Brendan McDonagh has recently been appointed by the Irish Government as the head of The National Asset Management Agency, (NAMA). McDonagh’s experience mainly comes from his former position as Director of Finance, Technology and Risk with the National Treasury Management Agency (NTMA). His appointment comes some weeks after the government’s budgetary announcement and while his appointment has been welcomed by many in the industry, there are still some concerns over how NAMA will operate.

The Irish residential property market peaked in mid 2006 while the commercial market peaked in 2007. A dramatic drop in property prices ensued amid the credit crunch across the board, resulting in large write downs of bank loan books, both in Ireland and across the globe. The rise of the property market was fuelled by speculation instead of sound rental cash flows leading to the current state of flux. The flux was caused by the lack of liquidity in the financial markets with Ireland suffering greatly due to negative global opinion on asset values and further affected by inconsistencies in some banking practises.

Past property speculation has led to the current market we find ourselves in. How do we get out of this weak market into a stronger one? The NAMA model has been chosen by the Irish Government and we understand that approximately €90bn of distressed loans will be taken from the Irish Banks (AIB, Bank of Ireland, Anglo Irish Bank, EBS and Irish Nationwide Building Society) by this entity and subsequently managed. The theory is that this transfer of bad assets will free up financial money markets and foreign cash will flow back into the banks, and thus back into the country.

The terms of the €90bn transfer of assets remains uncertain and has led to much speculation on how the management of the new entity will go about its business. This has caused property developers in particular to voice their concerns, as it is unclear which assets will be taken, at what price and how they will be managed thereafter. Sean Dunne has allegedly tried to set up a Developer’s Federation to help protect Irish developers from any mandatory powers and strategies from NAMA enforced upon developers.

Some specific concerns about NAMA include:

1. How will the loans move from one bank to the NAMA entity and how long will this take?

The issue here is that €90bn worth of loans will take a long time to move from one piece of software (bespoke to individual banks) to a newly created or old IT system within NAMA. This presupposes that NAMA will operate and manage the day to day concerns of its new clients in their own IT system. Such a transfer of information would take months to perfect and control.

2. Will NAMA complete developments currently underway?

A developer/builder who has a portfolio of projects may have one or several projects underway at present. If the case is transferred from a bank to NAMA, will the project continue? In other words, will NAMA have working capital to fund the completion of this development project? If not there will be lay offs on site, professional and sub contractor fees will be unpaid and creditor meetings could be called with winding up petitions following shortly after. Should winding up petitions be successful, the asset would be placed on the open market and it is the duty of the appointed liquidator to achieve the best price. These types of properties will be sold well below estimated value due to simple supply vs. demand economics. The danger is that strategies decided by NAMA could move the market due to their dominant position.

3. Will the developer be given a chance to refinance the asset if it is moved into NAMA?

Let’s say, for example, that a developer has been moved to NAMA from AIB and the transfer occurred at a discount of 70c in the Euro, so that a loan of €100m was bought by NAMA for €70m. Could the developer refinance this new liability of €70m with say Bank of Ireland or any other bank? Would NAMA restrict such refinancing or would the other banks be restricted from taking on this new business now or in the future when as expected the financial money market frees up for Irish banks (which is an indirect objective of NAMA)?

4. Will foreign owned banks be included in the NAMA model?

In this market many developers have several banking relationships. A developer could have one loan with AIB (€35m), another with Bank of Ireland (€50m) and maybe another with Bank of Scotland Ireland (€25m). At present we understand that only loans with AIB and Bank of Ireland will be considered for moving into NAMA (i.e. €85m), but the €25m would remain with BOSI (a subsidiary of HBOS, owned in the most part by the British Government). How will this process affect the BOSI lenders and their reactions to this developer? How will NAMA react to loans and assets outside their control and owned by their borrower who may have a large guarantee on the line for the €85m?

5. At what level of exposure is a property developer to be moved into NAMA?

If a property developer has an exposure of €10m secured against land which has fallen in value to match or be less than the bank debt, will this case be moved into NAMA? The general view is that maybe this case would not be transferred into NAMA due to its small size in comparison to larger property developers in Ireland. However the existing relationship manager within the bank may not be willing to support the case due to its sector and may actually delay bringing the case forward until it is confirmed 100% that the case will not be transferred into NAMA. The stagnant relationship between the bank and the borrower would result in delays on strategies with the risk (if this is a common scenario) that the market would be affected by such delays or further down the line with forced sales at low prices.

Ultimately there will be a time where there is no longer the level of speculation currently in the market and structures will be formalised. However, the key to satisfactory solutions are knowledge and preparation. The best way to protect yourself from this ever changing set of circumstances is to keep abreast of the latest information and identify strategies that would mitigate to your benefit any involvement with NAMA. Be sure to have independent advice on these strategies with an individual or firm which has your sole interests at heart.