The eagerly anticipated draft legislation establishing the National Asset Management Agency (NAMA) has been published by the Irish Minister for Finance (the Minister). The Bill follows a number of initiatives over the past 10 months to protect and preserve the stability of the Irish banks. The purpose of NAMA is to address the level of impaired property and development loans on the balance sheets of Irish banks. NAMA is to be established as a statutory body corporate with extensive powers to acquire, hold and manage bank assets. It is anticipated that NAMA will acquire bank assets worth approximately €90 billion. The State can lend NAMA up to €10 billion in addition to debt securities to be issued by NAMA or the State.
The Irish Government is keen for the Bill to be reviewed by all stakeholders in advance of its formal publication to the Irish Parliament (the Dail) in September. The Government has stated that the Bill may be substantially amended in September. Key enabling regulations will also be published in September. NAMA is expected to begin operations in October with the acquisition by NAMA of the 50 largest relevant exposures from the participating banks by Christmas.
Whilst the Bill provides clarity in relation to a number of issues relating to NAMA, a number of key questions still remain. The following is an overview of the most important provisions of the Bill and an analysis of some of the key issues arising out of the Bill.
Who are the Participating Banks?
A bank (and its subsidiaries) can apply to the Minister to be designated as a participating bank within 28 days of the establishment date to be set for NAMA. The Minister may designate any applicant once he believes that the bank is systemically important to the financial system or the acquisition of that bank's assets is necessary to achieve the purpose of the legislation. However, the Minister will have regard to support available to certain banks in Ireland which are subsidiaries of overseas banks and may have access to other support schemes, the financial situation of the bank in question and other resources available to the Minister.
What assets may be acquired by NAMA?
The range of bank assets that may be acquired by NAMA is extremely broad and potentially extends beyond development loans and related security. Categories of assets which may be eligible for acquisition include:-
- Loans used in part to fund the development of land;
- Loans where any element of the security consists of an interest in development land;
- Classes of loans where the overall indebtedness under such loans is such that, in the opinion of the Minister, their acquisition is necessary for the purposes of the legislation; and
- any other type of credit or financial accommodation and any related rights designated by the Minister.
In addition, eligible assets may include loans or other facilities to third parties who are related to the borrower under another eligible asset. Third parties who are related to a borrower include:
- Companies controlled by the borrower at any time;
- Any person who at any time was in a partnership with the borrower; and
- Any other classes of persons designated by the Minister.
New loans which were made after 31 December 2008 will not be eligible for acquisition by NAMA (although refinanced or renegotiated loans which were originally made available prior to that date can be included).
How will eligible bank assets be valued?
The short answer is that we do not know yet. Some clarity is provided in the Bill however. It provides that bank assets are to be acquired at their "long term economic value" (LTEV) as determined by NAMA. The LTEV is to be determined by reference to the following factors:
- the current market value of the underlying property security;
- the current market value of the bank asset; and
- the LTEV of the underlying property.
Valuations must be carried out in accordance with regulations to be made by the Minister (expected in September) and the EU Commission's State aid rules.
Certain of these valuation factors to be considered by NAMA are at odds with each other and the precise weighting or formula to be applied to these factors remains unknown. NAMA shall have regard to the following factors in determining valuations:
- valuations submitted by the banks;
- acquisition values already determined;
- credit worthiness of debtors; and
- performance history.
Banks can object to NAMA's valuation of individual assets. NAMA may either take on board these objections, remove the asset from the portfolio to be transferred or continue with the acquisition. A bank will have a single opportunity to object to the total portfolio acquisition value once the entire transfer process is completed but only if that bank has objected to the individual valuations which in aggregate exceed one-eighth by value of the total portfolio. Valuations are then carried out by a specialist valuation panel of up to 12 experts who will decide the appropriate total portfolio acquisition value.
How will eligible bank assets be acquired?
Participating banks are to provide NAMA with information on their assets and are subject to a duty of utmost good faith. This is a very high standard and would require full disclosure by the participating banks to NAMA of all relevant matters concerning their loan assets. NAMA will then decide which assets it wishes to acquire. An expert reviewer may be appointed by the Minister for Finance if a participating bank disputes that a bank asset is not an eligible bank asset for the purposes of the Bill.
