The Irish Government has announced details of a plan to establish a new commercial semi state agency, the National Asset Management Agency (NAMA), to acquire portfolios of property loans from banks operating in Ireland. Property loans of up to €90 billion in aggregate book value will be purchased by NAMA in return for new issues of Government bonds (or NAMA bonds guaranteed by the Government). These Government bonds will enable Irish banks to access liquidity and provide credit to the Irish economy.
NAMA will be governed and managed by the National Treasury Management Agency.
Principal Features of NAMA Proposal
Precise details of the NAMA proposal are still being worked out, but the following principal features have been announced:
- Eligible institutions will be selected by the Government based on their loan book, access to support, ownership structure and relative importance to the Irish economy. It is not yet clear whether participation will be limited to the banks covered by the existing Irish Government Guarantee Scheme;
- Potentially all of the property development loans of participating banks could be transferred to NAMA. In addition, the participating banks' largest property investment loans and foreign property loans will be transferred. Selection will be based on a detailed assessment of each loan portfolio;
- Loans with an aggregate book value of up to €90 billion may be acquired, at significant discounts to book value. Discounts are to be based on asset quality, risk and underlying security and to reflect the "real economic value" of the loans in accordance with EU State Aid rules;
- Banks that opt to participate in the scheme will not have the ability to select which loans are transferred to NAMA. In addition, legislation will provide NAMA with a mandatory power to acquire loans to ensure cooperation of banks and to overcome any legal difficulties with assignment of loans;
- Generally, it is intended that individual borrowers can not opt out of the transfer scheme;
- NAMA will be staffed by professionals and will operate on a commercial basis. It will seek to ensure that all loans are fully honoured. Loans are to be transferred on their existing terms and conditions to optimise the return on the portfolio over time.
- The proposal envisages participation by private equity investors in the financing and the working out of certain loans.
- Any profits generated by NAMA will accrue to the Government and any eventual losses are to be met by a new bank levy.
Timing of Legislation
Legislation setting up NAMA and establishing the transfer scheme is a stated priority of Government and is expected to be introduced "before the Summer". The NAMA management structures will be put in place in parallel with the drawing up of this legislation.
The Government is in dialogue with the EU Commission to ensure the proposal complies with EU State Aid rules. In order to secure EU approval, the proposal will be required to be in line with EU Commission guidance on asset relief measures including:
- Banks to bear losses to the maximum extent, if necessary through clawback arrangements where they cannot share the burden up front;
- A common EU approach to valuation and asset categories; and
- Limited 6 month enrolment window.
Impact on Banks, Bank Shareholders and Borrowers
- If successful, the scheme will cleanse the participating banks of problem loans and leave them in a stronger position to lend to the Irish economy.
- Banks will be required to take an immediate and final write-down on loans transferred to NAMA. There will also be a reduction in risk weighted assets for regulatory capital purposes. The tax treatment of losses on loans transferred will need to be considered.
- Participating banks may need additional equity investment to cover loan write-downs.
- Any NAMA levy imposed will impact on banks going forward. It is not clear how the levy will operate. Will the levy apply to all banks or just participating banks and in what proportions?
- Banks will be required to transfer performing and non-performing loan portfolios representing significant parts of the banks' lending business. This raises questions about the banks resourcing and infrastructural needs going forward.
- It is not clear how the NAMA scheme would impact on property loans already securitised or funded by covered bonds.
- The need for additional equity investment in the banks as outlined above will lead to dilution of existing equity shareholders. Whilst the Government has not committed to any further capitalisation of the banks, it has stated that any additional investment in participating banks will likely be by way of ordinary shares rather than preference shares. This may lead to part or even total nationalisation of participating banks.
- The Government has stated that "considerable pain" is to be taken by shareholders in the Irish banks rather than by the taxpayer.
- The asset base of the banks will be eroded by the loan transfers to NAMA.
- Generally, borrowers will not be entitled to prevent their loans from being transferred to NAMA.
- A borrower's relationship with its existing bank lender will be terminated and replaced with a new relationship with NAMA, which has a mandate to extract maximum value from the loans in its portfolio. This may affect a borrower's ability to negotiate new facilities, refinancings, rollovers of existing advances, or waivers of terms and conditions.
- Particular legal issues may arise where fully performing loans, containing restrictions on transfer, are transferred to NAMA without the consent of the borrower.
- Can borrowers call for undrawn loan commitments to be advanced by NAMA?
Issues to be Clarified
- Valuation – The valuation to be applied to loans will be crucial to the success or failure of the scheme. While the Government has made it clear that banks and developers will not "get off lightly", specific details have not been provided. The valuation methodology will have to protect taxpayers, ensure banks can remain viable after the write-downs and comply with detailed EU State Aid requirements. A challenging task!
- Can NAMA Lend? – Will NAMA be able to lend to borrowers and originate loans and, if so, how will it finance such lending? This will be important in determining (i) how eligible loan facilities with undrawn funding commitments are treated and (ii) NAMA's ability to refinance loans and the terms of any such refinancing.
- Operational Issues - The scheme may involve the transfer in a very limited timeframe of all property development loans originated by Irish banks over the last number of years. This may raise operational challenges, especially in relation to capacity and infrastructure. Will NAMA develop its own infrastructure to manage this enormous loan portfolio or will it rely on existing resources of the banks and other service providers through outsourcing or agency arrangements?
- Foreign Law Issues - The Government estimates that up to 30% of the problem loans relate to foreign property. This may raise a number of conflict of law issues and questions about the recognition and enforceability of NAMA's statutory powers in foreign jurisdictions.
- Role of Private Equity – The precise role of private equity investors will have to be clarified. On what terms will they be permitted to co-invest with NAMA and/or to actively manage and work out loans?
Government Guarantee Scheme
The Government also announced its intention to extend the existing Government Guarantee Scheme to issues of debt securities of up to 5 years maturity by the covered institutions.