Thursday, 5 July 2012
Committee of Public Accounts DebatePage of 4
Chairman: Before we begin I remind members and witnesses to turn off their mobile phones as interference affects the sound quality and transmission of the meeting. I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a Member of either House, a person outside the Houses or an official by name or in such a way as to make him or her identifiable. Members are reminded of the provisions within Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister or the merits or objectives of such policy or policies.
Mr. Brendan McDonagh: With me today is Mr. Ronnie Hanna, head of asset recovery; the chairman, Mr. Frank Daly; the new chief financial officer, Mr. Donal Rooney; and Ms Aideen O’Reilly, head of the legal affairs.
Mr. Seamus McCarthy: Before presenting a summary of the key findings in the special report for consideration by the committee today, I will briefly outline the context in which the report was prepared. Section 57 of the National Asset Management Agency Act 2009 provides for the audit by me of the agency’s annual financial statements. The first set of audited financial statements produced by the agency covered the period from its establishment in December 2009 to the end of 2010. The audit of the agency’s financial statements for 2011 was completed last week. The chief executive will be able to brief the committee on when the financial statements will be published.
In addition to the requirement to publish annual audited financial statements, NAMA is required under section 55 of the Act to publish quarterly financial results, which are unaudited reports. The latest available section 55 report relates to the final quarter of 2011 and includes a summary full-year outturn on a pre-audit basis. In addition to my responsibility to carry out the annual audit of the agency’s financial statements, I am required under section 226 of the NAMA Act to carry out an assessment every three years of the extent to which NAMA has made progress towards achieving its objectives. The Act separately imposes a duty on the Minister for Finance to assess NAMA’s progress every five years. In both cases, the first assessments are to be carried out as soon as may be possible after the end of 2012.
My predecessor took the view, given the scale and complexity of the agency’s operations, that it would not be sufficient for public accountability purposes if we restricted our reporting to the formal audit report on the agency’s annual financial statements and the three-year assessment of objectives. Accordingly, he decided to carry out two examinations under section 9 of the Comptroller and Auditor General (Amendment) Act 1993, the results of which were presented in special reports.
The first report, published in October 2010, focused on the process established by NAMA to acquire property-related bank loans. The report considered the acquisition process for the initial tranche of loans, for which the agency paid a total of €7.7 billion. That is approximately a quarter of the €32 billion it eventually paid for all the loans taken on. The report also outlined NAMA’s initial corporate governance structure and its resource and procurement arrangements. The report for consideration today deals primarily with the way in which NAMA manages the loans it has taken on. It also provides an update on the loan acquisition process. At the point when Special Report 79 was being finalised NAMA had completed valuations of over 80% of its loans and had provisionally valued the remainder. The acquisition value of almost €32 billion represents approximately 43% of the nominal value of the loans which amounted to €74 billion. The acquisition cost represents the initial carrying value in NAMA’s books of accounts. The carrying value was reduced by €1.5 billion due to impairment in 2010 and a further substantial impairment charge was incurred in 2011.
There was a significant element of State aid in the amount paid by NAMA for the loans it took on. The analysis of the amount paid for the first five tranches of loans suggested that the State aid element was more than one fifth of the current market value of the loans at the time of acquisition. The banks from which the loans were acquired incurred substantial losses related to the transfers, even after the State aid provision. Separate from the activities of the agency, the State has to date contributed approximately €64 billion in capital funding to the financial institutions involved.
NAMA’s predominant relationship with its debtors is one of lender-borrower with the bulk of the property related to the loans continuing to be managed by the debtors. Overall NAMA acquired approximately 12,000 property-related loans from approximately 800 borrowers. The borrowers’ liabilities were not affected by the acquisition discounts and, in most cases, they continued to owe the par value of the loans to NAMA. The loans were backed by security on some 35,000 properties, primarily located in Ireland and Great Britain. NAMA manages more than 80% of the debt directly and the balance is managed on its behalf by the participating financial institutions. By the end of 2011 NAMA was pursuing loan restructuring for approximately 28% of the directly managed debt. Property disposal and other enforcement action was being pursued in respect of one third of that debt. NAMA has also taken steps to have borrowers provide additional assets as further security for loans and the agency estimates that approximately €500 million in additional security may be pledged.
NAMA uses part of its receipts from loan repayments to fund new advances to some debtors. To the end of December 2011 NAMA had approved new lending amounting to €975 million of which €720 million had been drawn down. Ultimately, the agency anticipates advancing up to €3.5 billion during its lifetime for asset development and enhancement as well as for working capital. NAMA faces considerable challenges in recovering its outlay on loans and covering its costs. Risks to achieving an optimum long-term outcome include a slower than anticipated recovery in the economy and in the property market; failure by NAMA to collect all expected cash from debtors; and a failure by NAMA to achieve the best price when disposing of assets.
Clearly the property market in Ireland continued to deteriorate in 2011. The extent to which the impairment losses recognised in the agency’s financial statements are ultimately realised will depend on the extent and timing of property market recovery. NAMA’s key interim target is to reduce its borrowing by 24% by the end of 2013 and to repay the remainder by 2020. To meet the 2013 debt reduction target, it must have generated net cash of €7.5 billion after meeting interest costs and other costs as well as funding any new lending it undertakes.
NAMA had redeemed €1.25 billion from bonds by the end of 2011 and has recently redeemed a further €2 billion. The agency generates cash from the loans it has acquired in the form of proceeds of disposal of loans or security and other recurrent receipts from borrowers. The main source of recurrent receipts from borrowers relates to expected net rental income generated by the borrowers’ property transactions. Assumptions were made at valuation stage about the likely extent of income flows for each loan. A sample of eight borrowers involving 682 loans with original loan obligations of €4 billion was examined to establish how cash received in 2011 differed from what was originally expected. Excluding receipts related to property disposals, the examination found that two borrowers had remitted substantially more than the rental income originally expected due to payments from sources not identified at valuation stage. For the other six borrowers there were substantial divergences between the valuation projections and the cash received in 2011, with a net shortfall of 26% for the six borrowers concerned. As a result the report concluded that there is a need for NAMA to identify and control the factors that contribute to such shortfalls, including non-payment by tenants of rent and the use of rental income to pay debtors’ overheads and expenses. It was also noted that the valuation model used by NAMA at loan acquisition stage did not take account of the overhead costs that would be incurred in the running of the developers’ businesses.
The chief executive officer pointed out that when NAMA acquired its loans, it found that it had not been the general practice of the original lending banks to require debtors to remit rent collected from properties to controlled bank accounts. He stated that the agency was making significant progress in controlling debtors’ rental income and I expect he will update the committee on developments in this regard. The agency agrees the level of overheads it considers appropriate to allow to borrowers who continue to manage the underlying properties and developments. The principal determinant of the level of overheads is the approved organisational structure and associated costs for each business unit.
The other primary form of income for NAMA has been the proceeds of loans and property disposals. Some €900 million has been raised through the sale of loans to other financial institutions. By the end of 2011, NAMA had received almost €3 billion from sales of property mainly in Britain. An examination of a sample of properties disposed of indicated that properties in Britain had been sold in the first half of 2011 at prices that were on average 2.5% higher than the market value of November 2009. A total of 29 properties sold in Ireland in 2011 had realised prices that were on average 5% below the November 2009 market value. We have found that to date properties were sold either by debtors or by insolvency practitioners with NAMA approval. Since the sales were at arm's length from NAMA they were not governed by codes of practice for the disposal of assets that apply to NAMA and which require competitive processes when disposals above a certain value are being made. In July 2011 NAMA set out a framework requiring debtors and insolvency practitioners to comply with competitive process for the disposal of assets. There is more detail in the report but that is probably sufficient to set the agenda for the meeting.
Mr. Brendan McDonagh: Our appearance before the committee today arises from the recent publication of the second special Comptroller and Auditor General report on NAMA which deals with the management of its loans. The first report of the Comptroller and Auditor General on the acquisition of bank assets was published in October 2010. I propose to refer to some of the key issues raised in the second report and to update the committee on progress made by NAMA to address the formidable challenges to which the report alludes.
Our view is that the publication of this report is timely since it comes at an important juncture in our evolution. Up to recently, our focus, of necessity, has been on establishing and consolidating the agency. This has included the recruitment of specialists in finance, property, banking, law and other disciplines to enable the agency to carry out the statutory functions conferred on it by the Legislature. It has also meant putting in place a suitable valuation framework to enable us to value and acquire the loans from the participating institutions in line with the approved EU Commission methodology. It has meant engaging either directly or indirectly with close to 800 debtors and determining an appropriate strategy to deal with them as well.
The Comptroller and Auditor General report deals with many of these issues in some detail but I will confine my comments to some of the key points raised in the report. Overall, we are satisfied that the report reflects positively on our progress to date and that the agency’s establishment was managed in a manner which gave rise to no serious concerns on the part of the Comptroller and Auditor General. To put this into context, much of this work was carried out in very difficult circumstances. We started off with relatively few staff, with few precedents to guide us and we had to work under constant and intense public scrutiny from the beginning, with the threat of litigation. At one stage at the end of March 2010, there were probably as many auditors dealing with NAMA as there were NAMA staff. We found ourselves dealing with reluctant clients - debtors and bankers - who were struggling to adapt to the new circumstances and many of whom were less than enthusiastic about the idea of an outside party intervening in a relationship which had become, unfortunately, all too intimate.
The first part of the report deals with our acquisition of €74 billion in loans from the participating institutions and payment to the institutions of €32 billion as consideration for these loans. The Comptroller and Auditor General concludes that, based on his audit and specialist advice commissioned by him, he is satisfied he has received a reasonable degree of assurance that NAMA’s valuation processes were robust. It is important to point out that our being in a position to provide this assurance required that we follow an extensive due diligence process, which meant that every loan and every property securing those loans had to be valued individually. It also meant that loan and security documentation had to be reviewed in detail.
That leads me to the question of costs and the rationale for incurring such costs. We incurred total due diligence costs of €74 million, of which €64 million was recovered from participating institutions through a reduction in the loan acquisition values. Our detailed review of close to 11,000 property valuations submitted by the participating institutions resulted in a reduction of €2.24 billion in the price we ultimately paid for loans. In addition, the extensive legal due diligence process we carried out resulted in a further downward adjustment of €477 million resulting from diminution of legal security and title.
