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Archive for February 8th, 2012

[UPDATE: The NAMA reply to Gerry Adams is available here]

You may have missed a High Court judgment just before Christmas which involved NAMA; the case is Peleton Limited (in receivership) v Companies Acts and the judgment was published online last week The judge, Ms Justice Mary Laffoy  notes in the introduction to the judgment that “although this is not disclosed on the originating notice of motion dated the 11th October, 2011 which initiated this application, the applicant is the National Asset Management Agency” Peleton Developments, one of Jack Ronan’s companies – Jack having becoming a household name in recent weeks on the back of the Vita Cortex dispute – was the subject of a NAMA receivership in July 2011 when Declan Taite of Farrell Grant Sparks was appointed a statutory receiver. The High Court case was interesting because what was at issue was the Company Registration Office (CRO) refused to recognise the appointment of NAMA’s receiver because the loan in 2004 to Peleton upon which there was subsequent default, wasn’t registered with the CRO. And because the CRO wouldn’t recognise the appointment of a receiver, this gave NAMA a problem with dealing with the assets of Peleton. So what NAMA did was applied to the High Court to be given special permission to register the 2004 loan. In the event, NAMA was successful at the High Court but its prospects were by no means certain. But you might have thought that surely if adequate due diligence had been conducted when NAMA acquired the loan from AIB, that this issue wouldn’t have arisen at all.

Which brings us to the subject of NAMA’s legal costs for 2010, 2011 and 2012 which were detailed in a written response by NAMA’s CEO, Brendan McDonagh to a question from Sinn Fein’s Gerry Adams. The written response is described as a “parliamentary question” in today’s Irish Times which describes the content of the response, but I cannot yet see any such parliamentary question online, and also it is usual for a minister to respond to a parliamentary question, not a third party to the Oireachtas like Brendan McDonagh.

According to the written response reported in the Irish Times today, NAMA incurred €9.75m of legal fees in 2010, €16.46m in 2011 and €1.35m so far in 2012. The total so far is €27.55m and of this, €10.14m relates to due diligence on the acquisition of loans – like those acquired from Peleton above – and was recharged to the banks. Remember the NAMA scheme allowed the due diligence and valuation fees incurred in the acquisition of loans to be recharged to the original banks; that’s not widely appreciated by the general public, but since we own Anglo, INBS, EBS and AIB and own 15% of Bank of Ireland, it might be a moot point.

But what about the remaining €17.41m which wasn’t due diligence? This is where this matter becomes fudged. NAMA issued a press statement yesterday evening which said “The legal costs incurred in 2010 and 2011 relate to legal due diligence conducted on loans which NAMA acquired from the participating institutions. Arising from these reviews, questions were raised about the enforceability of security in certain cases and as a result legal discounts amounting to €368m were imposed; this reduced correspondingly the acquisition cost of the loans. This relates only to the first five tranches; the value of discounts applied in later tranches is currently being quantified. Therefore, the saving to the State in carrying out this due diligence was a large multiple of the legal costs incurred.”

Maybe NAMA is suffering from the Enda Kenny ailment of omitting the word “some” from its statements. Maybe it meant that “some” of the “legal costs incurred in 2010 and 2011 relate to legal due diligence” But again, what about the remaining €17.41m?

I don’t know to what this €17.41m relates, and neither apparently does Gerry Adams because it is not described in the NAMA answer. But it may well relate to NAMA’s failed legal struggle with developer/investor Paddy McKillen, where Paddy won several points of his case at the Supreme Court and after which, there circulated estimates in the media that NAMA would incur some €7m of costs relating that case. Might the €7m have been an underestimate? When quizzed by Sinn Fein’s Pearse Doherty about the costs of the Paddy McKillen case which ended at the Supreme Court on 12th April 2011, the NAMA CEO Brendan McDonagh told an Oireachtas committee in September 2011 that “the Deputy raised the issue of costs involved in that case. We are still waiting for the costs on McKillen’s side to be submitted to us and the matter will go to the Taxing Master in terms of seeking to reduce them. The costs on the NAMA side were not significant because we did a good deal of the work through the Attorney General’s office and the Chief State Solicitor’s office and, with the agreement of the Attorney General, we only used external counsel and legal firms where necessary.” The view on here was that NAMA had legally cocked-up by failing to ratify a decision, originally made before the company was incorporated.

So if Paddy McKillen case’s costs were “not significant” on the NAMA side, then were the costs on Paddy’s side which NAMA was footing, far more than €7m? Who knows? Certainly not Gerry Adams, because this case is apparently not referred to at all in the written response.

