ANALYSIS:Nama will clearly not be forking out the full price for the €90bn worth of loans it is purchasing to bail out the banks. The sum expected to be paid will not be revealed until final debate on the legislation in September
THE DRAFT legislation creating the Nama “bad bank” fails to outline the discount that the State will pay for €90 billion in bank loans. Minister for Finance Brian Lenihan has said that an estimated cost of the scheme will be announced on September 16th.
Lenihan said that following the formal publication of the legislation in early September, he will say how much will be raised in bonds which will be used to buy the loans at a significant discount.
He said these details would be given when the Dáil meets to debate the final Nama legislation.
Lenihan said that the loans would be purchased at a price that reflected the assets’ “long-term economic value”, which in many cases would be “significantly less” than the book value of the loans.
The size of the “haircut” applied to the loans will determine whether the two main banks, Bank of Ireland and Allied Irish Banks (AIB), will require further capital from the Government and whether the State takes larger equity shares in both lenders in addition to its 25 per cent preference share stakes.
“The picture will become clear on September 16th,” said Lenihan. However, he warned that the estimate provided at this time may not be “a final value”.
The full impact on the capital of the banks will not be known until June 2010, when 10,000 loans have been valued individually and moved across to Nama, according to the agency’s interim managing director, Brendan McDonagh.
“We won’t have an exact capital value by September 16th,” he said. “The final capital position of the banks will not be known until we complete the process.”
Lenihan said that he would also outline the mechanism by which the loans would be valued by Nama on September 16th.
He said London investment bank HSBC and estate agents Jones Lang LaSalle were working with Nama on a valuation model.
He declined to provide an aggregate value of the bonds the Government expects to issue to pay for the bank loans: “I am not quantifying anything today.”
Banking analyst Emer Lang at Davy stockbrokers said: “We are none the wiser in relation to the likely haircuts that will be applied to assets transferring from banks to the agency.”
The loans will be priced at the current market value adjusted to reflect “a longer-term economic value which the underlying asset could reasonably be expected to attain”, according to the Government’s notes on the draft Bill.
The long-term economic value will take account of a number of factors such as “demographics, supply and demand projects, and macroeconomic projections”.
Lenihan said some assets may be worth more over time, but Nama will not apply this valuation to all loans as some assets may not be worth more than their current market value in the long term.
He said that in such cases the current market value of land originally earmarked for future development may not be worth more than agricultural value.
Certain assets such as bank shares and racehorses which have been provided as security on the loans could be valued at their current market values, he added.
Lenihan said that of the loans being transferred, assets with a book value of €30 billion related to “pure land”, €30 billion were backing work-in-progress projects and €30 billion were secured on commercial investments provided as collateral for the development loans.
He said that about two-thirds of the assets were in the Republic and about one-third was overseas, the bulk of which was in the UK.
He said Nama will be reviewed after five years but declined to say how long the agency would be in operation, saying that the duration of such bad bank schemes varied.
The Government will introduce a bank levy if Nama is left with a shortfall at the end of its life.
However, Mr Lenihan said he “didn’t envisage a levy” as he didn’t expect Nama to be left with losses.
McDonagh said that interest was being paid on more than 50 per cent of the €90 billion in loans.
The interest amounts to an average of 2 per cent above the floating rate of interest – the six-month Euribor rate which sets the borrowing costs on commercial loans.
The Government would pay the Euribor rate on bonds issued to buy loans, which will leave Nama with enough cashflow to fund the agency, McDonagh said.
He could not say how many loans which should be yielding interest were not doing so: “We don’t have that level of detail.”
- Draft Nama Bill does not outline "significant discount" to be paid for loans
- Minister will disclose estimated aggregate cost of Nama on September 16th
- Assets will be priced at market value adjusted up to "longer-term economic value"
- Long-term value will take account of demographics, supply and demand, and economic growth
- Certain assets may be worth no more than current distressed market or agriculture value