Altogether, therefore, a due diligence process which cost €74 million led to a reduction of over €2.7 billion in the acquisition price of loans. Let me state emphatically that expenditure on professional fees was, and is, an aspect of the business that I find very unpalatable but, in this instance, I think it was money judiciously spent, given that otherwise the taxpayer would have paid substantially more for these loans than they were actually worth. Also, it was a requirement of the EU Commission so as to assist them in verifying the quantum of State aid to the participating institutions.
With regard to State aid, the report has been interpreted by some commentators as implying that we paid more for the loans than we ought to have done. I reject this categorically. The report refers to the State aid component of the NAMA scheme, which was €4.96 billion by reference to the first five tranches and which proved ultimately to be €5.6 billion for all tranches when all the due diligence exercises were completed. The report points out that NAMA, under the Act, had discretion to pay a price for loans which was less than their long-term economic value. The reality is that the State aid is a function of the discount rate used; the EU-approved discount averaged just over 5% whereas, in an open market, buyers would probably have discounted the loans at a rate of about 15%.
In all cases, our acquisition price was the long-term economic value as determined by the EU Commission-approved methodology. I regard that as reasonable in the circumstances. It was never our objective to pay as little as we possibly could for the loans. Our aim was to pay the right price which, in this case, was the price that gave us a reasonable prospect of recovering the consideration paid on behalf of the taxpayer but also gave the banks as much State aid as was permitted by the EU state aid rules.
We have to remind ourselves at this point that the purpose of the NAMA scheme was, first and foremost, to provide State aid to participating institutions. From the State’s perspective, therefore, it was important that the amount of State aid available under the scheme be fully utilised before other State funding options were considered. Given the level of assistance required by the participating institutions, there would have been little point in NAMA paying less than the long-term economic value of loans if that meant that the resulting shortfall would have had to be funded from some other part of the State’s coffers. We paid as much for the loans as was allowed under State aid rules, no more and no less. Ultimately, because of the extent of impairment in their balance sheets, the amount of assistance required by the institutions proved to be well beyond what the NAMA scheme could provide, and other measures had to be taken to supplement it. A final point is that, despite the different discount rates, NAMA ultimately paid the participating institutions an amount close to the current market value of the underlying property as at 30 November 2009.
Another major theme of the report is NAMA’s management of debtor relationships. A key early priority for us was to identify any additional cash flows and unsecured assets controlled by debtors that could be applied towards maximising debt repayment. This included putting in place mechanisms which enabled us to fully capture rental income from debtor assets. This had been neglected by the banks and the report acknowledges our efforts to ensure that such income be paid directly into bank accounts over which we have control.
We set out to identify, and obtain charges over, unencumbered assets controlled by debtors. Not surprisingly, this was the most fractious and contentious part of our engagement with many of them, but I am pleased to report the effort has yielded a substantial return for the taxpayer. At the end of December 2011, we had secured €384 million in unpledged security from debtors and, in the intervening period, we secured an additional €130 million in unpledged assets, bringing the total secured to date to €514 million. This amount includes arrangements with certain debtors that the transfer of assets to connected parties be reversed. So far, this has yielded assets worth €160 million, including cash, property assets in Ireland and abroad, company shares and loans to family members. We continue to pursue a number of other debtors in order to obtain unpledged security and I expect that the value of our enhanced security will have increased further by the time these cases have been resolved. This figure is consistent with what we advised this committee previously and it also confirms our sense that there is no pot of gold out there that has been siphoned away by debtors.
The report draws attention to the challenges facing us in terms of achieving our long-term objective of repaying our debt. We are well aware of these challenges. There is no doubt that price movements in the Irish market since 2009 have made our task much more difficult, but we remain resolute in our determination to achieve our primary statutory objective.
In the impairment review, which was conducted in preparation for the 2011 financial statements, we carried out a detailed assessment of projected debtor cash flows, including asset disposal proceeds and rental income. Based on this, we have already signalled that we will take a material impairment provision when our results are announced later in the month. Notwithstanding that additional charge, however, we will be in a position to report both an operating profit and a profit after tax for 2011 of just over €200 million.
Our strong cash position enabled us to redeem another €2 billion of our senior notes last week, bringing the total redeemed to date to €3.25 billion. We are well on the way towards meeting our initial target of redeeming €7.5 billion of the senior debt by the end of 2013. The board, following a recent review of strategy, has recently reaffirmed its confidence that NAMA remains on course, at a minimum, to redeem by 2020 all the senior bonds issued as consideration for its acquired loans.
We have now completed our assessment of all 800 or so debtor connection business plans. The results of that intensive engagement with debtors can be seen in the cash inflows to NAMA which have now reached in excess of €8 billion since inception. These include the proceeds of asset disposals; we have approved asset sales of €9.2 billion since March 2010 as well as interest and other income used by debtors to reduce their indebtedness.
The credit decision framework is now fully functioning and operating very efficiently. From inception at the end of March 2010 to the end of May 2012, some 11,000 credit decisions have been made, and I am particularly pleased to report that the average turnaround time for credit decisions is now down to 5.2 days. There are some outliers, of course, for which there are good reasons, but the charge that NAMA is slow in its decision-making is comprehensively refuted by this statistic. Credit decisions taken include the approval of credit advances in excess of €1.3 billion to preserve and enhance the value of the assets securing our loans.
I mentioned earlier that we are very much alive to the challenges ahead and are taking appropriate measures to address them. We have entered a new phase of our evolution which will require us to develop and implement strategies aimed at maximising recovery from our assets. As a first step, the board approved a revised organisational structure designed to ensure that NAMA responds effectively and dynamically to these formidable challenges. The reorganisation, which was implemented three months ago, involved the restructuring of the agency into five divisions, one of which is an asset managementdivision charged with identifying, appraising and implementing development projects that make commercial sense. This team is particularly focused on what can be achieved over a medium-term horizon. Part of its job is to identify prospective supply shortages in the years ahead and to take the necessary action now to deal with those shortages.
Over 90% of Irish property under our debtors’ control is located in or close to counties with large urban centres of population, such as Dublin and neighbouring commuter-belt counties as well as Cork, Limerick and Galway. Our view is that the long-term prospects for much of this are positive. For instance, there is an emerging shortage of large office accommodation in Dublin suitable for foreign direct investors setting up or expanding operations in Ireland, and we maintain close contact with the IDA at a very senior level so that we can anticipate and ultimately meet such requirements. We also expect that there may be pressure on the supply of certain types of housing stock in Dublin in the second half of this decade, especially larger family houses in areas with good infrastructure, particularly water and drainage infrastructure and schools and transport links. In this and in other market segments, we will look to anticipate forthcoming supply shortages and will direct our funding accordingly if it makes commercial sense.
We are also prepared and expect to make much use of vendor finance to generate commercial property transactions. Our best estimate at present is that up to €2 billion in vendor finance advances could be involved. An important point to make about vendor finance is that it will help to reduce the credit risk profile of the NAMA loan portfolio. Lower quality credit risk is replaced by debtors with a much stronger capacity to repay. Our first vendor finance transaction was completed recently and there are currently a number of other transactions under consideration.
Another priority for us is to attract international capital through the creation of monetisation vehicles such as qualifying investor funds, knows as QIF. The establishment of the QIF is being sponsored by NAMA but it will operate independently of NAMA with its own board. It will be an investor-friendly and tax-transparent vehicle with access to capital in order that it can bid for and purchase Irish assets in the market. The QIF is subject to receiving regulatory approval from the Central Bank and, if this is forthcoming, the intention is to launch at least one QIF sub-fund before the end of the year.
We in NAMA look forward to making an effective and vigorous contribution to national recovery. Our ultimate success is very much tied up with the performance of the Irish economy, not least because a vibrant domestic economy means increased demand for the property assets which secure our loans. Many pressing challenges have been tackled and surmounted to date and I assure the committee that we will be equally energetic and spirited in dealing with the challenges that are ahead of us.
I have addressed briefly some of the key issues that may be of interest to the committee. The chairman, Mr. Frank Daly, and I are now happy to respond to any additional points members may wish to raise.
Chairman: Before calling on Deputy Fleming, I wish to clarify an issue relating to correspondence from DAC Beachcroft Dublin, waiving its confidentiality in regard to Treasury Holdings that the committee considered earlier. Will Mr. Daly comment on that before we begin our proceedings?
Mr. Frank Daly: I am aware of the letter, as we have a copy of it, and as I understand it, some members of the committee may have been briefed on behalf of Treasury Holdings, but our position is that as there are legal proceedings in the High Court as we speak between Treasury Holdings and NAMA, it would be inappropriate for us to deal with any of those matters today at the committee.
Deputy Sean Fleming: I thank Mr. McDonagh, Mr. Daly and their colleagues for attending here today. I wish to raise a separate point before I proceed. This is the seventh month of 2012, yet we have not seen the audited accounts of NAMA for 2011. The last set of NAMA audited accounts were for December 2010, some 18 months ago. It is not acceptable that an organisation as large as NAMA should come before the Committee of Public Accounts seven months after the year end without the audited accounts being available to members. I know the Comptroller and Auditor General referred earlier to the fact the audit has been completed and it will be published early this month. Last year NAMA signed off on its accounts on 30 June, six months after the year end. That was too late. I ask the chief executive to use in future whatever resources it takes to produce the audited accounts closer to the period to which they refer. The public and the Committee of Public Accounts should have this information. PLCs must report much more regularly. The last set of unaudited figures produced by NAMA is the section 55 report at the end of December. The quarterly management accounts were not produced for the end of March. Most organisations can produce their management accounts within days of the end of the period. We should have seen them at the end of April. This is the month of July and the last set of financial information we have received from NAMA is a year and a half old. That is not satisfactory.
I heard Mr. McDonagh refer to a new phase. Will he bring me up to date on it? The issue I wish to raise is not referred to in the opening statement, but it is relevant to current activities. At the end of March, when the promissory note of €3.1 billion was due to be issued in respect of the Irish Bank Resolution Corporation Limited, IBRC, the Minister for Finance made an announcement that Bank of Ireland would be involved in an arrangement to do that, which would require approval from an extraordinary general meeting. I understand NAMA provided the bridging loan of more than €3 billion. Did NAMA do that? How much did it charge for doing this transaction and what rate of interest applied to it? When will it be repaid? What rate of interest did it get on this money prior to lending it to the Government? If there was a differential, how much is involved? Will it fall to the taxpayer to pay the difference?
I suspect that this €3 billion transaction was NAMA’s largest financial transaction but it did not get a mention. Will Mr. McDonagh inform the committee of the when, where and how of that arrangement because there is a lack of information on it?
