National Asset Management Agency (NAMA) National Asset Management Agency (NAMA) and the Irish Housing Crisis Problems and Solutions By: Robert Curry, MBA Class of 2011
Contact Robert Curry Harvard Business School MBA Class of 2011 MBA Class of 2011 Email: rcurry@mba2011.hbs.edu Tel: +1 860.538.1154
Abstract For the 12 years preceding the crash, the Irish economy experienced rapid expansion. Following the freeze-up of international banking markets in 2007/08, Irish banks no longer had the liquidity to fund operations had the liquidity to fund operations. The real estate market subsequently collapsed and The real estate market subsequently collapsed and the Irish government stepped in to create the National Asset Management Agency (NAMA) to relieve banks of their bad assets so that the banks could begin lending again. This was a necessary and unavoidable step. NAMA has faced much public criticism as it appears that banks and developers received a bailout not available to the general public. Several other countries including the US, Sweden, and Japan faced similar crises in the past. The countries which most successfully addressed these problems acted swiftly and with broad political support broad political support. The countries which had less success were often slow to act. The countries which had less success were often slow to act Learning from these past crises, local communities need to approach NAMA and property owners with a plan for failed developments, partnering with solvent developers. These plans should be as specific as possible. plans should be as specific as possible. NAMA must accept and prepare for the owning and disposing of large amounts of real estate assets rather than just loans. In addition NAMA must address its poor public image and misinformation in the press. Seller financing should be used to jumpstart the market. The government must address antiquated bankruptcy laws. The government should also abolish the stamp duty on property and introduce an annual property tax. This should increase liquidity in the housing market. In addition, the government should create a debt restructuring plan for individual homeowners based on net worth and ability to pay. The e t t ing pl n fo indi id l homeo ne b ed on net o th nd bilit to p The moratorium on foreclosures is only delaying the inevitable and creating further illiquidity.
The Irish Banking & Housing Crisis • 1996-2008: rapidly expanding economy – 1995-2000 GDP Grows 9.5% – 2000-2008 GDP Grows 5.5% • Rapidly increasing home prices – At peak new construction accounts for 12% of At peak new construction accounts for 12% of GDP • 2007-8 international banking market freezes – Banks have trouble financing operations Banks have trouble financing operations – Banks stop lending • Construction cannot continue • Construction cannot continue • Housing market collapses
Housing Prices 2010 to Q3 only Source: 5
Banking Problems • Without international financing available banks are not able to finance daily operations b k t bl t fi d il ti • Real estate and construction loans begin to g go into default • Government steps in to recapitalize banks Government steps in to recapitalize banks – Essentially nationalizes 5 major banks • Government guarantees liabilities ( € 440bln) – deposits & bank bonds – deposits & bank bonds
NAMA Created – a timeline • April 2009: Decision that a “bad bank” needs to be established to deal with non-performing loans established to deal with non performing loans – Will protect performing assets of bank – “bad bank” called National Asset Management Agency • July 2009: legislation drafted • October 2009: Dáil Éireann (RoI Parliament) passes NAMA legislation. • November 2009: NAMA singed into law • December 2009: NAMA board appointed and comes into existence • February 2010: EU commission approves NAMA • March 2010: First loans transferred to NAMA Source: 27
