Uncertainty adds to developers' gloom over agency

Brian Lenihan's failure to spell out how Nama will work has led to paralysis in the sector, writes ARTHUR BEESLEY, Senior Business Correspondent

AMONG PROPERTY developers big and small, deep gloom about the arrival of the National Asset Management Agency (Nama) is matched by huge confusion about its policies and mode of operation.

Amid rampant fear that many established players might be obliterated by the new agency, the failure of Minister for Finance Brian Lenihan to set out exactly how Nama will work has led to a sense of paralysis in the property sector and fevered speculation. In a community accustomed to easy profit and the luxury lifestyle, a sense of profound uncertainty pervades.

Big-timers such as Seán Dunne, Bernard McNamara, Liam Carroll, Paddy Kelly and many other players of scale became prominent figures in their own right in the boom. And for every big player, hundreds of others have smaller-scale operations throughout the State. Each and every one of their development loans – good, bad or middling and valued up €90 billion – are to be shunted into Nama. Easy it will not be. Some debts runs to billions, others to hundreds of millions. All will go to Nama.

Some of the major developers flew helicopters to work when times were good, their weekend camaraderie a fixture of the social pages. But supersized leverage and the implicit belief that the economic expansion would never end imbued the sector with massive risk. The brutal economic contraction has thrown all that into stark relief, with dire consequences for Ireland’s public finances and its shaky banking system.

Developers were the princes of the boom, the largest borrowers in a banking frenzy that led once-secure financial institutions to the brink of collapse. Unable to repay their loans, a large number of big borrowers are now the beneficiaries of generous forbearance from banks. Their main worry is that Nama will lead them into foreclosure and bankruptcy.

After all, the bleak economic situation is all the worse for the banking crisis and its resolution will impose a yet unquantified cost on taxpayers for decades to come. Thus, developers fear that Nama will be used as an instrument of symbolic retribution for the excesses of the boom by doling out public floggings to them.

Never mind that Government policies and lax regulation reinforced the lending extravaganza. The coalition is already in line for a severe hammering in local and European elections next month and two byelections in Dublin.

Notwithstanding Fianna Fáil’s traditional proximity to the property community, developers fear Nama will seek to take scalps to demonstrate its determination to address the problem. Anger at tax increases and dismay at the crippling loss of jobs as more and more companies succumb to the recession is such that there is little public sympathy for developers who cannot repay their loans.

Where developers attribute the fortunes they made in the boom to entrepreneurial verve, others see greed. They were big beneficiaries when the price of residential and commercial property zoomed upwards. On the other side of the table, home buyers and businesses in other sectors paid out in spades for property inflation.

Nama’s objective is to restore fiscal stability to the banks so that they start lending again, a sine qua non for any economic recovery. But the plan is fraught with complexity and uncertainty over its precise contours. That the scale of the job carries with it the danger of overwhelming those in charge is but one of several problems.

The sense of confusion was underscored a week ago at the Committee of Public Accounts by Dr Michael Somers, head of the National Treasury Management Agency (NTMA) and a crucial figure in the Government’s efforts to calm the banks.

Although Nama will operate under the umbrella of the NTMA, Somers said he did not know how the new body will work.

“I know very little, apart from what has appeared in the newspapers,” said Somers, who hosted the press conference at which the plan was announced by Lenihan. “The decision on the establishment of Nama was announced in the April supplementary Budget and that it would be done under the aegis and the auspices of – both words were used – the NTMA. What more do I know? I do not know a vast amount.”

Peter Bacon’s grand plan has a certain elegance: bank balance sheets cleaned up by transferring good and bad loans to Nama, good loans yielding income for the State and bad loans are run off by the agency in the hope of a return years down the line. What works in theory, however, says nothing about practicalities in real life or of the prickly conundrums that will inevitably arise.

Questions abound. How will Nama achieve consistency in its treatment of developers? How will cross-colateralised loans be treated? How will loans syndicated between banks participating in Nama and non-participants be treated? How will Nama treat partnerships and joint ventures between developers, some of whom may be struggling financially alongside co-investors who are not struggling?

There is more. Will Nama close down developers over poorly performing loans even if their better loans are still being repaid? To what extent will Nama provide working capital to developers to finish off incomplete projects? If Nama keeps some developers who aren’t repaying loans afloat in the interests of the project at large, how will it justify closing down others?

Then there is the possibility of legal challenge. Although Lenihan says he doesn’t want Nama to create a “lawyers’ bonanza”, senior legal sources say the system could be open to challenge on grounds of “appropriation of assets at an under-value”. Lawyers do not typically resist litigation so the courts are likely be busy. Therefore, it may ultimately fall to the Supreme Court to determine whether the plan is in keeping with the Constitution. To get to that point, however, could involve huge delays.

Nevertheless, several property sources said there was little enough interest in new developers’ organisation proposed in recent week by Seán Dunne. Any legal challenges, they said, were more likely to come from individual developers.

For their part, banks are making tentative preparations for the transfer of assets to Nama by consolidating files on individual borrowers, their loan portfolios and their projects. With many borrowers deep under water, banks have already taken big bites from the equity put forward by developers in loan deals. In cases where there no equity remains, some lenders are already said to have called in personal guarantees.

Where lenders see merit in completing unfinished projects, instead of allowing them fall to ruin, banks have granted expensive mezzanine finance to developers and taken an equity position in the development. In many other situations, banks are simply waiting to Nama to start its work.

Developers contacted by The Irish Timesthis week stuck to their habitual reluctance to speak in public about their business affairs, but all said the absence of firm information was a big concern. "I'm probably the worst man to talk to, given that I don't know anything about it. I don't understand it," said one senior figure.

This view was mirrored a report published by Merrion Stockbrokers, based on the results of a survey of management figures in 25 building companies: “76 per cent of respondents answered ‘don’t know’ as they remain unsure as to how the agency is going to operate and how extensive its influence will be. Eight per cent of respondents felt that it will be a positive for the industry and 16 per cent felt that it will be a negative,” Merrion said.

“Almost all respondents did note, however, that regardless of whether it ends up being a positive or negative for the industry, the uncertainty over how it will function, the time being taken to establish it, which loans will be transferred etc, is causing effective paralysis in the housebuilding industry.”

Nama represents the culmination of Lenihan’s efforts to save Ireland’s banks as he struggles to reassert control over the wider economy. Although the forthcoming legislation has potential to make or break his reputation, speed is of the essence now and there is little scope for error.