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Archive for October 17th, 2012

In the Swedish bad bank in the 1990s, the majority of the 800 developers and property companies whose loans were taken over were eventually bankrupted or liquidated; Securum moved against 70% of its developers, and the signs are that NAMA is going to also foreclose on a significant number, if not the majority, of its developers. In yesterday’s edition of Iris Oifigiuil we learn that NAMA has had receivers appointed to embattled Clare developer Cronan Nagle Construction Limited. On 15th October 2012 NAMA had Declan Taite and Anne O’Dwyer of RSM Farrell Grant Sparks appointed as joint statutory receivers to the company.

Cronan Nagle is owned by the Nagle family and its two directors are Cronan Nagle (59) and David Nagle (36). It is best known for the development of hi-tech low-carbon footprint estates in and around Ennis in countyClare. It has been in the financial wars for several years and is already subject to a receivership.

Remember you can see a comprehensive list of Irish foreclosure action by NAMA here and in this regularly updated spreadsheet.

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If you were to ask most people in Ireland what NAMA does, the response you would get is that it manages loans to developers – collects interest and principal repayments, provides additional lending to finish out developments, agrees rescheduled loan repayments – and in some instances, forecloses on the loans and sells the repossessed property. And that’s more or less correct, though it should be noted it is generally the receivers who sell foreclosed property which is presently worth more than €1bn. NAMA itself has only taken possession of €7m of property, mostly relating to personal guarantees. But there is an activity in NAMA that slips below most peoples’ radar – the sale of loans. And since 2010 until 31st March 2012, NAMA has sold a staggering €1.9bn of loans. This blogpost examines the issues and is based on information given to the Sinn Fein finance spokesperson Pearse Doherty by the Minister for Finance Michael Noonan in the Dail yesterday in response to parliamentary questions – the full exchanges are shown at the bottom of this blogpost.

Cast your mind back to September 2011 when NAMA sold loans that were given to Paddy McKillen’s hotel company. This has been NAMA’s single biggest transaction and NAMA is understood to have received €800m for the loans that had originally been extended to buy hotels. NAMA sold the loans to the billionaire Barclay brothers, David and Frederick who own the Daily Telegraph and the Ritz Hotel in London. Paddy wasn’t happy with the sale and he unsuccessfully fought a major court battle in London over the past year, which he has so far lost, though he has recently sought leave to appeal the decision. So NAMA’s biggest transaction to date has not been for the sale of any property, but it has been the sale of loans. Besides the Paddy McKillen loans, NAMA has sold loans with a nominal value of €1.1bn.

NAMA has made a profit of €90m on the sale of these loans. By profit, NAMA means a premium on what NAMA paid for the loans – remember NAMA acquired €74bn of loans for €32bn, and the €90m represents a profit on top of the €32bn element. It is understood in the case of Paddy McKillen’s loans that NAMA made a small profit, but NAMA has not disclosed the quantum.

Now here’s the bit that some people might find concerning. NAMA doesn’t do debt forgiveness to its debtors. The best it does is a 5-7 year agreement whereby the debtor works on the projects securing the loans, hands over all unencumbered assets to NAMA if there are personal guarantees, and if at the end of the 5-7 year period, NAMA is satisfied there is no more blood left in the stone, then it MAY write off any sum outstanding. But whilst NAMA won’t provide debt forgiveness, once NAMA sells a loan, it has no control over the behaviour of the buyer of the loan. So if Jim owes NAMA €100m and NAMA sells that loan to Acme Bank for €60m and then Acme Bank does a deal with Jim whereby Jim pays off €65m of the loan and then sees his slate wiped clean, then NAMA has no control over that transaction and seemingly washes its hands of the loans once they are sold by NAMA. Some might say this leads to debt forgiveness through the back door.

