How NAMA is the perfect solutions for property developers to come up smelling of roses, again

I’ve been thinking about the possibilities that may arise with this new National Asset Management Agency. Given the lack of detail there is a possibility that the following scenario may arise. It is however impossible to totally rule it in or out given current details released. Please realise also that this is just my thinking at the moment – I’m not an expert on any of this.

You could surmise that this scenario would be political suicide for Fianna Fail if it did turn out to be true, and did actually happen, but given everything that’s happened in this country so far, it may not be beyond the realms of possibility.

This scenario became all the more “live” for me over the weekend when I saw in the Sunday Times that the person who actually came up with the National Asset Management Agency used to actually work for a property developer themselves – i.e. an insider in the whole Irish property game. (See here for the Sunday Times report on how Peter Bacon worked for Ballymore Properties).

Here’s my thinking on a how this who NAMA scheme might work:

A property developer sets up off the shelf company in 2006 to borrow €100m to buy a particular property.

This €100m borrowed from a bank, with the property itself as collateral, valued at €100m. No personal assurances are requested, because they were never given and there was always a bank down the road that would give the loan without it anyway.

Let’s assume that as of today then, there is €100m still outstanding – capital owed plus unpaid interest plus charges (therefore debt deemed toxic).

Now, the new National Asset Management Agency (NAMA) comes riding in on it’s white horse.

The property is deemed to be a distressed asset, with no interest being paid on the loan.

Magically, through whatever is the valuation formula that isn’t being revealed to us, the property is valued at €20m.

The net position now for the property developers company is that it’s still in the hole for €80m.

NAMA now assumes the responsibility of the debt from the Bank, and the property is handed over as well.

So, NAMA now owns property that was valued at €100m but is now worth €20m, and now has a creditor, the property developers company, who owes it €80m.

The property developers company is now supposed to make payments to the NAMA on a loan on property that it now doesn’t actually own.

As for the bank, it is now in the hole for the difference between the value of asset when it was passed to the Agency (€20m) and the amount of the loan (€100m). However the bank will most likely get a capital injection of €80m from the government where required to make this up – this is how people assume that the use and development of NAMA will lead to nationalisation of the main banks.

However most people don’t care about this and just say that the toxic assets are successfully removed from Banks balance sheet and they can get lending again. But watch below where they can start lending again.

The property developer will now look at the situation and see that they are running a company that is €80m in debt, but owns no assets. Obviously this isn’t worth continuing, so they wind up the company.

The NAMA now has a debt for net €80m which immediately becomes a bad debt, and property worth €20m.

As the property developer has wound up the company, there is no way for the €80m to be recouped since no personal assurances were likely to have been given to the Bank originally, and it was only the property itself that was used as collateral.

As of now, the original debt of €100m with the bank has now seen €80m handed over by the government to the Bank, and the NAMA sitting on a bad debt of €80m. If you remove the €20m value of the property, the original €100m debt at the bank has now turned into a €140m cost to the government via bank recapitalisation and the liabilities of its NAMA.

What happens next then? The NAMA is left sitting with huge debts, and an amount of property that it doesn’t have the mandate to develop or make money from – apart from maybe getting rental due.

How about if the original property developer sets up new company – or someone close to him does? This new company is set up to purchase and develop property.

The new company now identifies a distressed property, owned by NAMA, that it would like to get its hands on – mainly because of the fact that it used to own it previously.

The property developer company now gets loan for €40m from the same bank or another bank (that’s free and clear of bad debt and willing to lend thanks to NAMA and the government recapitalisation).

Property developer company goes to NAMA and offers €40m for the property that it has on its books, valued at €20m.

NAMA accepts the offer as it is making a book profit of 100% on the property – which it will crow to the rooftops showing us that the whole scheme is a fantastic success.

But, NAMA still has a remaining and now unrecoverable net debt of €60m. But this will be declared as “expected” by the government and will, they will tell us, be recovered by a “levy” on the banks to make up the difference.

Remember though, that even if this €60m was recovered from the banks, through the recapitalisation earlier in the process, the banks have already received €80m from the government, so the levy really is just the government getting their own money back.

And leaving the banks with a €20m profit on what was essentially a bad debt.

And in the meantime, our property developer friend gets his property back priced at a song compared to what he originally paid for it, and a repayable debt of only 40% of what he originally had.

As I say, I’m more into this for the conspiracy theory angle given that I’m not an expert on this whole thing, but I’ve run this scenario past a few people who know more than me about such things, and they haven’t dismissed it out of hand.

What do you reckon?

