SECTION 227 REVIEW OF NAMA

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1 SECTION 227 REVIEW OF NAMA Presentation to Institute of Public Administration - October 2017 Gary Hynds Shareholding and Financial Advisory Division

2 NAMA Background and Periodic Reviews Established in 2009 to remove uncertainty around land and development loans from participating banks balance sheets, the value of which had fallen steeply following the financial crisis. Acquired gross loans with outstanding principal balances of 74.2bn from Irish banks NAMA In total 31.8bn paid (57% discount on par debt) in the form of: 30.2bn ECB eligible Government guaranteed senior bonds 1.6bn unguaranteed subordinated bonds. Considerable competition and other concerns given the scale of the impact of NAMA on the property market in Ireland Periodic Reviews Safe guard put in place to address its likely dominant position in the Irish property market across a wide range of asset classes (Land, CRE, Residential, Hotels etc.) Provision made in the NAMA Act to allow for the on-going review of NAMA by both the C&AG (every 3yrs) and the Minister (every 5yrs) to ensure; 1. Continued adequate progress in achieving its objectives, and 2. Ensure the continuation of the Agency only progressed for as long as necessary. 2

3 Section 227 Review Legislative Requirements Section 227 Review was required as soon as possible after 2012 and every 5 years thereafter while NAMA continues to be in existence. Department s first Section 227 Review covered to YE2013 commenced in Q and published in July 2014 (c.10 months). Assess the extent NAMA has achieved or likely to achieve its objectives Consider if NAMA continues to be necessary, having regard for the purposes of the NAMA Act Strategic Objectives Redeem, at a minimum, the senior bonds issued in addition to carrying costs and working capital and development expenditure advanced to debtors; Generate transactions to contribute to the renewal of sustainable activity in the property market in Ireland; To do so over the shortest time possible, having regard for market conditions and optimisingthe value of assets; To manage its assets intensively and invest in them to optimise the income producing potential and disposal value. Purposes of NAMA Act Extensive list of purposes designed to address the impact of the financial crisis through; Facilitating the availability of credit in the economy and the restructuring of the financial system Protection of taxpayers interests Restore confidence in banking system and banking assets Contribution to the social and economic development of state 3

4 Methodology Key issues to be considered Evaluation of NAMA s business plan and strategy in achieving its objectives Evaluation of NAMA s financial performance to date and projected performance in the context of market conditions Evaluation of impact of NAMA s strategies, specifically the pace of work out and disposal schedule on Irish property market Evaluation of risks facing NAMA and their impact on NAMA fulfilling its objectives Evaluation of risks to NAMA s statistical classification and potential impact on Government finances Evaluation of alternative strategies or changes to NAMA and consequential impact on achieving its objectives Important Process designed not to second guess board and management of NAMA but to obtain sufficient information to allow the Minister meet his obligations under the Act Acknowledged at outset that Department would not comment on specific policy decisions 4

5 Methodology Initial Activity Three phases 1. Research Phase Early engagement with NAMA Board and management team No access to debtor specific information (different to C&AG) Specific data requests Aggregate financial and business plan data Macro and property market assumptions Board approved strategy documents / forward looking information 2. Property Market Review Extensive third party engagement with both buy and sell sides Access to detailed research on UK and Irish property market 3. Stakeholder Engagement 5

6 Stakeholder Engagement Wide range of parties consulted Internal Minister Exec Board Policy Committee NAMA Regular management meetings Specific data requests Aggregate financial data only Board approved strategy documents SFAD Others / Ad-Hoc Banks NAMA Advisory Ctee ERSI and similar bodies Industry DG Competition Office of the C&AG Responsible for conducting Review of NAMA under S226. Regularly consulted / information shared during S227 Review. 6

7 Performance Review Establishment and Loan Acquisition Initial Loan Transfers Establishment and State Aid Approval Review of C&AG Section 226 report on acquisition of bank assets. Consultation with C&AG and participating banks. Operational progress in the transfer of loans and NAMA s progress in negotiating and agreeing business plans. Comparison with international peers (Securam and SAREB (2012)) Initial Strategy and Expected Market Dynamics 2010 NAMA Business Plan Not ideal to judge progress against early plans alone Revised 2012 Business Plan followed Starting reference point publically available with ambitious high-level targets cash generation, debt repayment, contribution to economic recovery, optimising value of assets. Target to redeem 25% (or 7.5bn) of senior debt by YE2013. The initial business plan was necessarily based on incomplete and/or uncertain information difficult to assess NAMA s achievements and progress solely against this ambiguous backdrop. In early 2012 NAMA were in a position to revise the business plan, based on more complete knowledge of the acquired assets and greater visibility on market dynamics of the intervening years. Translated into NAMA Strategy A revised NAMA strategy focussed on the UK assets in the first instance while Irish assets were expected to have slower recovery and be sold later in NAMA s life. YE 2013 bond target remain (and was incorporated into Troika bailout programme). 7

