pays interest to the banks. It is the banks who obtain advances from the ECB for which they typically pay interest currently at just over 1.5%. The view on here is that this back to back relationship provides NAMA with a cheap loan though the ECB does not of course lend directly to NAMA). And construction of the road will (a) generate employment (b) business (c) create a legacy of infrastructure. So the view from here is that NAMA is to be praised for making the loan.

If there is one concern, then it is that this loan appears to go outside NAMA’s purpose. Though NAMA might claim the road will enhance the value of both its foreclosed properties and other properties in the area still managed by NAMA developers.

Now if councils throughout the country could devise proposals which might demand €5bn for feasible infrastructure improvements, then we might have a jobs and economic stimulus for the construction sector and beyond. And as long as councils repay NAMA by 2020, NAMA makes a profit on the loans and the economy gets a stimulus. And although the next 3-4 years might be bumpy we should have a “normal” economy by the end of this decade that will allow the repayment, or refinancing, of this loans.

To conclude this blogpost with an odd observation;  Dr Stephen Kinsella the University of Limerick economics lecturer asked the students in his 4th year class whether or not any planned to emigrate and this photograph here shows the result of the poll. If this country is to keep the cream of this graduate generation, it will need to provide a stimulus (a little lecturing on how to get on your bike wouldn’t go amiss either). This loan initiative by NAMA should be studied to see if it might be applied elsewhere.

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The NAMA CEO Brendan McDonagh delivered a speech this morning to a four-day seminar organised by the Construction Industry Federation. If the speech transcript becomes available it will be posted as an update here. The Irish Independent is reporting on the speech which in addition to the usual swipe at developers for not accepting the new realities, also touches on the subject of developers refinancing their own loans.

Now this has the potential to be a vexed issue and at NAMA’s Jesuitical performance before the Committee on Finance, Public Sector and Reforms last Friday, the NAMA chairman gave a stock response that NAMA would try all it could not to sell properties back to defaulting developers. NAMA couldn’t 100% guarantee that no developer would get his property back for less than the loan value but NAMA would do all it could to prevent that from happening. The NAMA chairman cited section 172 of the NAMA Act and it seemed that he was confirming that NAMA would cut off its nose to spite its face and would not sell a property to a defaulting developer even if it was the highest bid. This position of NAMA’s will attract support from many that see original developers as the cause of many problems, who should not now benefit, or be seen to benefit from their assets by buying them from NAMA at a discount.

However the NAMA chairman did not say last Friday if loans might be sold back to developers below the book value. For some people reading this blog, the concept of selling loans might be foreign but commercial loans (and even personal loans) are bought and sold all the time. AIB, Bank of Ireland and Anglo for example have been selling large portfolios of loans in the US recently. And even individual loans can be sold and there are companies out there that specialise in the sale of loans eg. HLIX in theUK.

Today at the CIF presentation, it seems that the NAMA CEO has confirmed that NAMA will in fact sell the loans back to developers. The Irish Independent is reporting the speech and says that NAMA will only sell loans as part of an “open process”. Really? How open was NAMA’s sale of loans in the Maybourne hotel group, reported here where the buyers were said to be the Malaysian sovereign wealth fund, 1MDB and Robert Tchenguiz. Maybourne is the company which controls three luxury hotels inLondon, and one of its principal shareholders is Paddy McKillen though the loans sold may have related to Derek Quinlan’s shareholding.

The Irish Independent is reporting that the sale of loans at NAMA or “refinancing” usually only applies to performing loans where the full price of the loan is paid. But selling a loan for full book price is not an issue at all. If NAMA bought a €100m book value loan from Anglo and paid €40m and the next day, someone offers to buy the loan for €100m then that should not concern the agency. However it is sales below book value which are of concern, and what the NAMA CEO seemed to be saying today was that the developer can bid for his loans and may indeed be able to buy them back from NAMA. So the €100m book value loan that NAMA bought for €40m might be sold back to the developer for €70m. At least that seems to be the message communicated today.