Mr. Brendan McDonagh: NAMA had built up substantial cash balances, and at the end of March the Exchequer was due to make a €3.1 billion payment so that IBRC could reduce its emergency liquidity assistance with the Central Bank. The Minister and the Government decided that they did not want to do that and the Minister issued a section 14 direction to the board of NAMA for NAMA to provide bridging finance to IBRC. NAMA was obliged to comply with that direction and it provided bridging finance to IBRC, pending the Bank of Ireland stepping in to the transaction. Bank of Ireland, as the Deputy mentioned, had to hold an EGM to approve the transaction, which was held on 19 June, and the IBRC returned the money to NAMA on 21 June. The interest rate on that money was 2.35% all in. NAMA has hedged the book in the market and our cost of funds for NAMA’s operations is around 2%, so we made about 35 basis points profit compared with our cost of funds.
I would like to put a few questions on the bread and butter issues. On the €74 billion par value of loan stock for which NAMA paid €32 billion, a discount of 57%, will Mr. McDonagh give a geographic breakdown of the discount? Was there a difference in the discount on the properties in Ireland and the United Kingdom?
Mr. Brendan McDonagh: The Deputy will appreciate that it depended on the type of property. In broad terms, in cases in which money was loaned speculatively on the back of land, the discounts could have ranged up to 95%. In the case of commercial property in Ireland, depending again on where it was located and the type of property it was, the discounts were probably not far off 50%. In the United Kingdom, obviously the market was much stronger and the discounts were probably in the overall range of 35%.
Deputy Sean Fleming: Mr. McDonagh has underlined NAMA paid as much for the loans as was allowed under state aid rules, no more and no less. That is an important issue. NAMA believes the €32 billion paid for the loans it assumed was no more or less than was allowed. The agency has incurred a further impairment cost of €2.3 billion on these loans. There was an impairment cost of €1.5 billion in 2010 and the section 55 report NAMA submitted to the Minister to the end of December which is not audited but satisfactory for this purpose shows a further writedown of €800 million in 2011. This figure was not referred to in the opening statement. Given the impairment costs incurred within two years of assuming the loans, it appears NAMA paid €2.3 billion above the value of the loans. In view of the statement NAMA paid no more or less than permitted under state aid rules, can one make the case that the banks were overpaid by €2.3 billion?
Mr. Brendan McDonagh: All the loans and underlying properties were valued by reference to a fixed valuation date of 30 November 2009. Obviously the value of the market, particularly in Ireland, has fallen substantially - probably by more than 20% - since that date. The banks were paid by reference to a date of 30 November 2009. That is the price they received at that point in time. The fact that we were holding the assets when the market was still deteriorating has resulted in us taking an impairment cost. However, the impairment process under IFRS accounting rules, about which we have talked about, is not a perfect exercise as it effectively looks at all the downsides and does not allow us to take credit for upsides in the portfolio. We will disclose, when we publish our annual report, a substantial unrealised upside figure in the portfolio which we hope to realise over the life of NAMA. This would bring the overall net figure down to quite a low figure overall.
Deputy Sean Fleming: The published accounts will show an impairment charge of €810 million for 2011. However, NAMA will include a note stating this is not the full picture but the accounting rules picture. Is that correct?
Mr. Brendan McDonagh: What we have agreed - this is further to discussions we had at previous meetings with the committee - is that we are disclosing as much as possible. We discussed this disclosure with the Comptroller and Auditor and General. We are disclosing a full impairment figure and also what we believe to be unrealised profits in the portfolio, which are not taken account of in the accounts.
Deputy Sean Fleming: That follows on from our earlier discussion to the effect that the strict financial accounts could benefit from additional information. I look forward to receiving this information in the coming days. What costs and overheads were incurred in 2010 and 2011? I seek a ballpark figure.
Deputy Sean Fleming: I am pleased to hear that. The new phase involving investment of €2 billion in the economy is important. My area benefited from this, as a press release from NAMA highlighted some time ago. The new €2 billion for vendor finance is also to be welcomed and I look forward to it being rolled out. Mr. McDonagh touched on the issue of IDA Ireland. Issues arose concerning NAMA’s role in the issue of headquarter offices for companies such as Sky, Google and Digital Realty Trust.
Mr. McDonagh has indicated that NAMA wishes to extend personal guarantees. The figures provided show that the top 29 debtors to the agency, all of whom owe more than €500 million, account for 45% of the €34 billion loan book. Does NAMA have personal guarantees from each of the 29 top debtors? Have many of this group failed to provide personal guarantees?
Mr. Brendan McDonagh: I will speak in value terms in respect of the figure of €34 billion. I estimate that of the €34 billion for the top 29 debtors, there is probably between €5 billion and €6 billion of what we call “non-recourse” loans, that is, loans for which there are no personal guarantees.
Deputy Sean Fleming: I will approach the next issue from a different perspective from that which I normally take. Some of the top debtors built premises for Sky, Google and similar companies and facilitated foreign direct investment. This is an issue on which NAMA has a direct handle. Some of these individuals are probably doing well in other countries at this stage. Owing to the personal guarantees they have provided, they will probably be afraid, even when things settle down again in Ireland, to reinvest and participate in providing facilities similar to those they provided in the past. I understand NAMA has indicated it may lift personal guarantees if doing so would be in the overall interests of the taxpayer and contribute to development. What is Mr. McDonagh’s position on that issue?
Mr. Brendan McDonagh: As the Deputy indicated, €74 billion is the par value of the loans we bought. The valuation of the assets when we bought them was €32 billion. We do not see the value of the assets recovering to a point at which we will get back the €74 billion. That is just not realistic. As part of our engagement with debtors, we also have a policy of trying to engage with them in a positive way. It is better to work with them than not to work with them because they have considerable knowledge of the assets, as the Deputy stated. However, this does not happen in some cases, but we are working with more than two thirds of our debtors, which we believe is good. If we had any doubt or concern about a debtor, we would engage in an asset search to determine whether the debtor had international assets. As I outlined, we do not believe there is a big pot of gold. We have been able to get back €500 million to date. That is not to say there are not exceptions that we have not found to date, but that would happen in any place. The board has always taken the view that if a debtor fully co-operates with NAMA, makes full disclosure, helps it to realise the maximum value it can on the portfolio, gives us access to unencumbered assets and reverses any asset transfer, we would, two years after he or she has helped us to realise the full amount, look at releasing him or her from personal guarantees, provided that nothing had emerged that would cause us to have a concern. This deals with the issue raised by the Deputy. NAMA is not a vengeance vehicle, but it recognises that we have to try to recover the maximum amount we can on the assets. We expect that if a debtor is fully co-operative, he or she will be given an opportunity to, I hope, redeem his or her personal situation. That is pragmatic in the context of the recent personal insolvency Bill which identifies that people can emerge from bankruptcy after three years. As the Deputy is aware, it was 12 years here in Ireland. A number of debtors would have taken the opportunity to try to establish their centre of main interest in the United Kingdom, have gone to the UK and have sought bankruptcy. We have to take a pragmatic view. It is cheaper for us to work with the debtors. They know more about the assets. We try to work with the debtors, and part of that is entering into arrangements on the basis that we believe it is the best commercial outcome for the taxpayer.
Deputy Sean Fleming: Mr. McDonagh is saying that the new legislation might force NAMA’s hand. People talk about the banks in regard to the insolvency but a debtor who may not have liked the 12 year bankruptcy arrangement up to now can come back, declare himself bankrupt and in three years’ time he is free of that, and essentially free of the National Treasury Management Agency at that stage. Does Mr. McDonagh see the possibility of the introduction of this new legislation costing NAMA money? He spoke about a more pragmatic arrangement but that sounds to me as if NAMA will have to strike deals that it might not have struck if this legislation was not introduced. Does Mr. McDonagh see this legislation costing NAMA money?
Mr. Brendan McDonagh: I suppose what we are saying is that the Personal Insolvency Bill has a limit of secured debt of up to €3 million. Our debtors have much more debt than that but outside of that, a debtor can still decide at any time that he is insolvent and prove that he is insolvent, and decide to make himself bankrupt either here or in another jurisdiction if he can prove that it is his centre of main interest. Our view is what is the best option for NAMA in terms of trying to get the maximum amount of recovery on the assets. Our view all along, even though it has not been popular, is that sometimes the best person to work with is the debtor who clearly made serious mistakes. He over-borrowed, he overpaid but that does not mean to say he is not the best person to work on the assets, given his knowledge of the assets.
Deputy Sean Fleming: To come back to the personal guarantees, from what Mr. McDonagh is saying, NAMA will release a debtor from his or her guarantee provided he or she works and co-operates with it for two years and discloses all any unencumbered assets he or she has either in Ireland or abroad that NAMA does not know about. I suppose they have to do a period of purgatory with it for two years in regard to assets it has not already-----
Deputy Sean Fleming: In terms of a debtor faced with seven or eight years to be released from a personal guarantee, and with the new insolvency arrangement, which is only three years, one can see he or she might be more inclined to move away from NAMA through that vehicle.
Mr. Brendan McDonagh: The debtor will always make a choice that he thinks is in his best interests. We might not always agree with that but if he has a legal mechanism to do it, he will do it. Our experience with debtors has been that we are working with two thirds of the debtors. They do not want to be adjudged bankrupt. They have other reasons. Pride is a big matter for them in that they will say, “I have created a problem. I want to try to solve the problem”. To be frank with the Deputy, many of these people have children, as we all have children, and they say, “Ireland is in a difficult situation and I want to try to help to be part of that”. It is not straightforward. Bankruptcy is not an easy option because to give the example of the UK, where everybody talks about bankruptcy tourism, they can go to the UK and be declared bankrupt and they are out of bankruptcy after one year but if it turns out that they have not done full disclosure or anything emerges, they can be put in bankruptcy for 12 years. Not many people are aware of that. Also, there are usually secured creditors, and we have done this ourselves, who have availed of the option that even if one emerges from bankruptcy after one year, one can be on this probation period for perhaps two years afterwards. Bankruptcy is not a straightforward option.
Deputy Sean Fleming: In his opening statement Mr. McDonagh said that cash inflows into NAMA since its inception have reached €8 billion. He also said that he has approved asset sales of €9.2 billion. I suspect Mr. McDonagh has approved €9.2 billion of sales but not all the proceeds came to NAMA. Some of the money was owed to other banks, and NAMA was part of the process of approving the sales. One would get the impression from what Mr. McDonagh said that NAMA got the €9.12 billion but am I right in saying that some of the €9.2 billion has gone to institutions other than NAMA?
