www.nama.ie NAMA The Irish experience eight years along the road Jamie Bourke 30th October 2017 1
Introduction - refresh 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. 2
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 3
Why an AMC? Why NAMA? 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. 4
Scope and critical mass 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 5
Acquisition of bank assets 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. 6
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 7
Transfer price 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 8
Staffing - challenges 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. 9
Debtor management 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. 200 Debtors 61bn Par debt Avg 305m Intensively managed by NAMA Key credit decisions and relationship management carried out by NAMA multidisciplinary teams Loan administration performed by Participating Institutions 600 Debtors 13bn par debt Avg 22m 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 10
Emphasis on consensual approach 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
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 12
Creating market liquidity 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. 13
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) 14
Progress Deleveraging by NAMA 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) 15
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. 16
www.nama.ie NAMA The Irish experience eight years along the road Jamie Bourke 30th October 2017 17