What the Minister won’t do is say if NAMA has a competitive sales process when selling loans below their nominal value. No seriously, that’s what the minister says. So Enda Farrell’s wife Alice Kramer’s old company, Ernst and Young is on the NAMA panel to sell loans. And should E&Y sell NAMA loans below their nominal value, the Minister won’t say if there will be a competitive tendering process. Seriously.

The Minister also won’t say what NAMA has received for the €1.9bn of loans that the Agency has sold. So NAMA might have bought this loans for €1.5bn and sold them for €1.59bn, making a €90m profit as reported by the Minister, but the Minister thinks revealing the €1.59bn or whatever the sales figure is would undermine NAMA’s commercial prospects. Seriously.

Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the procedure adopted by the National Asset Management Agency when selling loans under its control, so as to maximise the return to the taxpayer from such disposals.

Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm that the National Asset Management Agency does not sell loans under its control for less than the original book value plus accumulated interest to the point of disposal, unless there is a competitive bidding or tendering process.

Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm that the National Asset Management Agency has sold loans, or allowed loans to be refinanced out of NAMA, at less than the original book value plus accumulated interest to the point of disposal; and if it has, if the relevant debtor has obtained any financial advantage through debt forgiveness or debt write-down from these transactions.

Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the cash received by the National Asset Management Agency since its inception in respect of the sale of loans; the total original book value of the loans plus interest accruing to the point of disposal and the total NAMA acquisition value of the disposed loans..

Minister for Finance, Michael Noonan: I propose to take questions 179, 180, 181 and 182 together.

I am advised by the National Asset Management Agency (NAMA) that since inception to 31 March 2012 it has sold loans with a nominal value of €1.9 billion, and generated €7.2 billion in cash receipts from borrowers. (see page 3 of NAMA Quarterly Report, 31 March 2012 for additional detail)

The Agency advises that net profit on disposal of loans is recorded in its Section 55 Quarterly Accounts and in its year-end consolidated income statement.  The cumulative amount to 31 March 2012 is €89.7m. These documents are available on the Agency’s website, http://www.nama.ie.  The Section 55 Quarterly Accounts for the three months ending 30th June 2012 are currently being considered by Government and will be laid before the Houses of the Oireachtas in due course.

The Agency advises that in the case of a loan sale, it disposes of the entire par debt and that therefore the matter of debt compromise does not arise.  For the debtor, the only change is that there is a new loan note holder. NAMA operates a phased an orderly programme of disposal of both assets and loans to achieve the best possible outcome for the taxpayer.

The Agency advises further that it has launched an active loan sales process, having recently established two sales advisory panels one for Europe and one for the US.  NAMA’s objective in any loans sales transaction is to achieve the best outcome for the taxpayer. In this context, the disclosure of the additional information sought by the Deputy could adversely affect the Agency’s competitive position.  Providing such information would be commercially counterproductive for the taxpayer as it would be of greatest benefit to potential loan purchasers.

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“Ladies and gentlemen, thank you for asking me to speak to you.   I am conscious that I am your invited guest and so I will start by saying, that today I do not intend to speak of comfortable matters.” Fiona Muldoon, the Central Bank of Ireland’s Director of Credit Institutions and Insurance Supervision speaking at a banking conference on 16th October, 2012

It’s been just over a year since President Clinton dropped the clanger at the Global Irish Forum that mortgage debt was the biggest problem facing this country – THE biggest problem. A week or two after that, the Keane report was finally published in which a range of policies were examined. And since last October, mortgage arrears have continued to climb though the pace seems to be relenting, the Personal Insolvency Bill has been published which places banks in the gatekeeper position deciding who can, and who can’t, seek bankruptcy, and the banks themselves are getting more shouty about borrowers strategically defaulting on loans so as to secure better deals should some form of debt-forgiveness scheme be introduced. But for all intents and purposes, if President Clinton were to give an assessment of progress in government and banking policy since last October 2011, it would be withering.