What other legal costs might NAMA have incurred? NAMA has appointed receivers to well over 100 companies at this point. But the Agency apparently cocked up the appointment of receivers to the Grehans back in April 2011, and had to stand them down for a few weeks. NAMA is involved in litigation in the US, where an employee at a NAMAed property is suing the Agency in Georgia and in Florida the Agency was involved in a dispute over a development in Sarasota. NAMA is also exposed to substantial damages for ignoring a term in its loan agreement with Paddy McKillen, which may mean that the Agency’s sale of €800m of loans in the Maybourne hotel group may yet cost the Agency millions in damages and costs. NAMA is being sued by a receiver, Carl Dillon in a 2011 application and only last week Laing O’Rourke made an application against the Agency in Dublin’s High Court.

I wonder will Gerry Adams have appreciated the breadth of NAMA’s legal problems when he received the written answer. I wonder has he the information to ask if NAMA is incurring millions of euros in legal fees through incompetence, either in NAMA or at solicitors engaged by the Agency? Maybe another parliamentary question is needed.

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“I can give you this guarantee – arising from the expert report which Government has and will make decisions on in the next couple of weeks, there will be additional facilities for people who have distressed mortgage situations to help ease that problem; all the solutions are going to be slightly different in each individual case.” An Taoiseach Enda Kenny speaking alongside former US president Bill Clinton at the Global Irish Network event at Dublin Castle in October 2011

Last October 2011, there was a gathering of that strange beast called the Global Irish Network. Held in Dublin Castle over two days, the gathering dubbed the “Global Irish Economic Forum” saw the mingling of, and heard from, the great and the good of Irish business – resident, diaspora and hybrid like Denis O’Brien. The Network came about under the last administration which showed initiative in trying to gather together an Irish brain trust which might help the country recover from the collapse of the banking sector and the property bubble in 2008. It’s a funny old gathering which hasn’t been an unqualified success to date, and in fact looks a little uncomfortable in its own shoes. The forum gave rise to the worldirish.com website which has only recently started to provide any real content and for a long period simply allowed people register their names, which wasn’t very rewarding.

The star attraction at last October’s gathering was former US president and very good friend to this nation, Bill Clinton. I don’t know how Bill reached the venue but if he came in on the M50 motorway and paid a toll, then he might have contributed more economically to this country in the past year than U2’s Bono who also had a guest-of-honour status. That’s a bit of an exaggeration, but it captures one of the many paradoxes and ironies on parade last October. As I say, a bit uncomfortable and we might need get over that before truly embracing the enormous potential of some 70m Irish-connected people around the world.

Now Bill addressed the forum on Saturday 8th October having just had a 30-minute confab with An Taoiseach Enda Kenny. And it surprised me to hear Bill say that the biggest financial obstacle facing the country was the burgeoning mortgage crisis – remember, of the 800,000 mortgage accounts in the country, over 8% are in arrears for more than 90 days and some 70,000 mortgage accounts have been restructured in some way, for example, placed on interest-only repayments or offered payment holidays. Last week the Central Bank estimated that at the end of 2010, as much as 47% of the mortgage balances held at banks were on mortgages which were in negative equity, and remember house prices continued to decline by nearly 20% in 2011 so that 47% will inevitably have grown. You can view the video of Bill’s speech at the forum here.

Immediately after Bill’s keynote address to the forum there was a discussion session hosted by Fionnuala Sweeney from CNN where Bill said “that’s why I told you, you know, I can’t- the last big decision you have is what you’re going to do about the mortgage deal, where you can flush debt, the more you can generate small business demand, domestic stuff and growth. Everything else is stuff you know more about than I do” Fionnuala then asked Enda “and President Clinton also highlighted the mortgage situation here, he said that’s like a top priority, I mean do you have anything to say about that in terms of how you’re going to handle that?”  And Enda replied “the Government appointed a specialist commission to look at what other options that government might consider for distressed mortgages and that’s reported and it will be decided by government in the next fortnight or three weeks..what we want to do is put together another range of options for everybody that is in that is in that position, the best opportunity of getting out of it” and gave the following commitment “I can give you this guarantee – arising from the expert report which Government has and will make decisions on in the next couple of weeks, there will be additional facilities for people who have distressed mortgage situations to help ease that problem; all the solutions are going to be slightly different in each individual case”

That was 8th October. We are now at 8th February and in New York tomorrow, Enda is set to share the stage again with Bill, with the launch of the “Invest in Ireland” conference. This will be, I believe, the first contact between the two men since that cold and wet October afternoon, last year. There will presumably be a private meeting again, but what will Enda tell Bill about the commitment given in October?