What has been NAMA’s cash inflow to date this year? I have the figures up to the end of December from the report Mr. McDonagh sent to the Minster. They are not audited but I am sure they are accurate. What is NAMA’s cash flow looking like for the past six months?
Mr. Brendan McDonagh: I will give the Deputy right up to date figures on the cash flow position. Up to the end of last week, we had generated about €8.15 billion in cash. That is cash collected, mainly from principal repayments of €6.4 billion, and interest and other income of about €1.75 billion. In terms of what we did with that cash up to the end of June 2012, we had given out new working capital and development to our debtors of about €700 million. We have paid €600 million to the banks in interest costs to them on the NAMA bonds because they are holding them.
We have had overall operating costs, which include everything including the cash costs of due diligence of about €260 million. I will break down that €260 million so that the Deputy can understand it. We have paid the banks just over €100 million for administrating the loans on our behalf. As the Deputy knows, there is about 500 people working in the banks who help manage the loans on our behalf. We have incurred over €70 million in due diligence, and we have paid the National Treasury Management Agency, NTMA, which we are required to do under European Commission approval, approximately €50 million for all the costs incurred by it for providing services to us, and the staff. We have incurred other costs of about €40 million.
Mr. Brendan McDonagh: Effectively, it is other costs in terms of portfolio. For instance, the reviewing of the debtor’s business plans would cost about €15 million. Legal costs were probably about another €14 million and things like that. That is the majority of the €40 million.
As of last Friday we were holding cash balances of over €3.3 billion, and that was after the debt redemption of €3.75 billion. We had also paid back €300 million to the Minister for Finance in terms of working capital he had given us at the start of operations for us to set up.
Mr. Brendan McDonagh: No. When we approve asset sales it is on the basis that we expect the sale will complete. From the start we have to keep producing a pipeline of sales, and about €2 billion of that €9.2 billion of sales have not completed because the person buying the asset has not been able to produce the funds or he decided to withdraw from the transaction for his own reasons when he did his due diligence. The active sales pipeline is around €7 billion. About €5 billion of that has been received in cash in terms of sales, and about €1.4 billion has been received through debtors making normal principal repayments like amortising down the loans in that period.
Deputy Paschal Donohoe: I welcome the witnesses and thank them for their contribution. I will group my questions into five different areas. First, I will focus on the issue of assets that is covered in the report; second, the issue of rent collection; third, the matter of impairment; fourth, the issue of the guarantees; and fifth, I will ask some questions in response to the statements Mr. McDonagh made to Deputy Fleming.
I will begin by thanking Mr. McDonagh for all his work in what is a very difficult area. Some of the critiques from other parties about NAMA’s work note that it has become too adversarial in dealing with some points and suggest that a solution to all of this is to sell part of its work. A model based on NAMA being adversarial, when needed, and maintaining public ownership, given how much money the taxpayer has already spent, appears to have the essential elements for how we will move forward with the work. I would not want to see any let-up on either of those elements.
Page 80 of the report covers the issue of asset searches and provides details of the outcome of a number of asset searches NAMA has made. This touches on an issue to which Mr. McDonagh has pointed, the perception that there are large amounts of money to which NAMA and the taxpayer do not have access. Annex A details the results of a number of searches of debtors that NAMA has made over a period, and some of the results of the searches are substantial. For example, under search No. 6, NAMA discovered residential property outside Europe, two race horses and strips of land across Leinster. In respect of search No. 9, I will list all the assets that were initially disclosed to NAMA, namely, three properties in the United States of America, four high value vehicles, a share of an office building, a transfer of an asset to a spouse, a new corporate activity, a previously disclosed corporate shareholding, a previously undisclosed shareholding and an additional breakdown of a non-NAMA asset. One of the conditions of the business plan initially signed between NAMA and the debtor was the full disclosure of assets, but there is an example here of nine individuals or companies who did not do that. What action, or legal action, if any, was taken against these people for breaking what I understand to be an oath in terms of signing up to the business plan in the first place?
Mr. Brendan McDonagh: The Deputy is correct. We look for a full disclosure of all assets and liabilities in a statement of affairs. Clearly, as I said, if we have suspicions about people in that they still might be maintaining a lifestyle which is not in keeping with the amount of income they are disclosing to us, we would engage in an asset search. We would also be advised by sources, sometimes anonymous, who would write to me or the chairman in particular, to inform us that X has an asset in Y location and inquiring if this was disclosed to us. We would check that out as well.
We take seriously the matter of a person not making a full disclosure to us. It usually results in our taking enforcement action against a debtor. The majority of the instances that are quoted are subject to enforcement actions. Sometimes debtors take the view that, for their own reasons, they will not make a full disclosure, or sometimes if we bring them in and advise them that we have found additional assets and ask them what they want to say about it, they take the view that sometimes their financial adviser forgot to put them on their statements of disclosure. We have heard every sort of reason. It is like the excuse that may be given by a child that “the dog ate my homework”. We take the matter very seriously.
Under the NAMA legislation, if a person gives false information to NAMA, effectively it is an offence under section 7. We are in discussion with the Garda in regard to cases where we have found there has not been full disclosure. Obviously that is what we can do, and then we engage with the force in terms of trying to produce evidence to back that up.
In terms of the searches we have carried out to date, we believe they will cost us about €400,000 overall and we expect they will yield in the region of €5 million. Effectively, that is more than a 10:1 payback to date. In some cases we have engaged in searches that have not yielded anything but in other cases they have yielded a substantial return to us. We regard this as a very serious issue. If we have a suspicion about a debtor, we pursue it, but as I said in my opening statement, the majority of debtors did not see the change coming, did not transfer assets and we believe the majority of debtors have given us full disclosure.
Deputy Paschal Donohoe: We have an example here of nine who did not. There is an instance here of somebody who forgot to declare they owned a crèche and 29 separate parking spaces, and of somebody who forgot to detail the ownership of retail units. It is some case of the excuse that “the dog ate my homework” not to disclose these assets, on which, I am sure, Mr. McDonagh would agree with me.
Mr. McDonagh referred to the Garda. Is there anything more than discussions taking place with the Garda in this regard or is the force taking action? I deal with constituents who are having discussions with their banks regarding the restructuring of their personal mortgages. If they forgot to declare a personal asset, they would face immediate consequences. The individual to whom I referred forgot to declare 29 car parking spaces and another individual forgot to declare two race horses. Is there anything more than discussions taking place with the Garda or can we expect to see public action from the Garda in regard to this issue?
Mr. Brendan McDonagh: If the Deputy wants more details in terms of discussions, I will ask Ms Aideen O’Reilly, our head of legal affairs, who is dealing directly with the Garda on this, to speak on that.
Ms Aideen O’Reilly: We have one case - quite a complex one - where we have presented the Garda with a summary of the evidence we have found, some of which would have come from asset searches, and that has gone to Garda National Bureau of Fraud Investigation. It is assessing what we have given it and we expect to meet it shortly to get its initial view of the evidential weight of what we have been able to give it. We intend processing that to a conclusion, which ultimately will be a view from the Garda and probably also the Director of Public Prosecutions as to whether charges can be preferred in that case.
As Mr. McDonagh said, in regard to each of these cases, we follow two courses of action, one of which is to chase the assets to recover them, either through seeking judgments, placing judgment mortgages, registering lis pendens or, in some cases, instituting proceedings overseas to reverse the transfer of assets. The other course of action, which operates in parallel, is us actively looking at criminal sanction under section 7.
Ms Aideen O’Reilly: Not yet. No. We have taken the view that we will assess or ask the Garda to assess that particular case. We need to understand precisely what evidential requirements will apply. We are not a prosecuting authority. All we can do is refer the matter to the prosecuting authorities.
Deputy Paschal Donohoe: I thank Ms O’Reilly for that summary. I urge that we do everything possible to complete that case and follow up on the others because, to my eye, these are people who broke the oath they gave in the business plan. The Comptroller and Auditor General in his report is supportive of much of the work done by NAMA, but people will ask how these people were able to break an oath. If others, who are of less financial net worth and are facing difficult situations, break an oath, they face sanctions. If these people break an oath, we need a test case to move forward. It is important the other cases be handled once the first one has cleared.
Mr. McDonagh stated: “NAMA has also taken steps to have borrowers provide additional assets as further security for loans and the agency estimates that approximately €500 million in additional security may be pledged.” From where does that money come? It is quite the pot of gold, to use Mr. McDonagh’s phrase.
Mr. Brendan McDonagh: Much of it relates to the artwork, overseas property and so on that debtors bought during the good times. It is mainly property, although they would also have cash in bank accounts that would never have been pledged to the banks previously. We engage with them after they disclose these assets as part of their statement of affairs and ask them to pledge the cash as additional security. Between 2008 and 2010, debtors transferred assets valued at approximately €160 million, primarily into family members’ names. We identified these transfers and told them that, if they wanted to work with NAMA, they would need to transfer those assets to us.
Mr. Brendan McDonagh: The €160 million accounts for assets that debtors tried to put out of our reach by transferring them to family members or related parties. The remaining €340 million relates to debtors’ assets that were never pledged to banks as security. Those assets were unmortgaged and unencumbered. For example, a debtor who owes €1 billion might have unencumbered assets worth €50 million. If he or she wanted to work with NAMA, we would ask for that €50 million in assets as additional security.
Deputy Paschal Donohoe: I thank Mr. McDonagh for that explanation. The issue of rental valuations is covered on page 71 of the report. I am looking at figure 4.2. My point is on the underestimation of rent. The actual rent received by NAMA was 26% less than estimated by the business plan. The shortfall was €2.7 billion. Am I correct in my reading?
Deputy Paschal Donohoe: It is striking that, apart from the 32% figure in column C and the 69% figure in column F, much of which depends on people bringing new money into the equation to bulk up the rent payments, the other figures in terms of the degree to which rent was underestimated are considerable. Underneath the average, which is supported by non-rental income being used to support the business plan’s original rental estimate, the underestimation is significant. What is Mr. McDonagh’s observation on this table and on the Comptroller and Auditor General’s view on same?
Mr. Brendan McDonagh: In cases A and B, which are referred to on page 70, only €40 million was expected and €113 million was received. Viewing the €2.7 billion in terms of €10 billion is taking it slightly out of context. First, when we bought the loans in November 2009, rents were identified as being attached to properties. Due to the recession, some of those businesses closed and the rents disappeared. Second, and as the Comptroller and Auditor General identified in his report, when banks sell loans to one another, they do not take account of property management costs. Some of the rents are being used up to pay the costs incurred in respect of a number of the buildings. We are working on this issue.