It was no accident yesterday that the Central Bank of Ireland’s (CBI’s) Fiona Muldoon delivered an uncomfortable speech at Irish Banking Federation national conference in the Shelbourne hotel yesterday. She berated assembled bankers for their “wait and see” approach which is seeing a deepening of what has become known as the mortgage crisis. She appears to call for decisive repossession action with respect to delinquent buy-to-let mortgages and for a step-change in the approach to borrowers and their family homes.

But this is the Central Bank which has up to know displayed a shyness about action which has suggested on here that the CBI is being held hostage to fortune with its stress testing last year which assumed a level of loss at the banks that the CBI doesn’t want to see exceeded, lest it trigger the need for further capital injections at the taxpayers expense. This is the Central Bank which agonised over the Personal Insolvency Bill lest it make bankruptcy too easy, which again, might result in a hole in banks’ balance sheets which required further taxpayer bailouts. So why the apparent change in heart?

Industry sources are today suggesting that the risk of strategic default, particularly in the buy-to-let area, now outweighs the benefit of historical inaction by the banks. We are shortly going to get buy-to-let mortgage arrears data from the Central Bank for the first time, and the betting is that it will show an abysmal current situation AND an accelerating deterioration. If this interpretation is correct, then it is testimony to the failure of government and regulators to put in place credible solutions to the mortgage crisis, a failure that has allowed a situation develop where borrowers generally are actively considering or indeed actually effecting default, not because of inability to pay but because of an expectation of debt forgiveness amid government dithering.

For all of our sakes, policy makers need to up their game, and up it quickly. The view on here remains that we reform bankruptcy so that we have a tried-and-tested scheme, borrowed from any advanced economy – the UK and US for example – which allows banks to individually deal with borrowers in distress, to assess their individual financial situation, but which allows borrowers the sole discretion to pursue bankruptcy in which practically all assets are sold to pay off debts. Given the severity of the crisis that has been allowed develop, we probably need special measures to keep families in average family homes, otherwise the State ends up paying for alternative housing. But we need these policies, and we need these policies implemented now.

We don’t need one of Ireland’s greatest friends to tell us the mortgage crisis needs to be tackled now.

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The Irish retreat from the London property market continues apace with news that county Down developer, MAR Properties which has been NAMAed has sold an office building in north west London for GBP 8.45m (€11m). The building, Centre Heights, 139-151 Finchley Road, London NW3 was bought by MAR in 2005 for GBP 12.3m. It is not clear if the building is subject to a NAMA loan as MAR had borrowings from Ulster Bank and Bank of Scotland, two non-NAMA banks. The selling agents were Northern Ireland agents, BTW Shiels who seem to be making steady progress with NAMA work.

Last Friday saw the publication of the September 2012 IPD Monthly Property Index for the UK. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values fell by 0.4% in September 2012, which follows declines averaging 0.3% per month since December 2011. Prices reached a peak in the UK in June 2007 and fell steadily until August 2009 when a rally started. Prices then increased by 15% in the year to August 2010 but since then prices are actually down by 1.3% and in the last 12 months prices have decreased by 3.2%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 7.9%. Commercial prices in the UK are now 36.2% off their peak in June 2007. The NWL index  falls to 801 which means that NAMA needs to see a blended increase of 24.9% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The table below shows the three subsectors in UK commercial property with an index for all three at NAMA’s valuation date of 30th November 2009 of 100. Offices have been relatively buoyant whereas industrial premises like factories and warehouses have been relatively flat.

The overall outlook for the UK economy is muted in the short term with the country suffering a double dip recession after a quarterly declines in GDP in the first and second quarters of 2012 – 0.3% quarterly contraction in GDP in Q1, 2012 and 0.7% quarterly contraction in Q2, 2012. Most forecasters are now forecasting a 0.2-0.5% decline in real GDP in 2012. The UK has a so-called Office for Budget Responsibility (OBR) which is independent of Government and produces its own economic forecasts and commentary on fiscal policy. The latest report from the OBR was published on 21st March, 2012 and it forecasts GDP growth from 2012-2015 at 0.8%, 2%, 2.7% and 3%, deficit of 8.3%,5.8%,5.9%,4.3%, debt:GDP of 72%,75%,76%,76%, unemployment rate of 8.7%, 8.6%, 8.0%, 7.2%, house prices of -0.4%,0.1%,2.5%,4.5% and inflation of 2.8%,1.9%,1.9%,2%.

