Whilst Minister for Finance Michael Noonan was exposing the NAMA scheme to a re-examination by the European Commission, as he put in place a politically appointed and accountable NAMA advisory board which will practically have decision-making potential, despite the Minister’s protestations to the contrary; over in London, the NAMA CEO Brendan McDonagh was doing a good job himself of exposing the Agency to anti-competitive criticisms, or even something more serious. Without a care in the world, Brendan McDonagh told the Financial Times “most buyers can’t borrow at a margin of less than 4.5 per cent, even on a good asset. Our cost of capital is lower, so if we offer the finance at a minimum margin of 2.5 per cent and a 70 per cent loan to value, then we are all right” Elsewhere in what the FT grandly calls an “interview”, the NAMA CEO says that “all” loan sales will have vendor financing offered. Remember “vendor financing” or “staple financing” is where NAMA gets 30% of the purchase price upfront and the remaining 70% is paid over a term of years.
So just imagine that you are an Ulster Bank or Lloyds Banking Group manager this evening, and you are wondering what you will do with your Godforsaken Irish property loans portfolio. You might be considering offering loan portfolios for sale as a means to quickly disengage from the troubled sector, but when you do, you will find NAMA there in front of you, offering similarly distressed loans, for property in the same territory and in some cases, even with the same developers. Wouldn’t you love to be able to compete with NAMA offering similar vendor-financing terms? Sadly NAMA has been provided with Irish government guaranteed bonds on which NAMA pays an annual interest rate of just over 1%. Why would a potential buyer without funding – pretty typical these days – buy a loan portfolio from Ulster or Lloyds when NAMA is undercutting them?
Thanks to the NAMA CEO who is broadcasting the competitive advantage, at least these competitors will have testimony and record if they decide enough is enough with competition distortions at the Agency, and decide to make a complaint to the European Commision.
NAMA Wine Lake 
Isn’t this all supposed to be “confidential”? Sounds to me like McDonagh got a bit carried away with the experience of being interviewed by “The FT” and let a few things slip that Frank Daly would have preferred he didn’t.
Are these 30%/70% of what the original loan was, or what Nama paid for the loan. Well, since we don’t know what Nama paid anyway, what’s the difference I suppose….
@ NWL
“of 2.5 per cent and a 70 per cent loan to value”
Excuse my gross ignorance, but how is NAMA going to determine what is the “loan value”. Is it 70% of what NAMA paid for the loan or the current value? And, what happens if the value of the property continues to fall? Are these non-recourse deals and the party can walk away? I do not think it is beyond the wildest dreams that Irish real estate, especially commercial, will fall dramatically when/if the EU finally implodes. And, how long is NAMA locked in to their gratuitous 1% money?
This scheme has all the trappings of the previous ponzi. Why not try something really novel like letting the market decide?
With 30% of the PP up-front and 70% termed ghere would need to be a further significant drop before NAMA had a problem. In the absence of a satisfactory alternative cash market,I’d be happy to run with such a proposal from a risk perspective. I don’t see where a “ponzi” comparison fits this approach!
McDonagh, is that you?
I’d be happy too provided that the property is investment grade, the 30% is cash or near-cash and not property-linked and the remaining 70% is very well secured other than by property (in Ireland). Otherwise, a ponzi or market support scheme.
@BF, You’ve lost me there, Brian. You said that you were happy provided that the property was investment grade, then said that the loan should be secured other than by property? That’s contradictory.
The model is that the property is purchased for a specific sum. A valuation is carried out to establish its current market value and NAMA will lend up to 70% against that value. The purchaser contributes the remaining 30% (plus or minus any adjustment in the valuation in cash). The security for the 70% NAMA loan is the underlying property asset.
I assume (but do not know) that NAMA would not lend against an asset that was not producing enough income to amortise the loan.
@WSTT
You are right! Wasn’t thinking straight – I need to staple bits of my brain together. However, could investment grade property in Ireland fall by 30% from here and in what circumstances?
@ NWL,
The revised NAMA business plan (30June2010) has a section on page 10 which describes “Advances of New Money”. Part of this includes “NAMA has set a current minimum interest margin of 2.50% above the prevailing market interest rate. The return required by NAMA will increase commensurate with the risk associated with an asset.”
Although this probably relates to NAMA borrowers, it may also apply to staple finance. If so, then what is the definition of “market interest rate”. Is it the central bank main rate or the rate offered by other lenders in a market? I think it’s the latter as NAMA was not set-up to compete with banks.
@Ahura M “If so, then what is the definition of “market interest rate”.”
It’s the current euribor rate for any particular period. See link below:
http://www.euribor-rates.eu/
@who_shot_the_tiger,
It might be. But why not refer to it as the interbank offer rate? libor euribor etc aren’t commonly known as the ‘market interest rate’.
The reason why I think it refers to what other lenders are offering is that NAMA was not mean’t to compete with banks and therefore ‘nama finance’ would be more expensive (a lender of last resort if you like).
@ Ahura M,
I’ve checked – it’s euribor.