As I pointed out and as the Comptroller and Auditor General has stated, of more concern is the fact that, when we bought loans from the institutions, many debtors were collecting rent but not paying off the interest on their loans. They were pocketing the money. Since acquiring the loans and as part of our business plan process, we have ensured the rent is mandated into a NAMA bank account.
Mr. Brendan McDonagh: I can provide an up-to-date position on our progress. As of last Friday, we have full visibility and control of 86% of our overall debt. In terms of trying to capture that income, we have made significant progress in the past nine months. When debtors co-operate, they sign rental mandate forms. To get that rent into a bank account the debtor must sign the legal form. Some debtors who do not want to co-operate - they will probably end up in the enforcement stage - will not assign the rental income to NAMA until such time as we appoint a receiver and control the income ourselves.
Deputy Paschal Donohoe: If we were to look at a figure 4.2 that took on board NAMA’s progress in terms of, for example, having a single bank account into which it could bring all the income, would we be seeing a different set of numbers?
Mr. Brendan McDonagh: Yes. So that the Deputy fully understands the situation, costs associated with managing the portfolio are paid for by rental income. For argument’s sake, if the gross rental income is €100 million and costs amount to €20 million, €80 million would go into the bank account.
Mr. Brendan McDonagh: It was not missed. The loan valuation model that was approved by the European Commission did not take account of the ongoing property costs. The valuation model accords with the international loan valuation model, which is used by anyone who buys and sells loans on the market, and does not take account of such costs.
Deputy Paschal Donohoe: I thank Mr. McDonagh. I wish to address the issue of impairment, which the committee has discussed a number of times. Paragraph 2.25 on page 35 states: “Under conventional accounting rules the value of those assets was estimated to have reduced by €1.5 billion due to impairment by 31 December 2010 and the value of any further impairment during 2011 will be assessed in the course of the audit of the 2011 financial statements.” Did the witness give Deputy Fleming a figure on what the impairment is expected to be for the year just closed?
Mr. Brendan McDonagh: I did not give a specific impairment figure but in my opening statement I indicated we took a substantial impairment figure in 2011. Despite taking an impairment figure, we still reported a profit of over €200 million, as indicated in the management accounts earlier this year.
Mr. Brendan McDonagh: I do not believe I am. The format is that NAMA’s accounts, once approved by the Comptroller and Auditor General, are submitted to the Minister for Finance, who must bring them to the Government for approval.
Deputy Paschal Donohoe: For the set of figures published for 2010, the Comptroller and Auditor General in his opening statement referred to the carry value of the loan book, in other words, the valuation based on the November 2009 evaluation and everything that happens after. Is Mr. McDonagh in a position to tell us the fair value of the loan book if it was entirely based on current market prices?
Mr. Brendan McDonagh: Yes. At the end of 2011, our loan balances net of impairment is approximately €25.5 billion and we also had to disclose the fair value. Our fair value is approximately €25 billion.
Mr. Brendan McDonagh: Yes, although the long-term economic value is something that has been misunderstood by many people. The long-term economic value added a certain percentage to the property value of the loans and was then discounted. Effectively, the price paid to the banks was almost 100% of the current market value of the property at 30 November 2009. The long-term economic value was, effectively, eroded in the loan discounting model.
Deputy Paschal Donohoe: I will conclude with this, as the Chairman has given me much time. With the figure just given of fair value of €25 billion, I am concerned that so much of the difficulty in the economy that we now face was due to the banks sitting on a loss in property lending. When it crystalised, the loss was transferred to NAMA. The taxpayer is now managing a loss that is developing further as property prices continue to decline. That appears to be borne out by a fair value estimate of €25 billion, and the losses have moved from the banks to NAMA. If property prices continue to decline as they have since November 2009, the magnitude of the loss the taxpayer could face could grow.
Mr. Brendan McDonagh: That is making an assumption that the entire NAMA portfolio is in Ireland. Of the €32 billion paid to financial institutions, €18 billion is in Ireland and €14 billion is overseas. Considering any of the indices, the overseas portfolio is up approximately 10% since November 2009. There are few transactions in the Irish market and the indices are based on them; they indicate property value in Ireland is down 20%. That is the market and the reality of what we face. However, the Deputy is making an assumption that everything would be sold today, which will not happen. We have a mandate to 2020 and our objectives are to realise those assets between now and then. We do not believe we will incur substantial losses at all for the taxpayer and we believe we will be capable of repaying all the money if we can work out the portfolio between now and 2020.
Deputy Paschal Donohoe: One of the concluding lines in the statement from the Comptroller and Auditor General is that NAMA is consequently managing its debt in the context of a business environment that militates against full realisation of its initial investment.
Mr. Brendan McDonagh: It is a very difficult business environment. We are tied up with the Irish and international economies, particularly in the UK. We have taken a view that we would realise our overseas assets quickly as there is a good opportunity to take the value that exists. That has given us a buffer in dealing with the Irish market, which is beginning to stabilise. One can think about the trauma in the economy since NAMA came into operation in December 2009, which is significant. There has been much unemployment and very little growth. As there is stabilisation in the economy, property values will follow and allow us to recover that value over time.
Mr. Frank Daly: It is important, from the NAMA board’s perspective, to say that this challenge is one that is constantly on our minds and we constantly pay attention to it. We have spent quite a bit of time over the past few months considering the strategy and targets. It is useful to confirm this for the committee, despite the difficulties in the market and the mixed nature of our portfolio. In his opening statement Mr. McDonagh drew attention to more positive aspects of our portfolio, and we are very confident of meeting our targets and not incurring a loss.
Deputy Paschal Donohoe: In the opening statement, Mr. McDonagh indicated it was never NAMA’s objective to pay as little as possible for the loans. Given that the overall objective is to get the loan book to zero, should it not have been an objective to pay as little as possible? The rationale given is that if NAMA had paid less, the State would have had to provide more, presumably through additional recapitalisation of the banking system. It is not NAMA’s role to determine what else the State might have to put into the banking system, as that is a separate decision taken by the State.
Mr. Frank Daly: Our role was to value the loans at the time on the basis of the valuation of 30 November and no more than that. We did not enter into speculation about what would be an appropriate figure to pay the banks. In the first six months of operation, the constant criticism was that we would pay more to the banks than what the loans were worth. Subsequently there was a concern that we would pay less to the banks than what the loans were worth. The report of the Comptroller and Auditor General gives us comfort that in the process of valuing the loans and transferring them, we did what was right and proper, no more and no less.
Deputy Derek Nolan: I welcome Mr. McDonagh, Mr. Daly and their officials to the briefing. Mr. McDonagh mentioned that the impairment figure for 2011 has not yet been signed off so he cannot make it public. He indicated it was a significant figure. He mentioned that regardless of this, NAMA still made a profit in 2011. Is that a reasonable thing to put together? One can make a profit but the assets one has not yet disposed of could have depreciated. It is like comparing apples with oranges by saying our assets are impaired but we still managed to make a profit. They do not match.
Mr. Brendan McDonagh: We have to prepare the accounts in accordance with the IFRS. It is at a point in time at 31 December 2011. Part of that exercise is doing an impairment review of our assets. We took a substantial impairment in 2011, on top of the €1.5 billion impairment we took in 2010. Despite that, if one took a snapshot at that point in time, it showed that we had made €200 million in profit. I also pointed out to Deputy Fleming that we will also disclose in a note in our annual report that we have substantial unrealised gains. There is a technical accounting view around the IFRS that we could have taken that gain into our accounts if our auditors had agreed, but I am sure that they would not. That would have shown a completely different figure. I think it would be completely wrong for NAMA to do that and thus we have not done that and have taken the conservative view. That is the right thing to do. It is a point in time which is 31 December, the year end. The Comptroller and Auditor General gave us our accounting opinion last Friday night and said that the accounts are fairly presented. I believe that they are, the board believes so and the Comptroller and Auditor General has given us his opinion that they are fairly presented.
Mr. Brendan McDonagh: The view of NAMA is to 2020 and what will we have done and what will we have got back for the assets. I have always said that the annual view of NAMA in terms of the way it makes a profit and loss is meaningless. What is more meaningful for the taxpayer is what will happen in 2020 and whether we have paid €32 billion back to the banks. If there is a surplus, it will go to the Exchequer, but if not, it will be a different story. That is the view we should take of NAMA over its life.
Deputy Derek Nolan: I am sure that we had a base case in 2009 when NAMA started. At the time there would have been a financial model or economic scenarios trying to project forward the level for the property market. How far away was NAMA’s base case or projected case? Has the property market declined greater than NAMA had initially anticipated?
Mr. Brendan McDonagh: It is there in the indices. The decline since 30 November 2009, our valuation date, is that the Irish market has declined around 20%, and yet in the overseas market, which is primarily the UK, most of our portfolios are up around 10% since that time. Clearly, in 2009 one would probably have had the view that perhaps the markets would decline slightly more and then recover. They have not because of economic circumstances both here and internationally. We believe property values will recover over the life of NAMA.
Mr. Brendan McDonagh: The board of NAMA’s business plan was published in mid-2010 and showed NAMA’s operations under three different scenarios. The base case scenario was that NAMA would make €1 billion profit over its life. The scenario with prices recovering by 10% above the base case scenario showed that we could make about €3.5 billion profit. The adverse scenario, which was 10% below the base case scenario, said we would lose about €1 billion. The board, at the start of this year, had to look again at its business plan from mid-2010. We still have the view that we will at least break even as per our base case scenario.
Mr. Brendan McDonagh: Not at all. The board published its business plan in 2010 and made it very clear that it was taking a neutral view of the markets. Our job is not to interfere with the market. The market is what it is. Clearly, one would have had to have had a scenario that we would have known, when we did our business plan, that the UK market was recovering strongly when compared with November 2009. In response to the Deputy’s question on whether we saw property prices drop by 20% from November 2009 rates when we started the process, we did not, but we do see property prices recovering over the life of NAMA.
Mr. Brendan McDonagh: We are completely linked with the functioning of the economy. The Deputy will accept that the economy is showing signs of stabilisation. Clearly, the recent move in Europe showed that people are taking the view that Ireland is a recovery story. Those are the initial signs that are coming out of that. On the basis that the economy recovers, we would feel that we would benefit on the back of that. We are completely linked to what happens to the economy both here and internationally.