He might say that an expert group on mortgage arrears published its report on 12th October, but he will then have to admit that none of the recommendations in the report has yet been enacted. He might say that after nearly a year in office, his government has only now published the heads of an insolvency bill which will be finalised in April 2012 and may be enacted some time later, perhaps even by the end of 2012. He might say that there is now a scheme whereby distressed mortgage borrowers can have their property sold to a local authority or housing association and they can rent it back, but if he does he will perhaps mention that to date only one such household has benefited and that was only last week. And if Bill mentions householders who need help now, today, what will Enda say?

If you feel like reminding President Clinton of Enda’s commitment, then you can contact Bill through his foundation here.

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A fortnight ago, it was reported on here that NAMA was setting up something called a Qualified Investment Fund or QIF. This was prompted by NAMA issuing a tender for “investment management services”. A QIF is an investment fund which gets rich individuals and companies to pony up some cash which the investment fund then invests in assets, manages the assets and hopefully makes a profit and the investors get a return and can sell their stake, hopefully for a profit. It seems that the NAMA QIF will acquire assets that NAMA controls. I say “seems” because NAMA has declined to provide any more information on the QIF other than the bare details contained in the tender document.

At the end of last week, NAMA issued tenders for the provision of what it calls “custodian” and “fund management” services, and reading the tenders it seems this is for administration, accounting and some legal work.

So in summary, NAMA is intent on setting up an asset management fund. NAMA will sell assets to the fund. Presumably the fund will value the assets and ensure that due diligence checking is done on the assets and accompanying paperwork. The fund will have a third party managing the assets. The fund will have third parties providing accounting, administration and legal services. The fund will seek investment from rich individuals and companies and the fund will aim to make a profit. Now change the word “fund” to the word “agency” and ask yourself if NAMA is setting up a mini version of itself.

Now NAMA might not want to provide any comment or background to the QIF on here, but surely the Oireachtas committees which oversee the work of NAMA know about this initiative. After all there are 27 members – TDs and senators – of the Committee of Finance, Public Expenditure and Reform and the public accounts committee has 13 members, though there is some duplication of members between the two committees. These committees have both quizzed NAMA since September 2011. So surely they know what NAMA is doing with setting up a Mini-Me version of itself. And surely they can answer the following questions.

(1) How big will these funds be – €10m, €1bn, €10bn?

(2) What assets will be transferred to them?

(3) Will there be yet more loan and property valuations and due diligence before assets are transferred to the funds?

(4) How will the funds be marketed?

(5) Is this merely a means for NAMA to increase its headcount without affecting its topline 200 employee claim?

(6) Whose initiative is this?

(7) Will the initiative prevent property coming onto the market and thereby prevent property reach a clearing price and bottom?

The Committee of Finance, Public Expenditure and Reform whose membership is the following TDs and senators: Richard Boyd Barrett, Michael Creed, Jim Daly, Pearse Doherty, Stephen Donnelly, Timmy Dooley, Sean Fleming, Joe Higgins, Heather Humphreys, Kevin Humphreys, Peter Mathews, Mary Lou McDonald, Michael McGrath, Michael McNamara, Olivia Mitchell, Jonathan O’Brien, Kieran O’Donnell, Arthur Spring, Billy Timmins, Liam Twomey, Alex White, Sean D Barrett, Thomas Byrne, Michael D’Arcy, Aideen Hayden, Tom Sheahan, Katherine Zappone

And the Committee of Public Accounts whose membership is the following TDs and senators : Paul  Connaughton, John Deasy, Paschal Donohoe, Anne Ferris, Seán Fleming, Simon Harris, Michael McCarthy, Mary Lou McDonald, John McGuinness, Eoghan Murphy, Derek Nolan, Kieran O’Donnell, Shane Ross

UPDATE: 15th February, 2012. The Minister for Finance, Michael Noonan has today responded to a number of written questions on the NAMA QIF submitted by Pearse Doherty, Stephen Donnelly and Michael McCarthy. Here’s what the Minister had to say “I am informed by NAMA that it is currently tendering for Investment Management, Custodian and Fund Administration services with a view to establishing a Qualifying Investment Fund (QIF). Preparations are currently being made by NAMA to obtain the requisite regulatory approval and to set in place the appropriate governance and operational arrangements with a view to establishing a number of such funds during 2012.

The proposal emanated from within NAMA and has received approval in principle from the NAMA Board. NAMA advises me that the analysis which was presented to the Board contains commercially sensitive information and it has no plans to publish it.

The proposal would involve NAMA acquiring property assets, on an arm’s length basis, from receivers (or from debtors who would cede secured property directly to NAMA) and to package them into various combinations which could be monetised through sale to investors. It is proposed to assemble portfolios based on asset types (office, residential, retail, etc.) or geographical region (Ireland, Dublin, UK, etc.) and to secure international investment based on specialist investor preferences.

