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Archive for July 17th, 2012

Unfortunately, the UK Insolvency Service doesn’t allow searches on bankrupts’ former countries of residence, so it is not possible to search for (formerly) Irish-based individuals being declared bankrupt in the UK. The reckoning on here is that 17 developers* associated with NAMA have been declared bankrupt in the UK, but last week in the Dail, the Minister for Finance told the Fianna Fail finance spokesperson Michael McGrath that there have in fact been “approximately 20” – so we’re missing the names of “approximately” three.  At least six of the “approximately 20” were resident in Northern Ireland.

Minister Noonan reiterated NAMA’s stance that it is neutral on the jurisdiction in which a developer is declared bankrupt. In one case – of an unnamed Northern Ireland bankruptcy, NAMA is opposing the discharge from bankruptcy. And in at least one other case – John Fleming – NAMA is seeking to attach the earnings of the discharged bankrupt, and is pursuing the private pension.

Last week, we learned the stance of the state-controlled Irish banks towards bankruptcy in other jurisdictions when the Sinn Fein finance spokesperson Pearse Doherty sought a response from Minister Noonan

“AIB: I am advised that the incidences of persons declaring bankruptcy in other jurisdictions are uncommon for AIB. Notwithstanding this, AIB considers each action on a case by case basis and will adopt an approach which best protects AIB’s financial and legal position as it seeks to recover outstanding amounts owed regardless of the jurisdiction involved.

PTSB: I am advised that PTSB also adopt an approach to best protect the Bank’s right to seek repayment of all outstanding debt in a fair and equitable manner regardless of the jurisdiction involved.

IBRC: I am advised by IBRC that the approach of the Bank is to work constructively with each borrower on an individual basis to identify the most appropriate loan repayment plan. IBRC takes a very serious view of borrowers seeking bankruptcy in other jurisdictions as a means of circumventing the repayment of monies owed to the Bank. Where necessary, and as has occurred previously, the Bank will pursue borrowers to ensure bankruptcy is declared in what it deems to be the correct jurisdiction, with the ultimate goal of maximising recovery of loans for the Bank. “

IBRC of course famously pursued former tycoon Sean Ignatius Quinn (“Sean Quinn”) who originally succeeded in declaring himself bankrupt in Belfast, but IBRC had that order over-turned and Sean was subsequently declared bankrupt in Dublin.

So, according to NAMA, it has not suffered loss from developers being declared bankrupt in the UK, and in fact NAMA has praised the established expertise of UK officials in tracing assets across borders. But in Sean Quinn’s case, IBRC obviously took a different view, which it presumably it took for financial reasons. Confusing.

* Ray Grehan, Danny Grehan, Tom McFeely, John Fleming, Bernard Doyle, Patrick Fitzpatrick, Tony Fitzpatrick, Paddy Shovlin, Michael Doran, Martin Doran, Alastair Jackson, Fergal McAlinden, Peter McDaid, Mervyn McAlister, Peter Dolan, Sam Thompson, Sean McWilliams

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NAMA may only have concluded one deal so far where its new staple finance initiative has featured, but the Agency has announced that it ultimately intends making €2bn available to buyers of its commercial property. And in a market the size of Ireland’s and in an economic climate where there is precious little credit available from traditional sources, NAMA’s staple finance scheme is likely to be a game-changer. The European Commission has today confirmed that NAMA has not received approval for its staple finance scheme and that there is no documentation to show that NAMA sought approval for the scheme.

Staple finance, or vendor finance is where NAMA will convert part of the sale price of one of its assets into a loan to be paid by the buyer after a period of years. For example, if NAMA or one of its developers has an office block for sale at €30m and you want to buy the office block, then NAMA will take perhaps 30% in cash from you today – so you need to find a €9m deposit – and the remaining 70%, or €21m will be due from you in five years. And for the next five years, you must pay NAMA 3.5% per annum interest on the €21m loan. In five years, you hope to sell the property or refinance the €21m loan with a traditional lender and in that way, NAMA gets its €21m “loan” repaid. And if, for some reason, you don’t pay the €21m, then NAMA takes the property back from you and keeps your deposit and any interest payments.

When NAMA was planning the introduction of another scheme – its “negative equity mortgage” or as NAMA calls it, the “80:20 Deferred Payment Initiative” – it delayed the launch for several months so as to secure European Commission approval. And yet the negative equity mortgage product might apply to 750 homes – 115 in the pilot launched in May 2012 – and even if the typical home costs €300,000 then the value of the scheme for 750 homes is “only” €225m or one tenth of NAMA’s staple finance initiative.

The Minister for Finance, Michael Noonan has recently said that NAMA doesn’t have a standard template of terms for its staple finance initiative, and indeed he has refused to provide details on the parameters of the initiative. NAMA’s cost of funding is theoretically the 6-month Euribor interest rate – currently 0.8% per annum, though NAMA does hedge its interest rate which adds some cost to that. But still, with a cost of funds at around 1%, NAMA is in a very special position to be able to provide loans to buyers of its property. Ulster Bank and Certus can’t be too happy as they sell similar assets in the same marketplace but without the apparent wherewithal to provide financing, and even if they could, with a cost of funds that is likely to be 3%-plus, that they can’t provide staple financing at the same interest rates as NAMA.

