NAMA The Irish experience eight years along the roadec.europa.eu/cyprus/sites/cyprus/files/ireland_-_nama.pdf · 3 NAMA – three phases in its lifespan - Evolving focus Phase 1 (2010-2012)

www.nama.ie

NAMA

The Irish experience – eight years along

the road Jamie Bourke

30th October 2017

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Introduction - refresh

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NAMA was established in December 2009 by the Irish Government

Acquired €74 billion par debt from five financial institutions – 12,000 property loans

800 debtor connections – 5,000+ borrowing entities – loans secured by 60,000

properties

Created a new agency – recruited specialist staff with expertise in finance, banking,

law, property, insolvency and planning. 380 staff at peak; now circa 250

Paid €31.8 billion, including State Aid of €5.6 billion

Senior debt of €30.2 billion now almost fully paid; subordinated debt of €1.6 billion

to be paid by March 2020

NAMA has projected that it will return a surplus of €3 billion to the State when it

completes its work in 2020/2021.

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NAMA – three phases in its lifespan

- Evolving focus

Phase 1

(2010-2012)

Establishment and consolidation

• Loan acquisition

• Staff recruitment

• Systems

• Debtor Business Plan Reviews

Phase 2

(2013-2016)

Major deleveraging

• 25% of senior debt redeemed at end-2013

• 91% of senior debt redeemed by end-2016

Phase 3

(2017-2020)

Phased wind-down

• 100% senior debt (€30.2bn) redeemed

• Sub debt – first call date March 2020

• Phased transfer of surplus to Exchequer

• Complete SDZ Docklands and residential delivery programmes

Why an AMC? Why NAMA?

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Loan workouts are part and parcel of banking business but there are a number of reasons

why setting up separate AMCs becomes necessary in certain circumstances.

In the case of NAMA, these included:

The scale and systemic nature of the problem

Commercial property lending in 2008 was €160bn – same size as Ireland’s GNP.

€60bn was Land & Development lending – higher risk.

Banks tend to be slow to recognise impairment and to deal with it. Irish banking

system forced to recognise losses on commercial property loans. Banks were slow to

recognise losses on other problem loan portfolios.

The need to get an overview of total debtor exposure across the financial

institutions – many of the larger debtors had loans outstanding with a number of

NAMA institutions

The requirement for specialist skills – particularly specialist real estate and

workout skills.

Scope and critical mass

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AMCs work well for commercial property loans which can be worked out quicker; different

model required for SMEs and residential mortgages which require longer time horizons

NAMA acquired €74bn of land and development and associated loans - identified by the

market and the credit ratings agencies as the riskiest loan exposures - from five

Participating Institutions (PIs) covered by the Irish Government guarantee scheme

The consolidation of a significant volume of property loans in NAMA has yielded

significant efficiencies – debtors dealing with only one lender.

Consolidation of professional skills and resources in turn have generated cost efficiencies

and substantially better returns than would have been achieved had the banks been

directed to establish their own individual workout subsidiaries

Acquisition of bank assets

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Total acquisition price of €31.8bn reflecting long-term economic value of bank assets

(overall 57% discount to par value of loans)

Senior government guaranteed debt of €30.2 billion (now almost fully paid)

Subordinated debt (first-loss piece) of €1.6 billion to be paid by March 2020

Acquisition price included a State Aid element of €5.6bn i.e. NAMA paid at least €5.6bn

more than a private investor would have paid (reflects long-term economic value)

NAMA acquired its loans by reference to a property collateral valuation date of 30

November 2009 and, as a result, had to absorb losses arising from the impact of the 25-

30% decline in Irish property values which took place subsequently

The participating institutions (PIs) would have been paid about €22 billion by the market

(assuming that there would have been buyers) rather than the €32 billion that they

received from NAMA.

Loan acquisition

Legal due diligence, valuation, purchase and transfer of over 12,000 property-related loans with a

par value of €74 billion. Majority of loans acquired over 10 months between March 2010 and

December 2010

Building an organisational structure from scratch:

Staff: started life with just 10 staff in January 2010 (peak staff of c380)

Systems: now there is an integrated enterprise IT platform in place including integrated MIS

and GIS systems

Building a debtor/loan management platform from scratch: 800 debtor connections representing

5,000 borrowing entities and 60,000 property units

Key challenge: getting to grips with the data as quickly as possible. Everything else flows from

this, including identification of staff skillsets and strategy

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Transfer price

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What do we think the assets are really worth when normal conditions return? Intrinsic value

is key

Long-term Economic Value (LEV) of property: “the value that it [property] can

reasonably be expected to attain in a stable financial system when the crisis

conditions prevailing … are ameliorated and in which a future price or yield of the

property is consistent with reasonable expectations having regard to the long-term

historical average…” (Section 72, NAMA Act 2009)

LEV – EU Commission concept

• ‘Asset Valuation...absent the liquidity stress...reflecting underlying economic value of

the assets....relative to the likelihood of the assets producing cashflows based on its

credit fundamentals’

Realistic transfer price forces banks to crystallise their loss positions on Day 1 and allows

the AMC to operate from a rebased asset valuation level … whilst also recognising the

longer time horizon over which the AMC is has been given to work out the assets

Carrying acquired assets at their old book value leads to unrealistic expectations and could

create an unsurmountable target for the AMC

NAMA acquired its loans by reference to a property collateral valuation date of 30

November 2009 and, as a result, had to absorb losses arising from the impact of the 25%-

30% decline in Irish property values which took place subsequent

The requirement for specialist skills – particularly specialist real estate and workout

skills. The task of an AMC is to manage the underlying collateral effectively

Challenge of retaining experienced staff in a recovering economy and property market –

recognition that NAMA is winding down

Majority of staff on specified purpose contracts – no job security.