Deputy Derek Nolan: I am sure Mr. McDonagh believes NAMA will break even, but the conclusion of what he has said is that he cannot be sure of that. If it is the case that within two years, NAMA’s initial business plan is already out of kilter by a dramatic amount in the context of the property market, Mr. McDonagh cannot be certain that the market will recover over its lifetime. He could not say now that he is reasonably confident of breaking even if NAMA is already so far off its base case plan just two years into its project. It seems a step too far for Mr. McDonagh to say that he is confident that NAMA will break even over its lifetime.
Mr. Frank Daly: Nobody is ever going to say that they are absolutely certain about anything. It would be foolish for us to do so no more than for anybody else to say it. If the Deputy goes back to 2009 and the early business plan dated July 2010, Ireland was in a completely different scenario. There was not much talk around then of a bailout or troika. Those were the projections. We now base our projections and our confidence on the emerging state of the economy which we believe is more positive. We base it on the various forecasts and macros available. There is not much more we can do than make use of them and of the expertise that exists. We are not, by nature, an overly optimistic organisation. We are a pretty cautious organisation both in terms of our projections and the type of work we do, as evidenced in the report we are discussing. Based on its best state of knowledge, based on the best projections and macros that exist, the board, at this stage, believes we will break even and repay all our senior debt. I do not have any reason today to say that I am any less confident about this than I was some months ago when the board took that view.
Deputy Derek Nolan: On that point, during the week Mr. Daly gave a media interview in which he said he expected a recovery in the property market. What does he define as a recovery in the property market?
Mr. Frank Daly: I do not think I said there was going to be a recovery in the property market. I was asked what I thought the state of the property market was and I said I was cautiously optimistic about the property market stabilising and that the recent indices and reports would indicate such. I did point out I thought it would be a measured stabilisation, that it was likely the signs in Dublin were more positive than elsewhere and that the signs in certain parts of Dublin or certain sectors in Dublin were more positive than elsewhere. I think it will be a very measured recovery. I think we are in the stabilisation stage. I was also at pains to point out that nobody in NAMA is trying in any way, either by anything that we say or anything that we do, to do anything other than get the market back to a stable state, a sustainable property market. We have no interest in getting the property market back to the mad levels of earlier years.
Mr. Frank Daly: That is the basis on which we make projections. We have another eight years to go. We must take account of this. We are taking into account modest growth in the economy and the property market in that period. On that basis, we believe we will repay all senior debts and break even.
Deputy Derek Nolan: NAMA has announced that it plans to invest approximately €2 billion in the coming four years in finishing off property projects with a realisable value where the investment will pay for itself. How is this being funded? Are people with loans being given further loans?
Mr. Frank Daly: The CEO may wish to talk about that matter. It is being funded by NAMA from cashflow, not by it going to the Government looking for money. Funding will be made available for worthwhile projects where we believe investing in the property project to finish it off, or even in starting a development on a greenfield site in NAMA’s portfolio will increase the value of the portfolio and, ultimately, enhance its sale value. We have laid down tight criteria by which we judge projects. It will involve people on our books – debtors - if they have property or land in their portfolio to which we believe value can be added. Ultimately, that is the best result for the taxpayer.
Mr. Frank Daly: The investment capital will be advanced using strict criteria and with strict monitoring to finish the property. A good example of NAMA advancing funds is property in Charlestown, north County Dublin. As the matter is in the public domain, I do not have a problem in mentioning it. It is a facility of €13 million for the completion of a shopping centre and entirely predicated on pre-letting to tenants in the development. We are very confident in investing in the project. Another is a facility we are advancing for a south Dublin residential construction project, comprising 38 houses and parklands, a lake and site works.
Deputy Derek Nolan: Is NAMA lending to people who technically are insolvent? If people are in a position where they are finding it difficult to repay loans on business plans, are they receiving funds?
Mr. Frank Daly: These debtors are on our books and we are working with them co-operatively. We believe they have a potentially commercially viable future. They have the base property portfolio and we believe it is worthwhile investing, ultimately to the benefit of the taxpayer.
Deputy Derek Nolan: Is NAMA lending to people whom it does not expect according to the agreed business plan, to repay their loans? Is it giving further loans to people whom we do not expect to repay their current loans?
Mr. Frank Daly: What we are doing is advancing money to ensure they will be in a better position to repay their loans than they are now. Every penny of the money advanced to them for that purpose will be recouped with profit.
Mr. Ronnie Hanna: We look at projects rather than the people involved. We are lending towards enhancing the value of a particular project. If the debtor is the best person to work through the project, we are backing his or her skill. It is not a question of lending money to him or her, per se, but investing in the project and seeing its value increase in order that the debtor can pay us back more. It is a view of his or her capability and our assurance that the project will add more value to NAMA.
Deputy Derek Nolan: I hope Mr. Hanna has a straight answer to this question. What is to stop an insolvency arrangement or bankruptcy from occurring after NAMA has lent to someone in this position who may already be insolvent? Is there a pitfall such as that the money could be lost owing to bankruptcy?
Mr. Ronnie Hanna: As money is secured on the asset, we have the ability to take control. We have step-in rights, if needed; therefore, we are in control if anything happens to the individual working through the project.
Deputy Derek Nolan: The witnesses referred to a well known circumstance, where people with properties in NAMA were not paying it the rent but pocketing the money. They were building their funds for use in the next bubble. How much money did NAMA lose owing to that practice?
Mr. Brendan McDonagh: It is hard to estimate. The ones which really lost money were the banks before we acquired the loans from them because they did not control the rent income. From our point of view, we have 86% control over all income. I do not have the figure for losses with me, but I do not believe it is a large amount since NAMA took control of the portfolio.
Mr. Brendan McDonagh: Yes. If the debtor wanted to work with NAMA, we asked for the money back. A number of debtors had to return money on the basis that NAMA would not work with them otherwise. In the case of those who did not return the money, it usually resulted in enforcement. We started pursuing those debtors on foot of their personal guarantees and could attach judgments to recover the money. Much of the time, we found that the money had been spent because the debtors had continued to fund their lifestyle that they could no longer afford and pretended that they were still rich. They spent money foolishly, but that is, unfortunately, a factor in the debtors with whom we are dealing. Over two thirds of our debtors are co-operating with us and we have over 86% control of debtors’ rents at this stage. We hope to get the rest of it before the end of the year.
Mr. Brendan McDonagh: Our objective is to get the money back and, once we had got it back, we said to them that if anything like this emerged again, we would take enforcement action against them. They are, therefore, on a short leash. We let them go this time. We recover what we can. If a person has taken in €100,000 in rent and returns €100,000 and we know he or she has no other income, he or she cannot give anything else. We must then decide whether we want to move forward. In the majority of cases we did not move forward with the debtor and had to pursue them through a legal route.
Deputy Kieran O’Donnell: I welcome the witnesses from NAMA. What rate of price increase and growth in the economy in the coming eight years is required for NAMA to break even? The original model was based on a 10% increase in the time period in question.
I refer to the management of the portfolio. Since NAMA was established, how much has been paid in management fees to each of the institutions and how much has been paid to them in interest on NAMA bonds? What is the rate of interest?
How much has been paid to developers in terms of salaries? How many developers are involved? Some 29 debtors appear to make up 45% of the total loan portfolio. It is all about the loans, really. Mr. McDonagh said two thirds of the debtors are working with NAMA but one third are not. Will he tell me who makes up the one third? What is happening with that portion of the portfolio and what is its value? How many people are involved? What legal fees has NAMA incurred to date? To whom have those legal fees been paid?
The original loan portfolio was €74 billion but NAMA paid €32 billion. I understand NAMA has recovered €2.7 billion, having called in various guarantees, but it has written off approximately €2.3 billion. It has probably still paid approximately €32 billion. Have any loans been sold on? Have any loan portfolios been re-financed by people whose loans were taken on by NAMA? Of loans which were sold on or re-financed, how many have been written off? Will Mr. McDonagh answer those questions which came up on foot of issues covered earlier?
Deputy Kieran O’Donnell: Property prices have gone down by 20% in the interim. Obviously, Mr. McDonagh works with numbers. NAMA has revised its figures on growth in the economy and on property prices. What were the parameters it used?
Mr. Brendan McDonagh: The parameters the board used in its most recent strategy were that growth in the economy, based on the forecasts available, will probably average at around 2% per annum. In terms of the €14 billion in overseas assets, the board has taken the view that we will have disposed of the majority of those by 2015 or 2016. They have increased by an average of 10% over November 2009. We take the profit on that portfolio and that gives us a cushion. The majority of the decline in Irish property values of 20% will have recovered by 2020.
Mr. Brendan McDonagh: Probably the majority of the 20%. What one must think about here is that the Irish market will take a while to recover but in the meantime, the properties are producing very good rental income. If we have control of the rental income, it will allow us to increase our overall cashflow because the rental income will be greater than the actual interest cost on the loans and we can use that-----
Mr. Brendan McDonagh: We believe it is realistic. The reality is that it will not happen in a linear way, as the Deputy will appreciate. When prices fall, people would say they maybe over-correct. When they come back, they may not come back in a V-shape but they might come back and sort of plateau for a year or two until the economy recovers. Assuming we have-----
Deputy Kieran O’Donnell: On that basis, I am happy. Will Mr. McDonagh move on to the management fees in regard to the banks and developers? How many developers are involved? What is the amount being paid to individual developers? What is the largest amount paid to an individual developer?
Mr. Brendan McDonagh: In terms of the banks, the fees we can pay the banks, as set down by the European Commission, are ten basis points. It is 0.1% of the nominal value of the portfolio. On a €74 billion portfolio, one would be planning to pay them €74 million per annum. In 2010, because we acquired the portfolio at different stages in the year, we paid the banks about €12.8 million. In 2011, we paid them about €57 million. The parameter around that is a maximum of ten basis points or cost recovery. Some banks’ cost recovery is less than ten basis points, so we pay them less than that because, obviously, they have volume.
Mr. Brendan McDonagh: In terms of developers with whom we have agreed business plans and with whom we are working, there are about 165 individuals. The cost of them in 2012 will be in the region of €15.5 million. The average cost of each is around €90,000.
Mr. Brendan McDonagh: The largest amount, as we said before, is €200,000. There are three debtors to whom we have agreed to pay €200,000 but the majority of the debtors fall in the range of €100,000 to zero. We are paying some debtors maybe €10,000 per annum.
Deputy Kieran O’Donnell: Some 29 debtors make up 45% of the portfolio. Three make up in excess of €2 billion, nine between €1 billion and €2 billion and 17 between €500 million and €1 billion. Of those 29 debtors, how many are in receipt of salaries to manage the portfolios?