NAMA will then prepare acquisition schedules which will set out the precise assets to be acquired, the acquisition value and the date of transfer. The assets will transfer on the date specified in the acquisition schedule for Irish legal purposes. The transfers take effect notwithstanding any legal or contractual restrictions to the contrary.
Bank assets are to be paid for by way of government bonds or government guaranteed NAMA bonds.
Once a bank asset is acquired, NAMA acquires all of the participating bank's interest in the asset and all obligations of the participating bank relating to that asset, subject to any obligations or liabilities which are excluded in the acquisition schedule. The precise effect of this on banks or NAMA's obligations to make further advances which are provided for in loan documentation is not precisely clear. For instance, could a participating bank be obliged to make a further advance but not have the ability to rely on its original security which would have transferred to NAMA?
The contract entered into between a borrower and the participating bank is not to change in any material respect, subject to any exclusions provided for in the acquisition schedule. NAMA is also to be entitled to the benefit of any rights of set off which the participating bank had against debtors.
NAMA will not be liable for representations made in relation to loans by participating banks prior to the date of acquisition. This will be particularly important in the case of oral representations or understandings in relation to loan facilities prior to their transfer to NAMA. NAMA can give directions to syndicate agents or security trustees to carry out functions including the realisation of security or enforcement of guarantees as appropriate.
Provisions in contracts, such as bond documentation, entered into by participating banks which would cause a default under those contracts arising out of the operation of NAMA and the transfer of bank assets are declared to be of no effect as a matter of Irish law. The effectiveness of this provision in relation to foreign law contracts is also unclear.
Participating banks are required to continue to service loans transferred to NAMA unless otherwise directed. Third party servicing is also provided for. Fees are payable in respect of servicing and a basis to be agreed with the consent of the Minister.
How are foreign assets to be acquired by NAMA?
A significant portion of the bank assets are governed by laws other than those of Ireland. The treatment of these foreign assets is slightly different under the Bill. If under Irish law, the proposed transfer of an asset to NAMA is governed by a foreign law, and such law permits the transfer, the participating bank is obliged to do everything necessary to effect the transfer.
If the foreign law does not permit the transfer of the asset, the bank is obliged to do all that is permitted under such foreign law to transfer to NAMA the greatest interest possible in the foreign asset. The bank will also be under an obligation to hold the asset for the benefit of NAMA under a trustee type relationship.
What powers and rights will NAMA have?
The Bill gives NAMA a unique set of powers to allow it overcome legal and practical impediments to the fulfilment of its functions. These include:
- The power to appoint a statutory receiver. In this regard, the appointment of a statutory receiver cannot be displaced by the appointment of an examiner or liquidator;
- The power of foreclosure in certain circumstances in respect of underlying property security. This will enable NAMA to acquire outright ownership of land, rather than a security interest;
- Compulsory acquisition powers exercisable on application to the High Court in respect of any land or easement which in NAMA's opinion is necessary facilitate the sale or development of land;
- The power to set aside dealings in land, including dealings in land which is not charged to a participating bank. Given that this will impact on third parties, it is unclear what effect this power will have on the operation of the property market;
- Assets transferred to NAMA will benefit from a range of statutory exemptions from certain rules of law which otherwise invalidate such assets or related security. Examples include the prohibition on companies making loans to directors or connected persons and the requirement to file particulars of charges with the Companies Registration Office. It is unclear how these exemptions will affect the valuation of assets; and
- The Bill contains a number of provisions which reduce or eliminate taxation that might otherwise arise on the acquisition, holding and disposal of loans and related assets by NAMA and its subsidiaries.
Is the conduct of participating banks regulated?
The Irish Financial Regulator may with the approval of the Minister give a direction to a participating bank to regulate its commercial conduct by restricting balance sheet growth, restricting takeovers of other credit banks, requiring balance sheet reduction or consolidation or merger of participating banks. Clearly these are quite extensive powers and little detail is given in the Bill as to how or when these directions could be given. Further, the Bill provides that the Minister may direct the participating banks to draw up or amend a restructuring plan. These restructuring plans must comply with EU State aid and competition law rules. Participating banks can be forced by court order to put these plans into effect in accordance with the timetable directed by the Minister.