8 Performance Review Market Outturn and Performance vs Strategy Property Market Developments Between NAMA s portfolio valuation date of November 2009 and the finalisation of its strategic plan in March 2012, Irish commercial property values were estimated to have fallen by c. 22%. Irish Commercial Property Market Irish Downward Trend Continued Values continued to fall from November 2009 levels reaching c. 27% declines by year end By year end 2013, values had begun to recover, reclaiming some of the declines since November The commercial property market had appreciated by over 10% from November 2009 to March 2012 and appeared to have reached an inflection point. By December 2013 UK commercial property price indices reflected an 11% increase on November 2009 values. UK Commercial Property Market 8

9 Performance Review Financial objectives Performance vs Strategy Cash Generation Reduced loan book From inception to end 2013 NAMA increased the accounting value of its loan portfolio by c. 5.4bn through loan interest income earned, net profit realised on sale of loans above their carrying value and other surplus income. NAMA reduced the accounting value of its loan portfolio over the same period by c. 11.6bn through principal cash repayments and proceeds from the sale of loans and collateral, net of funds advanced to borrowers. Senior bond redemptions Target to redeem 25% (or 7.5bn) of senior debt by YE2013 was achieved despite significant weakness in the Irish property market. Very confident of achieving published targets given strength of investor interest in Ireland Operating Costs Review also analysed NAMA s operating costs to YE2013, which were found to compare very favorably with industry norms (vs size of loan book). Non-financial objectives Social and Economic Development Development and Vendor Finance Social Housing FDI NAMA role as a provider of development finance to facilitate the completion of construction projects throughout Ireland Close working relationship with Government departments and housing bodies to identify and deliver social housing units. Considerable investment by NAMA to remediate properties to required standards Since 2011 worked closely with the IDA and others to identify suitable commercial properties to meet requirements of FDI number of major lettings/sales achieved including Facebook and Google 9

10 Strategic Review Key Risks to Achievement of Objectives Current Market Context Stability of Operational Capacity Ability to achieve objectives clearly linked to international investor appetitive and prevalent levels of liquidity in international markets for real estate assets Risk that market conditions do not continue to support strategy or that NAMA fail to attract interest due to uncertainty disposal schedule Ability for NAMA to retain operational capacity and staffing expertise seen as a significant risk given NAMA s wind down mandate and recovery in Irish property market Consideration of Strategic Alternatives Assessment of impact of continuation of existing strategy High level assessment of alternative strategies, including; Early sale or refinancing of NAMA Acceleration of strategy and likely impact on outcome Review conducted in parallel with NAMA s own strategic planning 10

11 NAMA Section 227 Review Main Conclusions and recommendations Expected and actual performance of UK and Irish Markets NAMA s balance sheet progression to YE2013 Supported NAMA s strategic decision to focus on the early sale of appropriately valued UK assets and to defer the sale of Irish assets with greater valuation upside pending recovery later in the Agency s life. Docklands SDZ & Residential Delivery Staff Retention 80% senior debt by YE2016 Flexible approach to disposals & redemptions Take advantage of investor interest in Ireland NAMA well positioned to achieve its objectives, based on its performance and financial outturn. As a result, NAMA s continuation deemed necessary to achieve these objectives 11

12 Lessons learned Board/management buy-in critical Clarity of process Timing, right of reply etc. set out early Access to information Clarity around information sought agreed at board level Personal / granular information excluded if possible Arrangements for transfer and protection of information off site 12

13 Department of Finance Government Buildings Upper Merrion Street Dublin 2, D02 R583 Ireland This presentation is for informational purposes only. No person should place reliance on the accuracy of the data and should not act solely on the basis of the presentation itself. The Department of Finance does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modelling, scenario analysis or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.