Monetary policy is overseen by the independent Bank of England and the  current Bank of England rate is 0.5% and has been since February 2009. So far the UK has printed an additional GBP 350bn of new sterling in an economy of GBP 1.5tn – UK inflation since 2007 has been over 15% compared to near-flat prices in Ireland.

About half of NAMA’s portfolio was located in London which has so far performed very well from Aug 2009 to Dec 2010 but has been more subdued over the past year. Supply shortages and money chasing a relatively stable investment have maintained prices and there might even be a short term fillip from this year’s Olympics. Beyond London and the English south east, there is evidence of prices waning amidst sluggish economic growth and stunted lending. NAMA’s strategy for UK assets was revealed in the recently published Comptroller and Auditor General’s report. NAMA expects to dispose of half of its UK assets by 2013, and 40% extra by 2015 and just 10% by 2020. So by 2015, NAMA will have largely exited the UK market.

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Jones Lang Lasalle (JLL) has today published its commercial property series for (the Republic of) Ireland for the three months ending 30th September, 2012 – the report should be available shortly on the JLL website but for the time being, there is Jack Fagan’s report in today’s Irish Times. The JLL series is one of the two Irish commercial indices referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page. The other quarterly Irish price series is published by SCSI/IPD and will be available on Tuesday 23rd October at 3pm; because it is generally published after JLL’s, it is not used here to help compile the NWL index, but the SCSI/IPD index does historically show a very close correlation with JLL’s.

The JLL Index shows that capital values fell in quarter one, 2012 by 2.4% – this means that with the exception of Q4,2011 Irish commercial property has declined in value for 20 of the last 21 quarters and the aberration in Q4,2011 when a 1.2% increase was recorded was due to the exceptional measures set out in Budget 2012 – the reduction in stamp duty on commercial transactions from 6% to 2%, the abandonment of proposals to abolish Upward Only Rent Review terms in pre-February 2010 leases and the enhancement of capital gains arrangements for commercial property held for several years.

Overall since NAMA’s Valuation Date of 30th November, 2009 prices have declined by 25.6%. Commercial prices in Ireland are now 66.5% off their peak in Q3, 2007. On an annual basis prices are down by 5.2%. The NWL index is now at 791 which means that NAMA needs to see a blended increase of 26.4% in property prices across its portfolio to break-even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss). NAMA acquired loans underpinned by €9.25bn of Irish commercial property. The Q3, 2012 decline of 2.4% means that the underlying NAMA property has declined by €166.5m in Q3, 2012 (€9.25bn minus 23.8% to Q2, 2012 adjusted for 2.4% in Q3, 2012) – so much for NAMA claiming the market was stabilizing, but I see that JLL is claiming the pace of decline is moderating but if you exclude the fillip following the December 2011 budget announcements, we are still back at c10% per annum declines.

Rents decreased by 0.5% in the quarter following a 1.4% decrease in Q2,2012 and that was after a 0.7% increase in Q1, 2012 which was itself the first increase since Q2,2008. This is unsurprising as secondary market rents have continued to slide even though there are indications of prime rents stabilizing. Last week, Lisney reported that commercial rents declined 2.4% in Q3,2012.

UPDATE: 1st November, 2012. The SCSI/IPD index for Q3,2012 has been published and although the quarterly decline registered was 1.7% overall which was less than the 2.4% recorded by JLL, the peak to trough remains remarkably similar with SCSI/IPD at 66.4% and JLL at 66.5%. According to SCSI/IPD, retail fell by 2.2% in Q3,2012 whilst offices fell by 1.3% and industrial fell by 1.8%.

 

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