It is not envisaged that additional due diligence will be required given the substantial amount of information which has already been collated on loans and on the property assets securing them.

If regulatory approval is granted, the Board will consider issues such as the size of the QIF and its marketing.

It is not envisaged that additional recruitment of staff will be required as the administration and management of the Fund will operate on an arm’s length basis from NAMA.”

It seems that NAMA is at present unable to establish the order of magnitude of these QIFs – note the plural “s”, NAMA is intended to create a number of them. However you might expect the QIF managers where NAMA has tendered to have been given an idea of the size in order that they could bid for the work. It is indeed strange that no further valuation/due diligence will take place with  the transfer  of property to a QIF and NAMA appears not to want to answer questions just now as to whether the QIF is a vehicle which allows NAMA to increase its headcount by employing more third party suppliers.

UPDATE: 17th February, 2012. NAMA has issued a Q&A sheet in support of its tendering for a management company. It is amazing to me that much of the information in this Q&A was not originally contained in the original tender documents as it is quite basic information, which incidentally seems to contradict Minister Noonan’s responses above. It seems that the QIF will have due diligence and valuation of assets acquired because today’s Q&A says “It is envisaged that property due diligence will take place primarily at sub-fund level” and ” It is envisaged that the QIF will appoint the independent valuer ” and ” The assets acquired by the QIF will be valued prior to acquisition “. Also NAMA now says in response to the basic question about the size of the QIFs “this information is not known at this time but initially it is likely to be less than €500m”. Also the QIFs will only have real property and will not include loans or financial products. The the Q&A sheet is here.

UPDATE: 22nd February, 2012. I can’t recall there being so many questions that have arisen on the part of interested contractors in response to a tender but today NAMA has issued yet another Q&A sheet for the role of QIF manager. We don’t learn very much except NAMA’s original tender was obviously deficient if so many questions have been submitted. We learn that NAMA expects to launch two QIFs by Q3, 2012.  NAMA seems evasive when responding to what seems an obvious question as to why it isn’t employing managers inhouse – “NAMA is acting as promoter to the QIF. The regulatory structure of a QIF requires an investment manager at platform level to assist it in the selection and monitoring of sub-fund managers”  The new Q&A sheet is here.

UPDATE: 2nd March, 2012. The QIF continues to take shape as NAMA today releases more Q&As, this time in respect of the tender for custodian and fund administration services. The Q&As are here, but we learn that many aspects of the funds operation remain to be determined by the NAMA board, the investors will be identified through “reverse enquiry” – which is where potential investors will approach the QIF with a specification for the securities issued, not clear  exactly how this will work in respect of a QIF. Again NAMA says that it intends creating two QIFs to begin with and indicates a value of €500m though it’s unclear if that “each” or for both. In addition to real property, the QIF may hold “shares or units related to property”. It is “possible” that a performance related fee will be charged by sub-fund managers. NAMA will be an initial investor in the QIFs but expects to dispose of its interest “over time”, presumably by 2020.

UPDATE: 3rd March, 2012. I don’t think I’ve seen as many Q&A sheets being issued by NAMA further to the issue of a tender as I have with these QIFs. Yesterday a further three Q&A sheets were published additional to the one reported above. The sheets continue to demonstrate confusion amongst potential tenderers, some of which you’ll get with any tender but it is beginning to look as if NAMA’s planning for its QIFs is deficient because many of the questions go unanswered. For example one question asks how NAMA can have a seven-year QIF when the Central Bank of Ireland limit is apparently three years. Unlike NAMA’s own property assets, the QIFs’ assets will be valued twice annually. Neither the target investor base nor numbers are known at this time. The property in the QIFs “is anticipated” to be located in Ireland and the UK. Surely this is of primary concern and if you’re a manager of a QIF which understands the UK and Irish property markets, you’ll want to know if NAMA might throw you a curve ball with a Russian, Indian or Cape Verdean property? NAMA says that the QIF will not be offered to the public but that Irish-based investors will be allowed invest. NAMA hasn’t decided how title insurance on the QIFs’ assets will work and if the fund will avail if gearing – now this is basic stuff and it is unsettling that NAMA is engaging in a tender process without having worked out these details. The QIF will be required to engage a range of external service providers including managing agents, external accountants, legal advisers and appraisers. The Q&As also say “54. Will the fund receive a DD sign of pack for each property?
a. Legal DD, Confirmation of title?
b. Technical, i.e. all buildings structurally sound?
c. Environmental?
d. Measurement Surveys?
e. Market Valuation?
A: Yes, full due diligence will be carried out before QIF acquires the assets.”

In other words there will be a second round of due diligence before these assets are passed to the QIFs. “DD” above means “Due Diligence”. The three Q&As released yesterday afternoon are here – one, two, three.

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