Public Affairs Ireland Journal
February 2010
Michael Neary explains NAMA's business plan
This is the year when we will begin to see the effects of the impending loans on the Irish banking, financial and property markets, as well as the wider community. Commentators expect the transfer of the loans for the largest borrower exposures to take place within the next few months, pending approval of the NAMA plan by the European Commission, with the transfer of the remaining borrowers’ loans to be phased over the following months.
NAMA’s “mission statement”
The key purpose behind the establishment of the agency is to remove uncertainty about the banks’ balance sheets, clean them up, and provide them with a better ability to access liquidity and thereby facilitate the availability of credit to the real economy.
Price to be paid
NAMA will be funded through interest bearing NAMA bonds. Furthermore the crystallisation of loan losses at the financial institutions will lead to a requirement for recapitalisation, for which the State is likely to be the key financier. NAMA had previously guided that the discounts would on average be in the region of 30 per cent. However, commentators are now indicating the discount could be up towards 34 per cent. The higher than expected discounts will add to the capitalisation needs of the banks. The level of recapitalisation required will become clearer over the next few months, and the final picture is expected by May, however, stockbrokers are currently predicting capital deficits of in the region of €4.5 billion and €2.7 billion for AIB and BOI respectively.
The NAMA business plan outlines the expectation that in the region of €62 billion will be repaid by borrowers and another €4 billion will be recovered from asset disposals over the next 10 years, and that by the end of its life NAMA will generate a profit of over €5 billion. The net outcome has been subject of significant debate over the past few months. It will be dependent upon the performance of the property market over the coming years.
Administration of the agency
The loans to be transferred will consist of eligible land and development loans, as well as associated property-backed loans of the banks covered by the scheme. Following transfer of the loans, the largest 100 borrowers (circa 50 per cent of the portfolio) will be intensively managed by NAMA. While all credit decisions will be made by NAMA the relationship management and loan administration of the other borrowers (circa 1,500 will be carried out by the participating institutions within NAMA parameters.
Engagement between NAMA and the developers
NAMA have commented that developers will be pursued for repayment of the loans in a rigorous fashion.
NAMA will expect borrowers to prepare a detailed business plan. The quality of a borrower’s business plan will have a major bearing on NAMA’s decision making process. Every borrower will have an opportunity to present an updated business case and it will need to set out:
- summary of all group facilities, from all banks (including non-NAMA banks), and details of timing and extent of repayment of borrowings;
- summary of the portfolio of properties/developments;
- details of workout proposals (e.g. sell, complete or mothball developments);
- the current balance sheet, detailing a list of all assets and liabilities;
- integrated 3 year cash flows on a project basis and on a group basis;
- details of any proposed new funding from third party sources, and any requirements for new debt funding;
- details of the assumptions underlying the projections;
- stress testing under relevant sensitivities;
- details of the key risks and opportunities in the plan;
- management involvement and incentives;
- management’s view of the market;
- taxation implications of the projections;
- details of the scrutiny structure; and
- other options available, including insolvency of parts of the group if appropriate;
Following NAMA’s review of each developer’s business plan, and a financial review by an independent advisory firm, a decision will be taken whether to accept the plan, refer the developer back to amend/revise the plan, or whether to reject. Where the plan is approved, NAMA will continue to work with the borrower, and the borrower’s subsequent performance will be monitored against the targets set out in the business plan. In cases where the plan is rejected, or the borrower does not cooperate, NAMA will initiate the enforcement process.
Security attaching to loans
As the review of loan books and the valuation process is progressing, the issue of security provided to developers is becoming a topical issue for bankers and NAMA. In cases where developments are multi-banked, questions are being raised whether all of the banks’ exposures are fully securitised. NAMA have indicated that the strength of security will be a key consideration when determining the value of the loan being taken over.
Conclusion
As NAMA becomes one of the world’s largest property management businesses, the coming year will prove to be one which shapes the future of the financial and property development markets in Ireland for years to come.
We are advising our clients to embrace NAMA and be proactive, to ensure the business plan assumptions are realistic and prudent, to prepare sensitivity analysis, to have an appropriate team including property advice, and to demonstrate their involvement and role in their group’s business plan.
The business plan is a vital part of the NAMA process and it is important for borrowers to engage and prepare their plan diligently.
Michael Neary is the Corporate finance partner in Grant Thornton