Bad debt agency may be scaffold for property developers
The game is up for developers who lost the run of themselves, writes FRANK MCDONALD
DEVELOPERS WITH large loans from the banks are set to lose out big-time as a result of the Government’s decision to establish the National Asset Management Agency (Nama) to deal with the mountain of bad debt racked up in Ireland’s deflated property bubble.
A number of developers contacted by The Irish Times were reluctant to talk either on or off the record about the agency, as they were still studying the details released so far and teasing out the implications. They all wanted to know more about how the new agency would work.
“Most of them will be wiped out,” according to one developer, who agreed to speak on a confidential basis. “I think you’ll be finding a rush of Ryanair tickets for the developers to places they’ll be hard to find in. Otherwise, the wife and chisellers will be out on the street.”
Contrary to popular impression, he said many loans to developers were not given on a “non-recourse” basis – in other words, secured solely on the asset value of a site. “In the case of Anglo, they lent to almost no-one without personal guarantees, commercial loan or not.
“In the case of residential development, almost all banks asked for personal guarantees. The commercial loans (other than Anglo’s) were mostly done non-recourse, but with collateral support from other of the developer’s assets, which were charged as well,” the developer said.
“If the collateral support was already charged, then second charges were put in place [to secure a new loan] . . . In the case of Nama, the Minister for Finance has explicitly stated that they’ll be pursued for recourse, which is fair enough as that’s part of the loan contract.
“It’s important to realise that, although Nama buys the debt at a discount, the borrower continues to owe the full nominal value of the debt. Nama will be a commercial, profit-making body; its remit will be to cash in the full nominal value of the loan and make a profit.
“I imagine there’ll be a positive statutory obligation on Nama in the legislation to that effect. If the market price for realisation of the debt by Nama is less than the nominal debt amount, developers will be turfed out. There’ll be no mercy for those that can’t pay.”
Much would depend on the calibre of Nama’s top officials and frontline staff. “Hiring has already started for Nama’s managers, and you wouldn’t want some of those applying sitting beside you in a dark cinema. This type of person is remunerated by recoveries, so boot in.”
The banks that lent money so profligately during the boom will also suffer, which is why their share prices fell still further after the Budget announcement that the agency was being set up.
“It makes banks and their shareholders responsible for the losses,” the developer said.
“I thought it quite accomplished, quite elegant really, because it keeps those who caused the problem away from messing with the solution. The Government also has a residual provision that if there are profits, it keeps them and if there are losses, the banks will pay via a levy.
“Nama will have adequate time to deal with the assets and can attune supply to demand and avoid forced sales, thus attaining ‘natural’ prices, instead of banks being indiscriminately allowed to dump loans en masse in a market that isn’t able to take such a mountain of supply.
“Selling at a discount to Nama crystallises losses in excess of the banks’ current provisions. This probably makes them insolvent and requires fresh recapitalisation at prices that will wipe out the current shareholders – which is okay as the law of the market is that it was their risk.
“But recapitalisation needn’t be by the Government, as there are plenty of people who’d invest in a ‘clean’ Irish bank, and hence avoids the evil spectre of nationalisation,” he said. (Meanwhile, Nama would function as a “debt collection agency”, as John Gormley has called it).
“The banks will receive bonds for the loans (at written down values), which they can sell for cash. This would give them fresh liquidity to lend, thus getting the economy going again, while the increase in Government debt represented by the bond issue is covered by assets.
“The Government is insulated by the heavily discounted prices they pay for loans, the residual provision, the length of time they’ll have to work them out and the setting up a professional body [Nama] to do that. So I don’t think Joe and Mary Public will have a problem.”
As the developer pointed out, even Insurance Corporation of Ireland – which had to be bailed out by the Government in the 1980s – turned a profit at the end of the day.
He also believed the amount of profit that could be earned by Nama over 10 years is “very sizeable”.
Asked about financial institutions not covered by the Government’s deposit guarantee scheme, such as Ulster Bank, which has a large exposure to the Irish property market, notably in Ballsbridge, he said they would be “allowed opt in to the scheme if they want”.
Ulster and other banks not guaranteed here could “stay out of the scheme if they think they can recover more by themselves” – for example, by selling the Jurys-Berkeley Court hotel sites, bought for €379 million but probably now worth not much more than €100 million.
Nama was a “loan management regime” with a voluntary membership, and other banks “ought to join up, as it will be paying the [current] market price for loans in the secondary loan markets, which is what they ought to have them marked down to already.”
One way or the other, the game is up for developers and bankers who lost the run of themselves during the boom.
All we now need is a full and frank acknowledgement from the Government that it artificially inflated the bubble and thus made the bust more painful for everyone.