NAMA Purpose ———————— Number 34 of 2009 ———————— NATIONAL ASSET MANAGEMENT AGENCY ACT 2009 ———————— AN ACT— TO ADDRESS A SERIOUS THREAT TO THE ECONOMY AND TO THE SYSTEMIC STABILITY OF CREDIT INSTITUTIONS IN THE STATE GENERALLY BY PROVIDING, IN PARTICULAR, FOR THE ESTABLISHMENT OF A BODY TO BE KNOWN AS THE NATIONAL ASSET MANAGEMENT AGENCY FOR THE PURPOSES OF 10.—(1) NAMA’s purposes shall be to contribute to the achievement of the purposes specified in section 2 by— (a) the acquisition from participating institutions of such eligible bank assets as is appropriate, (b) dealing expeditiously with the assets acquired by it, and (c) protecting or otherwise enhancing the value of those assets in the interests of the State (c) protecting or otherwise enhancing the value of those assets, in the interests of the State. (2) So far as possible, NAMA shall, expeditiously and consistently with the achievement of the purposes specified in subsection (1), obtain the best achievable financial return for the State having regard to— (a) the cost to the Exchequer of acquiring bank assets and dealing with acquired bank assets, (b) NAMA’s cost of capital and other costs, and (c) any other factor which NAMA considers relevant to the achievement of its purposes. NAMA Mission Statement To manage acquired loans, efficiently, effectively and expeditiously and in the best interests of the State. NAMA aims to attain the best achievable financial return subject to acceptable financial risk. It will conduct its activities in a way which assists the property j p y p p y market to operate efficiently and in a way which achieves longer term sustainability while taking account of NAMA’s wider societal objectives. Source: 11& 26
Why NAMA is needed? • To relieve banks of non-performing assets so th t b that banks can continue lending k ti l di – Assets transferred to NAMA are Real Estate backed loans – Assets transferred at a discount to NAMA Assets transferred at a discount to NAMA – By allowing banks to retain performing assets, banks will be free to make new loans banks will be free to make new loans – Ensures banks meet capital requirements • To realize the long term economic value of loans • To provide working capital to debtors
How Loans are transferred to NAMA NAMA determines NAMA issues Bank identifies the long term the long term senior and senior and loans that meet economic value of subordinated transfer standard these loans bonds to banks If If plan cannot be l b NAMA and debtor NAMA assumes agreed upon, create business loan liability NAMA takes over plan for loan* plan for loan asset *NAMA directly works with 100 largest debtors, banks continue to work *NAMA di l k i h 100 l d b b k i k with other debtors. Source: 26
How NAMA makes money • Original NAMA business plan: 10% 10% � 10% 10% � Base � positive � negative � Scenario scenario scenario Estimated Book Value of Estimated � Book � Value � of � loans � acquired ₭ ������ 81.0 ₭ ������ 81.0 ₭ ������ 81.0 Value � of � Bonds � issued � to � Banks Banks ₭ ₭ ����� 40 5 40.5 ₭ ₭ ������ 40 5 40.5 ₭ ����� ₭ 40 5 40.5 Amount � NAMA � Recovers � from � loans ₭ ������ 44.7 ₭ ������ 49.2 ₭ ������ 40.2 NPV � of � NAMA � Profit NPV of NAMA Profit ₭ ₭ �������� 1 0 1.0 ₭ ��������� ₭ 3.9 3 9 ₭ ₭ ������ (0.8) (0 8) Value � of � Bonds � redeemed � by � banks ₭ ������ 40.5 ₭ ������ 40.5 ₭ ������ 38.5 • 5% of bonds issued to banks are subordinate and will only be paid if NAMA makes a profit – Makes banks share in downside risk Makes banks share in downside risk • Bonds carry an implicit guarantee of the Irish Government Source: Compiled from 26
Nuances of NAMA • NAMA only acquires assets of 1,500 largest d bt debtors – Represents the largest exposures by banks – Assumes that banks are inherently solvent and can handle losses from smaller borrowers can handle losses from smaller borrowers • Both performing and non-performing loans acquired acquired – Allows NAMA to leverage performing assets to maximizes repayment of non-performing loans • Buys loans at current market price + uplift Buys loans at current market price + uplift Source: 4
NAMA Balance Sheet – to date • € 71.2B in loans acquired for € 30.2B* – 11,000 total loans from 850 debtors – Top 30 debtors represent € 27B in loans p p – Next 145 debtors represent € 30B in loans • € 16B (book value) yet to be purchased • € 16B (book value) yet to be purchased • € 2.7B recovered thus far (sales approved) Tranche � 1 � and � 2 � (purple)** AIB BOI ESB INBS Anglo Total Book � Value ₭ ����� 6.02 ₭ ����� 3.75 ₭ ����� 0.18 ₭ ����� 1.26 ₭ ��� 16.00 ₭ ��� 27.21 Total � Consideration ₭ ������ 3.30 ₭ ������ 2.39 ₭ ������ 0.11 ₭ ������ 0.44 ₭ ������ 6.73 ₭ ���� 12.97 Discount � (Tranche � 1&2) 45.2% 36.3% 38.1% 65.1% 57.9% 52.3% Discount � on � all � Loans 54.0% 42.0% 60.0% 64.0% 62.0% 58.0% * As of December 2010 ** Only tranche 1 and 2 data is available Source: 25
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