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5 Responses to How NAMA is the perfect solutions for property developers to come up smelling of roses, again

  1. Gerard April 15, 2009 at 13:59 #

    I’m no expert either but I did get some cause for optimism on NAMA from this article http://www.irishtimes.com/newspaper/ireland/2009/0411/1224244443488.html

  2. valueireland April 15, 2009 at 19:20 #

    @Gerard – Thanks for the comment. I had seen that story this morning. Then again, there was also this story from the same paper where Dan Boyle of the Greens is worried that property developers
    may buy back their properties at a discount
    .

  3. Gerard April 16, 2009 at 08:49 #

    I suppose that it is no harm to bring every scenario out in the open. I am not convinced that the developers in question would have the necessary resources to buy back the properties in the short to medium term or that the banks would be too willing to get into bed with them again, any time soon. Perhaps there will be a few that will try to exploit the situation but I can’t see it being a common occurance.

  4. Peter April 16, 2009 at 11:29 #

    Interesting perspective. Thanks.

    Let me just clarify a couple of points. I work in the credit and restructuring dept of foreign bank (no other vested interests and I dont vote in this country) – so hopefully I can add something factual unbiais thoughts to your theory:

    The first point I would make is that although I am not against the concept of developing a way to quarantine sour loans within our banks I am completey against the NAMA project as currently proposed – and many in the financial industry are too!

    In your worked example you: (1) assume that the real property is transferred to NAMA – this is not the case, only the loan is transferred i.e. the €100m loan

    (2) the developer continues to owe the lender (now NAMA) the €100m – not €80m as you suggest.

    (3) NAMA has handed over €20m in govt securities in consideration for the €100m loan so the originating bank takes a hit of €80m – correct

    but this does not necessarily mean that the govt will have to inject €80m in fresh capital into the bank as this would assume that the total loan portfolios are valued in this range – which I dont think even the most bearish commentators are suggesting (although I must admit I personally think the values are much less than the values being suggested in media)

    But are correct on the fundamental point that the banks will need a fresh equity injection if they are to transfer these loans at big discounts and the consideration for this must be that the tax payer gets a greater shareholding in those banks.

    (4) You use the €100m as a proxy for the original value of the asset/site. Typically this would not be the case as even the most aggressive of property lenders would have lent not much more than 75% of the purchase price (ex stamp) so the original price would be more like €130m. ALSO in your example you are assuming no personal guarantees/cross collateral – this is also rare other than the most recent so called loan ‘vintages’. Although I have to say that other than for a lucky few developers the value of these guarantees are of limited financial value. But where they exist they are a useful way of the bank pressuring the developer to pony up new cash where the site is already a lost cause.

    (5) Your essential point I think is twofold (a) that somehow the state will end up paying twice and (b) that the ‘offending’ developer could end up with a windfall of some sort.

    Well the state may very well end up paying much more than it needs to but it wont be for the reason you outline as I said above (as we wont be putting the €80m into the banks (we couldnt afford to do this) it will be a lot less than that and we will at least get shares/warrants in lieu AND if we were to sell this asset example on the open international markets we would only get 20p in the £ whereas if one works with the original or local developer (who remember has already lost the 25% purchase price + stamp + other costs)- this process is very normal when working out distressed loans you will improve the recovery prospects and therefore the value of that loan. IF you rule this out on morality or political grounds you might aswell write off 90% or even all of the loan.

    By the way another problem exists in that I am not sure there are any lenders Irish or otherwise lending for new developments – this is likely to continue for some time – so any new funding will have to come from equity (which has other neg implications.)

    (6) You mention the levy being proposed by NAMA as a type of clawback if it all doesnt work out for NAMA. This is the most ridiculous feature of the NAMA deal (see recent FT editorial). WHY BOTHER seemingly purging the banks of the sour loans if you are not really transfering the risk?

    If the government is mad enough to proceed as planned with NAMA it needs to take whatever pound of flesh from the affected banks up front or over time but at predetermined cost otherwise the uncertainty still remains within the banks and the original problems remains unsolved.

    The last point I would make is that because NAMA will be highly politicised there will always the suspicion that FF are looking after their friends etc etc. I would much prefer if another govt was in power overseeing this because whether we like it or not – I can say from international experience – the best chance of optimising loan recovery will mostly arise from working with the original developer or at least local developers. This is a fact we are going to have to get used to.

    It might look from the above that I am in favour of NAMA – I am not. I think far better to keep the loans where they are but quarantined and possibly insured – if this ultimately means the banks are nationalised for a period – so be it! After all conventional wisdom would suggest that equity and sub debt takes the first hit in any commercial venture not the tax payers!

  5. Tom April 16, 2009 at 18:18 #

    I wish I understood NAMA but I just don’t!

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