Toxic partnership
DEVELOPERS were part of the poison, but plans for the National Asset Management Agency (NAMA) mean they will have to stay around to keep the project from collapsing.
They are like leeches used for emergency bloodletting.
Defaulting homeowners will find themselves in the Circuit Court fighting to save whatever assets they can.
But for the time being, it appears the only judgment developers will face is in the court of public opinion. Because however NAMA is dressed up to pay its way, it needs developers to hang on or settle up.
The draft legislation talks tough and shakes a pretty stern fist. If a developer used his home as collateral it can be seized, otherwise it is the only safe possession.
The minister can seek vesting orders to value and claim anything a borrower owns. In this regard, Finance Minister Brian Lenihan has stressed the agency is not a bailout for speculators.
The back of the NAMA legislation has two pages listing the specific powers its statutory receivers will have to chase down assets, buy up land or settle accounts.
It can lend money to customers of the developer and manage, lease or licence any asset to help settle a debt.
The receiver can employ a full team of “officers, servants, workmen and agents” at whatever salary he/she feels fit to squeeze money.
But here NAMA runs into problems — it is likely that in many cases there will be only empty assets to chase.
Last year, PriceWaterhouseCoopers (PwC) assessed Anglo Irish Bank, the next most toxic institution behind NAMA. Anglo had a reckless concentration of the asset profiles and property personalities on its books.
And, before the Government decided it had to nationalise the bank, PwC said if Anglo was to survive on its own steam it was dependent on whatever non-property safety net developers had. “The diversity of the customer’s asset base” was vital, it said. It is telling, then, that the Government did not consider the bank would be able to trade its way out of bother.
In the medium term, PwC said the reliance on retail sites, which are among safer categories of NAMA-bound assets, will severely impact on the servicing of debts.
Property developers do not appear to have been able to shore up riskier ventures with long-term sound buys.
Not alone did Liam Carroll lose on land, but his stocks on the Irish exchange lost €260 million. Hugh O’Regan, whose firm is in liquidation, had interests in a golf club and a private members’ club.
Paddy Kelly, the Dublin-based developer who has had a number of judgments made against his estate, had interests in speculative holiday villages in Europe and the US along with golfing developments at home.
Even the assets of those not before the courts are doubtful to realise anything like the value they were attributed when loans were secured.
Documents leaked from Icelandic bank Kaupthing from an assessment of Sean Dunne, reveal collateral of a personal €250m guarantee and €520m in hotel sites.
He had also taken out a loan to buy a 1/16th share in a Gulfstream jet.
On the afternoon he launched NAMA, Mr Lenihan said the assets linked to loans varied from stocks to race horses.
The Peter Bacon report, which produced the blueprint for the project, described just what a precarious species the Government is about to shotgun taxpayers into an arranged marriage with.
And this indicates the likely reward the country will get for its €90 billion dowry.
He said developers do not have the structures to source funding from their assets to trade through the slump. And they had relied on their own earnings and loans to build empires. “A feature of Irish property developers is that they are not publicly quoted and have not had a history of recourse to equity markets for their funding, unlike for example Britain.
“Instead they have relied on retained earnings (for equity) and bank lending for the balance.
“This shortcoming cannot be put right now and it represents a significant impediment looking forward to resolution of the impairment issue,” Mr Bacon said.
He was employed to try clean up the banking system. And his blunt message at the bottom of the summary report on the NAMA project was that in order to safeguard the banks, you needed to get them as far away from developers as possible.
“The overriding objective should be to break the link between banks and the property assets,” it said.
But like the neighbours nobody wants, the developers have to sit somewhere and have arrived at the door of the taxpayers’ NAMA project.
But in the current market, it does not need to have a soft spot for any developer to realise with this type of businessman it cannot simply release the hounds.
In the short term at least, NAMA needs the developers in business to pay the bills.
The agency is supposed to pay for itself, even the repayments it will make to Europe for monetary bonds.
As the Department of Finance explained in an e-mail yesterday: “The self-financing model is reliant on borrowers repaying their debts in line with their obligations and NAMA selling off collateral on loans which are in default, where it makes commercial sense to do so.”
It has yet to discover what amount of loans are still being repaid. But in the meantime, NAMA will have commitments to pay interest on bonds and there is a delicate balance to be struck with developers.
Interest rates on the bonds will be somewhere around 1.5% — it is still being worked out.
The agency expects the loans that are still generating an income to pay a 2% margin above that. This will keep NAMA afloat.
The Bacon report recommended these income raising loans should not be disposed of and their valuation be written down to provide the “headroom” needed to service interest.
On this basis the agency would not be expected to sell off profitable assets in the short-term. This may leave it cash strapped.
The other option is to seize properties off the developers with no hope of crawling out of the crater they dug for themselves during the boom.
NAMA can improve, complete and sell off land to help pay for itself.
But we are in the illiquid market — this means there is no money and nobody is interested in buying and this is why developers will not be chased.
NAMA will not buy the loans at the 75% mark-down suggested as appropriate for the Carroll empire. The minister has continually stressed they will be priced with a long-term value in mind. It would be loss-making to sell them until the market picks up.
Until then, mortgage holders will have to make their case in court while the men who built their overpriced homes will stay in business.