Deputy Kieran O’Donnell: Mr. McDonagh referred to the one third of debtors who are not working with NAMA. What percentage of that one third would be included in the 29 debtors? Mr. McDonagh said half of the 29 debtors-----
Deputy Kieran O’Donnell: The 29 debtors, who comprise 4% of debtors, make up just short of €34 billion, which is 45% of the total loan value. Of that €34 billion and of the €7 billion which have been enforced against, how many of the 29 debtors would be in the €34 billion?
Deputy Kieran O’Donnell: It is interesting that the big guys only make up 4% in numerical terms but that they account for 45% in the context of value. Mr. McDonagh has indicated that NAMA has served enforcement notices against half of these people. Therefore, the 4% of debtors to whom I refer are probably responsible for the bulk of the €7 billion. What are the chances of that €7 billion being recovered?
Mr. Brendan McDonagh: The reality is that in those cases what you recover is the value of the assets. As I said at the start, we never see NAMA or anyone else recovering the €74 billion. What we think we can recover is the €32 billion we paid for the banks. It is a function of the value of the assets, what we can realise the assets for.
Deputy Kieran O’Donnell: In what circumstances would NAMA have been obliged to take enforcement proceedings? NAMA has a job of work to do. However, members of the public see that the agency pays €15.5 million in salaries and management fees to developers to manage the portfolio. To a certain extent, the taxpayer has had to refinance and recapitalise the banks. Mr. McDonagh made reference to the fact earlier that the lower the value the agency paid, the more the banks required to be recapitalised. How many people will be on €200,000 per annum, apart from three debtors to whom Mr. McDonagh referred? Is that the maximum number?
Deputy Kieran O’Donnell: So three people are in receipt of €200,000 each and many of the others will be on an average of €100,000. Then there is also the €7 billion to which I referred earlier. That amount is almost the equivalent of the budget of the Department of Education and Skills, it is 50% of the budget of the Department of Health and it is virtually double the budget of the Department of Justice and Equality, which is approximately €4 billion. Ordinary people are of the view that this is crazy. I am not stating that NAMA does not have a job to do. However, it needs to explain to the ordinary taxpayer the rationale in respect of the 165 debtors under discussion. These individuals comprise approximately 20% of the total number of debtors. I expect the bulk of those to whom I refer are probably in the top range of debtors because the issue we are discussing probably does not arise in respect of the much lower value portfolios.
Will Mr. McDonagh explain the logic behind NAMA’s paying out €15.5 million per annum in salaries and management fees to debtors to have them manage the portfolios? In particular, will he explain the logic of paying most of these individuals an average of €100,000 per annum and of paying three of them €200,000 per annum? NAMA is also, for whatever reason, pursuing its debtors for €7 billion. I accept that it has a job to do but our job is to ask these questions. What is the rationale behind NAMA’s paying out almost €16 million each year to developers? As a result of the fact that these individuals’ loans were transferred to NAMA from the banks, some €64 million in taxpayers’ money has had to be expended on the banks. Does Mr. McDonagh understand from where I am coming on this?
Mr. Brendan McDonagh: Absolutely. We are obliged to consider this matter on a commercial basis, namely, what is going to assist us in getting the money back in order to get rid of the contingent liability on the State. If NAMA winds up making a loss, the taxpayer will be stung for it. The taxpayer is not being affected at present because all of the money is coming out of NAMA’s resources in terms of the realisation of the assets. We are obliged to consider matters in terms of what is the best commercial return and who is the best person to manage the asset. If a debtor has €1 billion or €1.5 billion worth of assets and if a receiver is appointed in respect of those, then, depending on the complexities involved, one will be obliged to pay that receiver between €500,000 and €1 million per year to manage the assets.
Deputy Kieran O’Donnell: Let me put it another way. I wish to focus on the agreements NAMA has reached with developers in respect of salaries. Let us assume that the assets involved will recover their value and will either be refinanced by the developers or sold on. Does NAMA have a clawback provision to enable it to recover the management fees being paid to those developers at present? I had particular views on NAMA at the time of its establishment. In essence, it bailed out the banks in the context of their balance sheets. If NAMA or some other vehicle had not been put in place, the businesses of many of the developers in question would either be in receivership or would already have been liquidated. There is a sense of fairness involved here. Has NAMA put in place any measures to allow it to claw back money from developers who might make profits at the end of the process? Does Mr. McDonagh see from where I am coming in this regard?
Mr. Brendan McDonagh: I absolutely see from where the Deputy is coming. However, our objective is to manage the assets as cheaply as possible and ensure that we either preserve or enhance their value. Who are we going to get to use that? The Deputy referred to the prospect of debtors’ refinancing their operations. The reality is that there are very few debtors capable of doing so because the banking system is not there to assist them in refinancing.
Deputy Kieran O’Donnell: NAMA is going to be in place until 2020. Let us assume that four years hence the economy recovers, a debtor and a financial institution with which he has reached agreement come forward to NAMA with a proposal that is higher than the value of that debtor’s loan, and NAMA takes a commercial decision in respect of that proposal. Four years from now, one of the developers currently being paid €200,000 per year will have amassed over €1 million, which essentially is being provided by the taxpayer. Effectively, this money is a salary but I accept that NAMA refers to it in terms of being for management. Has NAMA given any consideration to introducing a mechanism whereby these people would be viewed as having the use of the salary during the period in which the management loan is in place? If, after all, NAMA had not been established, the operations of many of these developers would have been liquidated by now.
Has NAMA, in the interests of fairness, considered introducing a model whereby, in the event of a profit being made at the end of the process, the taxpayer would be in a position to gain not only in terms of the sale of the loans but also in the context of the recovery of management fees paid during the period in which NAMA provided life support to keep various projects up and running? Obviously, NAMA must realise the best possible value in the long term. However, there must be a sense of fairness for taxpayers who, after all, are funding everything that is being done. The Dáil is currently dealing with personal insolvency legislation. There is a simple reason for this, namely, that ordinary people are under enormous pressure in making their mortgage repayments. Individuals come to our constituency offices and they literally break down. I have seen grown men who want to pay their mortgages but cannot do so cry. These people have children and are afraid their homes will be repossessed. It is our job to represent those to whom I refer.
I am quite pragmatic in terms of the way I look at things. However, I always seek to view them in the context of a sense of fairness. If I am giving a person a leg up and he or she benefits from that in the long term, I expect him or her to repay me. Are control measures in place to ensure that if, four or five years from now, refinancing options become available or the market recovers, NAMA will be in a position to recoup some of the taxpayers’ money that has been expended in respect of this matter? I take the same view with the banks, which have benefited enormously from the work done by NAMA. The question is whether we can look at these measures so that in five or six years time when the taxpayer looks at the situation, they can see that while it has been very difficult and they are still angry with the banks, they can see it is fair. Could Mr. McDonagh address that point?
Mr. Brendan McDonagh: I fully understand the point the Deputy is making. The benefit for NAMA will be realised by the value of the assets when they are sold, or as he said, when they are re-financed. If one has an asset that is worth €100 million today and by working it and getting it let, one can then get €110 million for it, let me assure the Deputy the €10 million will come to NAMA and not go to the debtor.
NAMA could engage in selling the loan portfolio to a third party. We have considered the option of retaining a reasonable part of an upsite in terms of that portfolio. However, the reality is that some of the people who buy the loan portfolios do not want the debtor, they only want the assets, so as soon as the loan portfolio is bought from NAMA they will, as the Deputy said, take a pragmatic view and tell the debtor to get out of their way and rather than bankrupt him, they take the assets, telling the debtor not to interfere. That is what happens in the real world. In terms of the banks benefiting from NAMA, clearly NAMA is a State aid, and this was approved by the European Commission. There is provision in the legislation for the Minister for Finance to promulgate a surcharge in terms of taxes that he can put on the institutions if he wants to recover some money from them. I fully understand the position.
NAMA will work with the debtor and pay him if we feel he is adding value. If he is not adding value, that arrangement will be discontinued and he no longer will be paid. It is not a case that NAMA will sign up a person and agree to pay them for five years to do nothing. That is not the way it works, they have to deliver against the agreed milestones. Some of these debtors are entrepreneurs.
Deputy Kieran O’Donnell: Look at it from the ordinary person’s viewpoint. When an ordinary person has a mortgage, the bank does not pay them to keep the mortgage going and enable them to come out of the slump until they get a job.
Mr. Brendan McDonagh: The difference is that people have a mortgage on their residence, but what NAMA is dealing with is a business. The people who can manage the business and add value are paid. One the Deputy’s point that without NAMA a number of these people would have been set aside and have nothing, the reality is that only those in the insolvency profession would be paid to manage the assets and they might not be able to deliver the best value in the long term. There is a trade off.
Mr. Frank Daly: Absolutely, I can fully understand it and NAMA and the board of NAMA are fully conscious of that. In some ways, the Deputy hit the nail on the head, because ultimately the benefit for the taxpayer is that NAMA gets the best possible return on these assets and that is where the claw-back, to which Deputy O’Donnell referred, comes. If by using the debtor to work the assets for four, five or seven years, and ultimately NAMA gets a better return, I think that is the ultimate claw back for the taxpayer. It is not that the debtors are queuing up to work with us, we take a decision in every single case as to the value of the particular debtor in terms of working the portfolio, as opposed to taking other action, which might involve sending in a receiver.
I now wish to comment on the sensitivity of taxpayers to this issue. I hear it from my friends and family and when I talk to people, and it is the one subject that continuously comes up, and it is probably one of the areas where we feel we have the toughest decisions to make. However, we make them on the pragmatic basis that this ultimately will get a better outcome for the taxpayer.
Deputy Kieran O’Donnell: I have two points. Could a situation arise where a developer having found a financial institution to re-finance his portfolio, negotiates with NAMA to take over the loans at the carrying value as distinct from the actual value, and works on the portfolio for NAMA and gets €200,000 a year? By the end of the five years he will have got €1 million in taxpayer’s money for managing it and it has kept his business alive, in other words, his business has been subsidised to the tune of €200,000 a year. In that situation, if the deal involved the recoupment of the full management fee, would the taxpayer deem that to be fair? Following the enactment of the NAMA legislation, the original developers who went into NAMA were able to use NAMA as a vehicle to park the loans and come out the other end. Could the scenarios I have outlined, and what public representatives are getting at the doorstep, arise?
