Tougher Nama discount: Foreclosure costs on €80bn loans worsen the 'haircut'

 

THE FIVE financial institutions participating in the National Asset Management Agency (Nama) face a higher discount on the €80 billion in loans to be acquired by the agency, as it intends to apply enforcement costs to each loan.

Nama will apply the cost of enforcing a foreclosure on a loan. This will equal 5 per cent of the underlying market value of the asset backing the loan, even if the loan remains good or performing.

This is higher than the 2.75 per cent enforcement approved by the EU for other “bad bank” schemes.

The cost is applied when the long-term economic value of a loan is being taken into account. This means the banks face a higher discount, as the enforcement cost is charged to the banks upfront in the so-called “haircut”.

The cost is included in the fees of €2.64 billion estimated by Nama in its draft business plan last October up until the year 2020.

Nama has also reduced the due diligence fees charged in the valuation of loans and underlying properties to €100 million from the €165 million figure in the draft business plan, due to competitive tendering with contractors.

However, Nama plans to recoup €125 million from the five lenders, as this sum had been fixed.

In the first wave of transfers Anglo is understood to be transferring the largest amount of loans, close to €10 billion, followed by AIB with about €3 billion, Bank of Ireland with about €2 billion, Irish Nationwide with about €1 billion and EBS with about €150 million.

The transfer of the first tranche of 10 borrowers has missed two deadlines due to the vast amount of paperwork, legal due diligence and valuation work carried out by the banks, and independently checked by Nama.

The agency is understood to have uncovered – through due diligence – complex, international and tax-driven corporate structures linked to the top 10 borrowers. Some of the borrowers have used financial centres such as Luxembourg and the US state of Delaware in their business dealings.

Nama will look for comprehensive business plans from the top developers before assessing them between May and July, and deciding whether to lend more funds to co-operative developers with viable proposals, or to foreclose on unco-operative borrowers who are insolvent and have little prospect of their business recovering.

The State agency may force solvent developers to sell key investment properties to recoup cash to offset their impaired loans.

– SIMON CARSWELL