@Ahura M, The fudge relates to who will provide the staple finance. It will most likely be Bank of Ireland as per WGU’s post. NAMA should have said that it will “help arrange” rather than “provide” staple finance
@ who_shot_the_tiger,
Fair point on staple finance. NWL would know more, but I don’t recall what would allow NAMA to offer such loans. Though they seem to think they can offer a mortgage product, so who knows. A creeping remit.
Re euribor on advances to creditors. I did a quick search on the business plan and bill. I didn’t see any definition. The closest it gets is the ‘market interest rate’. Any offering circulars (etc) I’ve read will quote the index if the rate is based on an index. If this is what NAMA had intended, why not just state the index and the margin. Personally I think NAMA have decided to interpret ‘market interest rate’ to mean euribor. The EU commission didn’t seem to address this point. E.G a 6m euribor + 250 would have raised competition concerns.
It’s a strange world where nama can lend cheaper than the government can borrower.
@NWL
There is something seriously askew with the NAMA thinking process.
This is the organization that has vast amounts of property under its control but cannot see its way to manage and finish that property. Yet the very same same organization has vast funds at its disposal to give HP finance to shift property from the State to private ownership.
Of what earthly benefit is this type of ownership transfer to the people of this country?
This is sheer nuts!
It’s even worse for a “foreign” bank if NAMA operates a cartel with the “Irish” pillock banks:
http://www.thepropertypin.com/viewtopic.php?p=578293#p578293
@WGU, Your friend in London is 100% correct. To date any suggestion of “staple” financing from NAMA has involves Bank of Ireland and AIB. The offers from the Bank of Ireland could be seen as tough with wide interest rate margins – which makes the offer of 2.5% margins from NAMA seem somewhat dubious. The offers from AIB were farcical and obviously designed to ensure rejection.
So, the deal is as follows. Client approaches NAMA to purchase property. Client can come up with 30% of PP, but cannot find a banker willing to lend the 70% (Nothing to do with his specific risk assessment, just an absence of appetite for property lending). Following a standard due dilligence process of the purchaser NAMA arranges staple finance of 70% of PP at 2.5% (in line with current standard lending rates). Property and risk now transferred to the purchaser & NAMA is now in funds for 100% of the current property value. Yes, there is a risk that property values will fall a further 30% (i.e. in which case we’re all past saving) or that purchaser’s cash stream will dry up. In either case NAMA has lost nothing as property can be re-posessed and NAMA has at least the 30% deposit (which would have been lost anyway due to further fall in prices. So where’s the big problem?
@44Brendan, I would agree with that analysis though I understand NAMA will lend at a 2.5% margin on what it pays for its bonds (6 month Euroibor, reset every six months, currently a tad over 1%), so NAMA will collect about 3.5% on the 70% of the purchase price that it is deferring. I don’t see the risk being placed on NAMA, it is selling the property in a depressed market where finance is otherwise difficult to come by, so NAMA avoids a fire sale price, generates activity, should get 30% up front plus some profitable interest. If the buyer then defaults, NAMA has a 30% buffer. Doesn’t prevent NAMA making a loss if property drops 50% for example, but what else can NAMA do in a shaky market with little credit? Economics critics might claim NAMA is propping prices up above clearing rates (which would be at fire sale creditless prices) and might further claim NAMA is abusing its competitive advantage of having cheap Government guaranteed funding.
Unfortunately,the above example does not apply to the vast majority of NAMA’s holdings.Are they getting into development lending,how will they decide with competing offers.One is all cash,but another one is higher with vendor financing.The smugness illustrated in the FT article is startling,if some of the non NAMA,institutions get serious about exiting,no amount of “financing” from NAMA will prevent a race to the bottom.It’s simply a yield enhancing tool,just another gimmick to distract from the ongoing serious issues facing NAMA.
Where are all the “investors”,no UORR concerns,budget full of RE goodies,and yet still no Irish transactions!
@John, yes the absence of any announced transactions – aside from Riverside II and One Warrington Place, which were arguably close to agreement anyway – since 6th December 2011 when Minister Noonan cut stamp duty, dumped UORR and offered other incentives, is surprising. According to CBRE in its bi-monthly commercial report
“A large number of overseas investors continue to seek out opportunities in the Irish market, particularly now that the Government have confirmed that they will not be proceeding with the implementation of retrospective legislation on upward only rent reviews. However, ironically, there is a lack of prime product to satisfy the volume of international demand.”
http://www.cbre.ie/ie_en/news_events/news_detail?p_id=10030&title=Notable_Improvement_In_Transaction_Volumes_In_The_Irish_Commercial_Property_Sector_
And this morning CBRE is reporting that Dublin is the #6 city in Europe attracting foreign investor interest.
http://www.independent.ie/business/irish/dublin-ranks-in-top-10-of-european-cities-favoured-by-foreign-investors-3043789.html
No press release from CBRE it seems, and whatever “interest” there is, it isn’t converting to sales just yet.
…. And Riverside Two still remains unsigned and un-contracted at this point.
@WSTT,Franks NI presentation is now available.NAMA,is planing on extending vendor financing and it’s ludicrous put option on Resi. into the NI market.
What’s next,Romania,Bulgaria…..Slovakia is having a liquidity crisis,is the Irish Taxpayer providing financing there too,backstopping any future falls in residential prices.
http://www.nama.ie/