NAMA was asked for a comment on its contact with the European Commission in respect of its staple finance initiative, and specifically if it has considered the potential for it to distort the marketplace and set itself at a competitive advantage. Any response will be posted here as an update.

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A large volume of private messages has been received on here over the past couple of days asking why there hasn’t been a blogpost on news coverage last weekend about NAMA paying developers large salaries – three developers are paid €200,000 a year and 66 are paid €100,000 each,. And the response is that there is nothing new in the latest coverage – okay, when last covered on here, there were only two (un-named) developers getting €200,000 and now there are three – and one of those three has been confirmed as Sean Mulryan of Ballymore – and previously we knew that 110-120 developers were being paid €70-100,000. But there is practically nothing new in the recent coverage, and that’s the reason there hasn’t been a blogpost. However the coverage in other media has yet again ignited the detonation cord to public outrage and prompted NAMA to defend the payments, and it is gobsmacking on here to see the same unchallenged rubbish being spouted by NAMA and the media, so this blogpost merely looks at the myths and realities

Myth: NAMA is paying a maximum of €200,000 salary in three instances.
Reality: I’m willing to bet that Sean Mulryan, whose assets in NAMA are said to worth billions, wouldn’t get out of bed in the morning for €1,000 a day gross which is what €200,000 a year represents once you deduct weekends, holidays and normal absence from work. But what he will get out of bed for, I would bet, is a bonus if his assets are sold for a price in excess of NAMA’s target. So Sean Mulryan may well have to do with just €200,000 for the time being, but he may be in line for millions, if not tens of millions and possibly even hundreds of millions if he reaches certain targets. Remember that alongside developers’ salaries, NAMA is offering developers a profit share scheme if their assets sell for a price in excess of a target agreed by the developer with NAMA. You won’t have heard much from NAMA about this scheme in recent days…

Myth: NAMA is actually saving money – when compared with the alternatives – by paying developers €200,000 a year
Reality: NAMA is paying FAR MORE than developers’ salaries – developers’ salaries are just the tip of the iceberg. NAMA is paying entire overheads for developers’ companies. Earlier this year in a Dail Parliamentary Question, we learned that NAMA is paying €55m in overheads to 41 developers – that’s more than an average of a million apiece. It’s still less than the 1.5% annual fee – the 1.5% is calculated on the value of assets managed – that receivers typically get, but remember that the developer’s salary comprises less than an average of 10% of what his development company is getting paid by NAMA in overheads. Add in the profit share to the salary and overheads and the cost-saving argument becomes questionable.

Myth: At 8am on any given morning of the week, you could go down to the Boardwalk at O’Connell Bridge in Dublin, pick up any random heroin junkie waiting for the methadone clinics to open, give him a shower, a suit and a mobile phone and a couple of hours of training and by 5pm, hey presto! you’d have a property developer. Shure what is there to it?
Reality: Take a look again at the Prime Time Investigates special on developers which was broadcast in December 2010. Take a look atCorkdeveloper Michael O’Flynn filmed taking off in his helicopter from his palatial home to go to the races and watch how his horse performs. Scandalous, isn’t it? Take a closer look, and you’ll see Michael and indeed most of the other developers in the programme with a mobile phone constantly glued to their ears. Now of course, they might be talking to the proverbial bookmaker or mistress, but the betting is they’re working. And that’s a mystery in the whole Irish property boom and collapse – how the public was never provided with real information on what the business of a property developer involves. Planning, construction, economics, financing, accountancy, tax, law, marketing, sales, architecture, personnel selection and hiring and firing, design, asset-management, project-management, politics, history and geography are SOME of the disciplines which developers need – or at least need be able to call on, thus the glue-on mobile phones – to be consistently successful on a large scale. Yes, anyone can buy a field in a rising market where credit is freely available, and maybe even build a dozen houses on an estate though even that requires some ability, but to build multi-billion euro businesses requires a lot of smarts. And that has never been really publicly recognised in this country. But nonetheless, the myth remains that ANYONE can do property development – ANY type of property development, residential, commercial, public in ANY location, Cork, Dublin, Ballyjamesduff, Beijing. Just try it.

Myth: No-one should get paid more than the Taoiseach
Reality: Even in autocratic China, you have billionaires whose wealth far exceeds that of anyone in the state party. Tom Cruise, Jay Leno and David Beckham earn multiples of Barak Obama’s salary. That’s not to say a country’s leader doesn’t have a more challenging, responsible or stressful job or that he/she needs more ability to do it well, compared with an actor, singer or businessman. But in a free and open society, people get paid what the open market will bear. And frankly An Taoiseach is getting paid more than many in his market think his job is worth – he gets paid more than the leaders of the UK and Denmark, for example – two countries providing us with bailouts. What’s the going rate for a developer? Well if that developer’s assets are limited to a few fields in rural Ireland, then not very much. If the developer has billions of euros worth of assets across the globe, then the going rate is going to be hundreds of thousands and probably millions. And if Ireland is broke and can’t pay, then the consequence should be that we lose a multiple of what is paid to the developer, as a result of failing to deliver a completed asset at its optimal worth. And for political reasons, maybe that will happen, but don’t think there won’t be financial consequences.

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