BUSINESS OPINION:IT IS approaching three months since the Government announced plans to cleanse the banks by buying up to €90 billion in the toxic loans. However, it is fast emerging that it could be some time before we know the knock-down price at which the State's "bad bank" Nama will buy the assets.
The Government has said that “an economic value” will be applied, in line with EU guidelines. This will allow the State to set an approximate value so it creates some flexibility. Minister for Finance Brian Lenihan must leave the taxpayer with some prospect of making a profit from the loans and at the same time not blow an even bigger hole in the banks’ capital forcing another Government hand-out. It will be an exceptionally difficult balance to strike. Either way, the State will be picking up the tab up-front.
Among the advisers to have been appointed to Nama are London-based bankers HSBC. Their short-term posting is to try to establish a methodology to price different types of loans in different locations together with the associated assets, primarily investment properties, provided as security for the speculative development lending.
The problem lies in the scale of the exercise and the banks’ relationships with the developers. Nama is expected to buy only loans with a book value of more than € 5 million, leaving loans under this amount with the banks. This will reduce the total loans being acquired to €80 billion. By dealing with the big developers, the belief is that the trickle-down effect from the large exposures will mean the banks will have to deal with the writedown on the small development loans themselves.
Put a floor of €5 million on the loans and it is estimated that the number of borrowers being handled by t he agency will fall from about 14,000 to 1,500, easing a massive administration headache. This is the so-called 80:20 rule at work where most of the debt is owed by a few developers.
The aim of the entire agency exercise is to get the banks and building societies lending again and, as the International Monetary Fund pointed out last week, Nama is pivotal to limiting the long-term damage not just to the banks but to the economy.
With credit-starved small and medium-sized businesses continuously banging on the Government’s door, Lenihan will be keen to get the agency up and running as quickly as possible. But pitfalls lie ahead. Given that lenders such as Anglo Irish Bank and Irish Nationwide had a large proportion of their property loans concentrated among a small number of developers, the lenders had developed close relationships with these borrowers and many loans were tailored specifically for them. Valuing these will be a huge challenge. All loans moving to Nama will have to be based on water-tight loan agreements and good legal title, which, given some of the side deals engaged in, may not lead to a straightforward transfer to the agency.
While HSBC may be able to set parameters on valuations to take account of the vast majority of loan types and the locations of the underlying properties, its methodology might not capture an accurate value for all of the bespoke loans.
The alternative is a painstaking process of sifting through each and every loan to assign individual values. This would be a logistical nightmare and slow the process right down given the proposals to staff Nama with a core team of 30 to 40 and to rely heavily on banks’ lending teams.
If the Minister directs quick action on Nama in an attempt to grease the wheels of credit, the accuracy of the valuations could therefore run awry without a forensic analysis of each asset.
Time is not on the Government’s side. Some of the foreign-owned banks with large exposures to developers who will end up as customers of Nama are going to court to recover debts.
The smaller Irish lenders owned by large overseas banking giants are tending to be the more aggressive as they have less to lose by securing judgments ahead of the pack and before Nama.
ACC Bank, which is owned by Dutch giant Rabobank, has a lower exposure to developers than most of the big domestic banks but it has shown its teeth by snapping at the likes of Paddy Kelly for large sums. The bank’s latest action is scheduled to bring developers Larry O’Mahony and Tom McFeely, involved in a property play at the Square in Tallaght, before the Commercial Court today.
Given that many of the large developers are multi-banked across institutions which are both inside and outside the Nama plan, there is likely to be further battles over cross-collateralisation. Last Friday Danish-owned National Irish Bank secured judgment for €37 million against four defendants, including Durkan New Homes, on the back of cross guarantees relating to a building project in south Co Dublin.
Officials working on Nama have met some of the foreign-owned banks with Irish operations that are larger than ACC and all sides have signalled that they wish to work together. From the agency’s perspective, this would help prevent one bank going on a solo run against a developer through the courts.
A further difficulty is that the UK-owned banks, Ulster Bank and Bank of Scotland (Ireland), both large lenders to developers, are dealing with their toxic assets under the UK government’s risk insurance scheme. This will allow them to write down their loans over time rather than all at once under the Irish “bad bank” route. Both are unlikely to accept large up-front writedowns as a result of the Nama discounts spreading.
There are so many moving parts to this puzzle that Nama could be long established before the public learns the discount it will pay for a fifth of the loans in the Irish banking system.
scarswell@irishtimes.com
