Nama may apply 10% discount on agreed loan prices


PROPERTY VALUATION:THE NATIONAL Asset Management Agency (Nama) is examining whether it will apply a 10 per cent discount under the agreed price of loans it acquires to incentivise participating institutions to deliver a return on assets transferred into the new body.

Brendan McDonagh, Nama’s interim managing director, said the 10 per cent discount would be returned to lenders if they secured a certain level of repayment on the loans in question.

The absence of incentives such as this, successfully deployed in an Indonesian case, meant there was a “somewhat hit and miss” repayment profile in other bad bank schemes.

“It’s certainly an option to be looked it,” Mr McDonagh said in wide-ranging testimony to the Joint Oireachtas Committee on Finance and the Public Service in the course of a four-hour meeting.

In return for the €60 billion in development loans and another €20 billion to €30 billion in associated loans, lending institutions will be given Government bonds to facilitate a resumption of credit flow into the wider economy.

“The institutions will receive Government bonds issued by the National Treasury Management Agency and they may use these bonds as collateral to avail of European Central Bank funding.

It is envisaged that the interest payable on the Government bonds would be offset by interest flows on performing loans acquired by Nama.”

Nama will have between 30 and 40 staff and will have a number of senior people within the lenders overseeing their administration of Nama loans. There will be ongoing communication with the institutions and Nama will insist on “staff rotation” to ensure that the officials who issued loans would not manage them for the new body.

Mr McDonagh said the steering group in charge of preparations for Nama was examining whether the new body will embark on its task by taking control of the loans held by the top 50 developers in various institutions. There was merit to this as many borrowers were “multi-banked” or had loans from a number of institutions.

He declined to set out the valuation metrics that Nama will apply when taking possession of property, development and associated loans, but said that loans would be valued on a case-by-case basis in accordance with EU guidance on impaired assets.

The “primary responsibility” of the steering group was to ensure that its proposals on valuation methodology and eligibility criteria for institutions were in line with state aid rules. The methodology will have to be applied uniformly and consistently across institutions. “It is envisaged that EU Commission approval will be received prior to the publication of draft legislation.”

While the European Commission has suggested that assets should be valued in the first instance on the basis of their current market value “where possible” the Commission acknowledged that there may be no meaningful value in current conditions.

“In the absence of a market value, the EU Commission has indicated that they would consider a transfer value reflecting the underlying longer-term economic value of the asset to be an acceptable benchmark as a basis of valuation methodology,” he said.

“The fundamental problem with these loans relates to the steep decline and adjustment in the value of the underlying security, ie the property market both domestically and internationally; this is commonly referred to as an old-fashioned property bust.

“How this EU guidance paper on valuation methodology is defined for the purposes of property assets in the Irish context is one of the core and central issues currently being discussed by the steering group and has already formed part of initial discussions with the EU Commission.”