VR programme – retention payments

NAMA sunset clause – never intended to become a permanent feature on the landscape.

Staffing - challenges

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NAMA’s focus is on intensively managing debtors, insolvency practitioners and loans to maximise debt

reduction and protect and enhance the long-term recoverable value of underlying assets. NAMA obtained

initial management information (MI) by requesting and receiving Debtor Business Plans.

Debtor management

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• Intensively managed by NAMA

• Key credit decisions and relationship management carried out by NAMA multi-disciplinary teams

• Loan administration performed by Participating Institutions

200 Debtors

€61bn Par debt

Avg €305m

• Relationship management performed by the originating financial institutions (dedicated NAMA unit) through NAMA Delegated Authority

• NAMA presence in each of the banks overseeing the management of the portfolio

• Relationship management and loan administration carried out by Participating Institutions / third party servicing firms within NAMA policy and procedures

600 Debtors

€13bn par debt

Avg €22m

NAMA seeking to ensure that debtors are aligned with NAMA objectives – maximisation of

debt repayment and of residential delivery.

Preferred approach is to work consensually with debtors where possible and NAMA has

worked with the majority (by value) of its debtors on that basis to date

Consensual approach means that debtors manage the agreed property and realisation

strategy, under close monitoring by NAMA, with suitably reduced overheads adopted to the

level of activity envisaged

Consensual approach also means reversal of any transfers of assets to related parties which

may have taken place over recent years and the granting to NAMA of charges over

unencumbered assets as additional security

Rental income from investment assets are brought within NAMA’s control – rents are lodged

to bank accounts over which NAMA has imposed security

Enforcement: Where a consensual approach is not possible and loans are in default,

enforcement proceedings are initiated. 11

Emphasis on consensual approach

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Asset management

From inception NAMA has placed a major emphasis on asset management to enhance

the future disposal value of the property securing its loans

Where appropriate and commercially viable, NAMA funds the development of certain

commercial and residential sites in order to maximise the recovery value of the associated

loans. The return on investment must be shown to outweigh the costs.

Working with debtors and receivers to:

• Complete unfinished development projects

• Fund new viable commercial and residential development [for which there is growing

demand in Dublin and the country’s other key growth centres]

• Enhance planning permissions and remove other barriers to development

Assess projects by reference to a wide range of feasibility criteria, including extent of

interest from prospective purchasers and tenants

NAMA competing for investor funds with other European jurisdictions which

have NPL portfolio problems – UK, Italy, Spain and CEE countries

Competitive advantages:

Ireland’s economic outlook

Ireland’s enforcement regime

Open marketing of transactions

Professional sales processes

State aid constraints – NAMA cannot exceed original EU-approved remit and

cannot act in ways which may cause market distortions.

Creating market liquidity

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Debt recovery options

Commercial transactions - Did not entertain buyers who wanted to buy at fire sale

valuations

Aided price discovery through supply of first wave of ‘major’ transactions.

Clear signals on transactions pipeline as Irish market recovered in 2013.

Consensual agreement with debtors and receivers to dispose of assets so as to

maximise their debt repayment to NAMA

Debtors refinance their debts with other institutions

NAMA's policy is that the sale of all loans and properties by debtors and receivers

should be openly marketed to ensure that the best price available in the market is

achieved

Launched an active loan sales process in 2011

Enabling NAMA to monetise its loan portfolio and thereby reduce its balance sheet.

Completed its first major Irish loan portfolio - €800m par debt portfolio (Project

Aspen).

Sale of debtor loans as single portfolios (Project Jewel) or as part of multi-debtor

loan portfolios (Project Arrow)

Commenced asset portfolio sales in 2013

Creation and sale of property portfolios controlled by a number of debtors e.g.

Project Hazel (retail)

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Progress – Deleveraging by NAMA

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Troika Target – 25% senior debt reduction by end-2013 – achieved

Troika Exit created opportunities – international investor interest

Contingent Liability – €30.2 billion guaranteed senior debt fully repaid

Impact on Sovereign – projected surplus of €3bn

Total cash generated – over €40 billion

Impact on Banks – removed substantial liability from Irish banks

EU/IMF report – NAMA seen in positive light internationally

“the creation of NAMA…helped improve the banks’ liquidity as it replaced their

distressed loans…with…senior bonds eligible as collateral for…funding”

“NAMA…illustrates that the active or ‘factory’ model to asset disposal can contribute

towards maximising the assets’ recovery value”

“a majority privately-owned structure has allowed keeping the NAMA … senior

bonds…off the general government balance sheets”

(Source: What Makes a Good ‘Bad Bank’? The Irish, Spanish and German Experience – European Commission, Sept 2016)

NAMA strategy Clear mandate - commercial objective is primary

The NAMA legislation is very clear that NAMA’s mandate is a commercial one and all

NAMA’s operations reflect this

Section 10 of the NAMA Act 2009:

“….NAMA shall, expeditiously ….obtain the best achievable financial return for

the State…”

• Maximise cash generation.

• Enhance asset values through asset management activity and through funding

commercial and residential development of NAMA-secured assets where it is

profitable to do so

NAMA has other objectives but they are subject to the primacy of the commercial

objective.

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www.nama.ie

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NAMA

The Irish experience – eight years along

the road Jamie Bourke

30th October 2017