NAMA recently declined to comment on sales of loans in response to a query from here. And the agency seems reluctant to comment on hypothetical scenarios like the example above. However from this perspective, it seems that NAMA can and is contemplating selling loans below book value to the developer whereas the NAMA Act proscribes the sale of property to defaulting developers, which if correct would suggest an inconsistency in NAMA’s approach. Section 172 of the NAMA Act only specifies property, there doesn’t appear to be any proscription of the sale of loans.

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One of the first initiatives launched by this new government on taking office in March was to undertake a comprehensive spending review – checking out the nitty-gritty of where the country was spending its money, and then making efficiency savings. Given Fine Gael (FG) and Labour had been out of office for so long and given the IMF agreement to take huge chunks out of state spending, it was a smart and probably necessary initiative. The review is now coming to an end but it has been overshadowed by demands from Minister for Public Sector Reform, Brendan Howlin that departments save €10.5bn on their costs over a number of years. And last month, Minister Howlin fired a shot across the bows of the departments saying that their proposals for savings didn’t go far enough – “I can’t pretend that every department has measured up in the same way” he said. So the pressure is on for departments to save costs and like a dab of toothpaste being squeezed from one end of a tube to another, it is only natural that Ministers will be trying to grab savings from beyond their departments, either from other departments or externally.

So step forward Minister for the Environment, Community and Local Government, Phil Hogan who seems to have spotted an opportunity to cut his own department’s costs without affecting the internal costs of the department. According to the Irish Independent today “the minister said he was unhappy with the toxic assets agency for not selling properties under its control at a discount to his department.” The famous NAMA “social dividend” is mentioned again in the Minister’s speech yesterday – remember the last of the eight objectives set out in 2 (b) (viii) of the NAMA Act calls for NAMA “to contribute to the social and economic development of the State”. Last week, it was reported here that Dail member, Deputy Stephen Donnelly had written to NAMA to prod the agency into making a decision on the redevelopment of Greystones Harbour and again the “social dividend” was cited in a plea that NAMA wouldn’t solely focus on commercial considerations when making its decision on the developer’s business plan.

One of the great concerns with an asset management agency, capably described by current NAMA board member Steven Seelig in a 2004 paper on asset management companies (AMCs) in which he made it clear that for an AMC like NAMA is to be successful, its objectives should be clear and not confused with social responsibility duties – “experience has shown that AMCs with clearly defined, focused, and consistent goals are more likely to be effective. In some instances, such as the United States, social objectives were added to the asset management objectives of the AMC. The RTC [Resolution Trust Corporation] was required to promote social goals in the areas of affordable housing and historic preservation by developing programs and giving preference to buyers who would meet program goals. The practice of mixing goals, and especially establishing conflicting objectives, is not recommended”

Despite making a loss of €1.1bn in its first full year of operations, NAMA is trying to maximise its return to the taxpayer. But with up to 100,000 people on the list for social housing and with NAMA controlling 10,000+ properties, it certainly makes sense for NAMA’s assets to be used by the State; however, if these assets are not acquired at arms-length then NAMA’s primary objective gets subverted and it may become nigh impossible to hold NAMA to account – if the agency reports further major losses, it may try to divert attention from intrinsic operational failure by claiming it is incurring losses on delivering this famous “social dividend”. Ministers muddying the waters for NAMA may turn the agency into a Buridan’s Ass which doesn’t deliver a profit or a social dividend.

There is still no word from Minister Hogan as to the timing of the introduction of a House Price Database, called for by the IMF and seen by practically all participants in the Irish property market as helpful, if not necessary, to delivering a degree of price discovery to enable a functioning market.

Lastly, it is of intense interest on here as to when an action will be taken under NAMA’s anti-lobbying rules. With the two seemingly all-encompassing exemptions under section 221(3) and 221(4) of the NAMA Act, can NAMA stop anyone – from either the public or private sector – from lobbying the agency to make decisions in their favour? Last Friday the NAMA chairman Frank Daly replied to a question at the Oireachtas Committee on Finance, Public Expenditure and Reforms; he was asked if NAMA wanted any change to the law to allow the agency to operate more efficiently; he replied “no”.

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