Summary of Findings - National Asset Management Agency - Management of Loans

NAMA has been operating for over two years.

By 31 December 2011 NAMA had acquired loans with a face value of €74 billion from the five financial institutions that participated in the scheme.  It paid €32 billion for those loans.  Almost €5 billion of the payment was made on an interim basis to the participating institutions in respect of loans that were valued provisionally.  NAMA expects to have all valuations definitively completed by the end of the first quarter of 2012.

Status of Loan Acquisition
The key features of the acquisition were

  • It is estimated that when all loans are finally valued the acquisition price paid by NAMA to the banks will represent around 43% of their par value i.e. the amount owed by borrowers to the banks.
  • The uplift to long-term economic value in the valuation of the underlying property collateral was almost 9% for the loans that have been finally valued.
  • When discount rates for distressed loans are applied, it is estimated that, even after a write-down of 57% at acquisition, that the acquisition price incorporates state aid of over one-fifth to the financial institutions.
  • The vast bulk of the loans that were acquired related to properties that had been completed representing 71% of the collateral with land making up a further 20%.  Around 9% is made up of properties that are in the course of development.
  • Over half of the underlying collateral (56%) is in the State with a further one-third in Britain.

Report Focus
As NAMA has now acquired all the properties it intends to acquire from banks the attention now focuses on its arrangements for managing the loans it has acquired.  Ultimately, the minimum target has to be to recover at least its outlay and costs from the interim management and ultimate disposal of the loan assets.

NAMA faces considerable challenges in achieving this income goal.  Its interim target is to reduce its debt by 24% by the end of 2013 with the entire process extending up to 2020 at least.  Risks to the achievement of the optimum financial outcome include

  • the anticipated amelioration in economic conditions not materialising or further declines occurring in the property market, affecting the value of property collateral and loan assets
  • not collecting all expected cash from debtors including ongoing rental proceeds of property
  • failing to achieve the maximum obtainable price when assets whether loans, real estate property or other collateral are disposed of.
  • The focus of this report is, consequently, on
  • the measures taken by NAMA to manage its relationships with borrowers and
  • the results of its initial debt management activities.

Management of Debtor Relationships
The predominant relationship that NAMA is managing is one of lender-borrower.  The bulk of the loan assets that are managed relate to property that continues to be managed by debtors.  Overall, NAMA has taken steps to structure its relations with its debtors through legal and quasi-legal agreements.

In practice, most of the debt is managed directly by NAMA.  However, of the original debt of €74 billion, €13 billion is managed on its behalf by the participating financial institutions.

While NAMA has, following the receipt of business plans, completed relatively few loan restructurings it is pursuing restructuring for around 28% of the directly managed debt.  In broad terms a further 34% of these loans are subject to disposal or enforcement actions with a further third of them at an interim letter of support stage.  No restructuring has occurred of loans managed by participating institutions.

As well as seeking to manage the loans, NAMA has taken steps to identify assets of borrowers that may be available as additional security.  The principal sources of those assets are likely to be

  • excess collateral identified in the course of the valuation process
  • other assets that fall within the scope of personal guarantees
  • assets identified in the course of business plan reviews
  • assets identified in the course of searches

It estimates that up to €500 million additional security may be pledged as a result.

NAMA has adopted strategies to guide its management on its approach to loan workouts and the timing of disposals as well as the approach to be adopted in different markets.  These take account of conditions in both industrial sectors and geographic areas.  It will be necessary for it to review these strategies on an ongoing basis in the light of alterations in its corporate strategy that take account of market conditions and have control and reporting mechanisms to assure itself that the individual loans are managed in accordance with policies tailored to the emerging conditions.

NAMA uses part of loan repayments to fund new advances.  Up to the end of December 2011, it had approved new lending amounting to €975 million of which €720 million had been drawn down by debtors.

NAMA’s most recent estimate of the amount of new lending by way of working capital and development loans that it anticipates making to all borrowers over the full period of NAMA’s life is around €3.5 billion, the bulk of which (€2.6 billion) will be advanced in the period from 2012 to 2015.  NAMA anticipates that it will recover the bulk of those funds it advances for capital and development.

Because the debtors continue to manage the underlying property NAMA agrees the level of overheads arising out of staffing and general administrative costs incurred by borrowers in managing the funded business.  The principal determining component of the overhead is the agreement by NAMA with debtors of the appropriate organisational structure and associated cost that should relate to each business.

The other major cost that can occur arises out of the use of insolvency practitioners.  In the case of receivers, NAMA is moving to a process of payment based on budgets that are submitted in advance by firms and requiring that receivers set out a strategy for the assets to which they have been appointed.

Income Collection and Disposals
One indicator of the challenge in generating the projected cashflows is the level of impairment experienced to date.  Losses within the overall portfolio recognised in its accounts up to 31 December 2010 were around 5%.  This assessment does not take account of post December 2010 market movements.  The market had deteriorated further in 2011.  For example, the residential property index produced by the Central Statistics Office indicated that residential property prices had fallen by an average of 16.7% in Ireland during 2011.

In the case of income from rents, in 2011 most borrowers whose performance was reviewed were showing payments that were lower than the levels projected when the loans were valued or when a business case was agreed.  For six borrowers, 2011 rental income was around 26% less than that projected at acquisition and, for this sample, only €8 million out of €10.5 million subsequently projected in business plans had been realised.

The difference between rental income anticipated at loan valuation and net rental income received during 2011 on the cases sampled was mainly due to property management costs that were not provided for in the loan valuations which were conducted in line with industry norms for immediate sales.

When NAMA acquired loans, it found that it was not the general practice to require debtors to remit rent collected from properties to controlled bank accounts.  The approach adopted by NAMA where debtors are co-operating has been to have rental income paid into an account, which NAMA monitors.  Methods of oversight include the use of rent collection agents and financial monitors.

NAMA needs to investigate the emerging income trends outlined above in order to ensure that the amount and timing of its income projections are realistic and that its income collection is maximised and any amounts held back are authorised and transparently accounted for.

In practice, NAMA has not, to date, disposed of property directly. Property that has been disposed of has been sold either by debtors or by insolvency practitioners.  This means that most disposals are not governed by the NAMA Code of Practice for the disposal of bank assets or the Code of Practice for the Governance of State Bodies, both of which require competitive processes when disposals above a certain value are being made.  However, in July 2011 the Board issued a guidance note setting out a framework for the disposal of assets by NAMA debtors and insolvency advisors under which property disposals should be carried out on a competitive basis.

By the end of December 2011, following adjustment for disposals that were no longer expected to proceed, NAMA had approved asset (loan and property) disposals amounting to €5 billion.
Overall, NAMA had received around €6.2 billion in cash to the end of 2011.  Up to that point, €2.9 billion had been received from the sale of property and a further €0.9 billion was received from the disposal of loan assets while a number of debtors had refinanced their loans and remitted the cash to NAMA.

In the sample reviewed the gross receipts for properties in Britain exceeded the market value at acquisition by 2.5% while there was a corresponding shortfall of 5% in the case of Irish disposals.  The costs of disposal including taxation in the two jurisdictions reduced the gross proceeds by 3.7% in Britain and 6.7% in Ireland.

Wider State Costs and Liabilities
The State has contributed €63 billion by way of capital to Irish financial institutions.  This capital was, in large measure, injected to meet the gap left by the acquisition of the loans at a discounted value.  The bulk of the cost of the acquisition of those loans has been met by NAMA through the issue of State guaranteed bonds.

Audit Results
In general, the audit work commissioned by my Office from valuation and legal consultants together with the audit testing conducted in the course of the audit of the 2010 financial statements gives a reasonable degree of assurance that the Agency’s valuation processes were robust.

In addition, the review found that NAMA has begun to implement systems and procedures to manage its relationship with debtors and, following recent restructuring within the Agency, this process is continuing in 2012.

In the area of debt management, preliminary audit testing indicates that

  • new lending to debtors was duly authorised and the purpose documented
  • receivers are being managed so as to achieve a measured service.

A major challenge NAMA faces is to ensure that remittances by debtors out of rental income are based on up to date control listings and that this element of its income is maximised.
The purpose of this report has been to give an early indication of the steps being taken by NAMA to manage its relationship with debtors and collect its income.
These matters are subject to further review in the course of the audit of the financial statements of the Agency for 2011.