Mr. Brendan McDonagh: Under section 172 of the National Asset Management Agency Act 2009 there is a prohibition on NAMA selling assets back to a defaulting debtor. If he was still a defaulting debtor, NAMA could not do that. That is not to say that if NAMA was offered a very good price for the portfolio in which instance a third party approaches us because they want the portfolio and having sold it to them, they re-employ the debtor, there is nothing we can do about it. That is an eventuality that could happen.
Mr. Frank Daly: We have a clear policy also in regard to loan sales, that NAMA will make the running and NAMA and not the debtor will run any loan sales. The debtor will not be in charge of that process. That is an issue that has come up, in the sense that one or two debtors have tried to do it and we have a very clear policy that this is a no. It is fine for a debtor that some party might be interested in his portfolio but NAMA will make the running.
I will also comment on the three debtors who are in receipt of a salary of €200,000. Are the witnesses aware that is more than the salary of the British Prime Minister and is the same as the Taoiseach’s salary?
The witnesses said that each case is examined carefully to determine whether it is beneficial for NAMA to engage the debtor to work the asset in order to realise the value of a given portfolio. To echo Deputy O’Donnell, do the witnesses understand how somebody from the outside looking at that, sees it as a case for the debtor of “heads you win, tails you will”, while the public does not view a developer who is a debtor in NAMA as a person of great acumen or effectiveness in his task? To be in NAMA is commonly understood to be a measure of underperformance, if not failure. Mr. McDonagh stated that three months ago NAMA underwent an organisational change and established a new section for asset management. For the purposes of clarity, will he explain what it is the debtors, some of whom are in receipt of large sums of money, do that cannot be done by the 194 staff of NAMA?
Mr. Brendan McDonagh: What we are talking about here in terms of the asset management division is that in cases where the asset has already gone into receivership or the existing debtor does not have a huge capability to deliver on the project, we usually make use of the asset management division to identify opportunities in the market where there is a proven need and demand and it makes commercial sense for us to find a joint venture partner to work with NAMA. This may mean developing a certain site or building an office block where there may be a pre-let from a foreign direct investment company which wants 100,000 sq. ft. of new office space in the centre of Dublin in 18 or 24 months’ time. The issue then is whether this can be delivered and this would usually originate with the IDA. It would come to us and say a company with a small operation in Ireland is thinking of expanding and needs 100,000 sq. ft. and ask if we have 100,000 sq. ft. That is the type of operation involved.
Deputy Mary Lou McDonald: I understand that. In certain circumstances, including where NAMA takes the view that a debtor is not equipped or perhaps willing to work alongside it, the asset management division will kick in. What does debtor A on a salary of €200,000 have that favours him to carry out such tasks on NAMA’s behalf, rather than having the work done in-house, if one likes?
Mr. Brendan McDonagh: As the Deputy is aware, there are few debtors - the figure is three - where we have agreed to allow them €200,000 out of their rental income. The debtors in question manage assets of approximately €6 billion. Therefore, they have a proven expertise in developing an asset or managing an existing asset to maximise the amount of income so that it increases the value of the asset over time. They have a particular knowledge and expertise in a certain sector. What the asset management division aims to do is deal with those debtors or assets which are not in that category, that is, the debtor is no longer in place or no longer has the capability to deliver.
Deputy Mary Lou McDonald: In that case, is Mr. McDonagh saying there is a deficit in NAMA’s asset management division? While I understand he is referring to large portfolios, to the ordinary five-eight following to these proceedings, the figures are unimaginable and utterly staggering. We all understand, however, that Mr. McDonagh is referring to very sizeable sums.
Mr. Brendan McDonagh: The majority of NAMA staff are involved in managing the two thirds of debtors who are working with us. Effectively, they are fulfilling what is almost a banking function by trying to get debtors to sell the asset and use the proceedings to pay down his debt. This is intensive work. An asset management division is geared more towards dealing with the property aspects of the portfolio. It is property people as opposed to banking people who are more involved in that side. They would have an expertise in what it takes to get the planning to improve a certain site or what one must do to find a joint venture partner to work with NAMA and put in some equity or build a certain type of building for which there is proven demand. A slightly different set of skills is involved. We need to have a range of skills in NAMA, including people with banking and legal expertise.
Mr. Brendan McDonagh: However, they are now operating in a controlled way with oversight by NAMA to make sure they are delivering in terms of managing the assets appropriately. We are maximising the value we can achieve with the assets.
Deputy Mary Lou McDonald: We are focusing on the asset management side, although I understand NAMA has a range of functions. In short, Mr. McDonagh appears to be saying that NAMA is paying a group of debtors and that they have some level of superior skill or inside knowledge to those directly involved in the asset management division. If that were not the case, why would NAMA pay any of them €200,000 to manage a portfolio of any size? It would strike me as sensible for this function to be carried out by people who are fully and directly under the control of NAMA, in other words, employed by the agency. Can Mr. McDonagh not see that is a reasonable proposition?
Mr. Brendan McDonagh: I see where the Deputy is coming from but I have to explain the business context. There are 35,000 individual properties in NAMA, which employs 200 people. The agency would probably need 1,200 people if it was to knock out all the debtors and try to manage the assets directly. Some of the debtors have specific knowledge of the assets and if they are prepared to work with us under particular circumstances, they are the best people to maximise the value.
Mr. Brendan McDonagh: The reality is that the debtors have specific individual knowledge of each individual asset. Starting today, it would take NAMA a long period to acquire this particular knowledge because it would be very difficult to replicate.
Mr. Brendan McDonagh: The debtors may have knowledge about a particular piece of land and what are the planning issues around the land. They have particular expertise in managing shopping centres and the development of offices. NAMA might have a few people who have expertise in those areas but they would not be able to spread themselves across the whole portfolio of 35,000 properties.
Deputy Mary Lou McDonald: While I understand that is a huge undertaking and NAMA needs to have sufficient staff, it does not strike me as anything extraordinary to have a knowledge of planning matters. It may be an area of expertise but it does not involve splitting the atom. If there is a problem in the staffing or resourcing of NAMA, that is one thing and if Mr. McDonagh can identify some extraordinary circumstance where a debtor has some extraordinary insight or level of skill, that is another thing. I am also aware that NAMA is dealing with a large number of properties and this is a major task. However, I am struggling to see any defensible rationale for paying a debtor €200,000 and holding his hand through the bad times, courtesy of the taxpayer, when the agency has a complement of 194 staff. Mr. Daly specifically offered up the fact in his presentation that he has a new asset management division. As a taxpayer, I would expect that the asset management division would do what it says on tin, namely, manage the assets. I suspect that no more than other committee members the public does not appreciate the notion of any debtor - I accept there are only three of them - being in receipt of €200,000.
Mr. Frank Daly: There may be a bit of confusion about the role of the debtor. The alternative is that we would get all the debtors out of the picture, put 1,200 staff in NAMA and create a massive quango. I am not sure anybody wants that, apart altogether from the practical difficulties of almost going back and starting from scratch with the managing-----
Mr. Frank Daly: I did not say Deputy McDonald suggested it but one must look at what the debtors are managing. They are managing businesses, in some cases they are businesses of €1 billion, €1.5 billion or even €2 billion. They are managing hundreds of employees and in some cases it could be thousands. They are managing hundreds of properties, the acquisition of planning permission, construction projects and the day-to-day building and sale of properties. The asset management division we have created has the primary focus of identifying some of those portfolios or properties where we could build them out and enhance their value. The debtors will have an input into the process but it will be led by our asset management division.
Side by side with that, the debtors, whether they be the three that are being paid €200,000 or the others that are being paid much less, have to manage the day-to-day business of every one of the debtor connections we have. In some cases those are extraordinarily big businesses. For NAMA to ever contemplate getting involved in the day-to-day running of those, as opposed to the oversight, would result in the organisation becoming a huge one. We would also have to build almost from scratch in terms of those day-to-day skills and we would have the downside of losing much of the corporate memory that is with the debtors and that is of value to NAMA.
I understand where Deputy McDonald is coming from. I understand also where Deputy O’Donnell was coming from earlier but this is the reality of a commercial decision that we have to make. We have only another seven or eight years to work this out. We cannot afford to do anything that compromises that. In some cases that means the pragmatic – not very popular – decision, one we agonised over, of working with the debtors and in some cases allowing them to take a salary out of their rental income.
Mr. Brendan McDonagh: Effectively, they are individual assets where we believe that over time, because of issues such as improved planning – they relate in particular to our overseas assets not Irish assets – since their acquisition, when the assets are realised we should see a substantial profit over what we paid the banks for the assets in November 2009.
Mr. Brendan McDonagh: We have people internally within NAMA and we also talk to external valuers. We also get indications of expressions of interest from people who come to us and say they believe debtor A is in NAMA and he owns a particular asset in London, for example and they say that if the asset was put up for sale that they would be in a position to offer X amount for it. That is how we gain that type of knowledge.
Mr. Brendan McDonagh: I would not say that. The amounts are informed but we have taken a conservative view and that is why we have not recognised them in our accounts because we have not yet got that cash.
Deputy Mary Lou McDonald: I wanted to clarify the position because I was taken by the term “unclaimed gains”. That appeared to me to be something much more concrete. The amounts are informed but speculative.
Deputy Mary Lou McDonald: In terms of future trends, in order for NAMA to break even we envisage a modest level of growth in the economy. In his opening statement Mr. McDonagh made reference to a thriving domestic economy being necessary to lift the boat. What role does he see for NAMA in terms of its resources being potentially used as part of some form of stimulus package or investment package that might be brought forward by Government? Has anyone spoken to Mr. McDonagh about that? Has it been an issue NAMA has considered or, more to the point, that the Government might have raised with it?
Mr. Brendan McDonagh: In terms of NAMA, as we said to Deputy O’Donnell, what we are projecting is that there would be stable economic growth averaged at approximately 2% per annum between now and 2020. It is clear that NAMA is operating in a market where a lot of banks are trying to sell down at the same time. It is a very competitive market. We are also in a situation where very few banks are lending into the economy so we are trying to engage in a number of initiatives on that front. On the mortgage front we have offered an 80:20 mortgage initiative where we will defer taking 20% of the price for five years on the basis that we expect to get it back at the end of five years. On the commercial property front, very few banks are lending for the purchase of commercial property, which is why we are offering vendor finance. As the chairman has outlined, we see ourselves making approximately €2 billion worth of finance available to help develop our projects where there is proven demand and it makes commercial sense for NAMA to do so. We believe we can play a positive part in the absence of a fully functioning banking system. By making use of our resources we can help to increase the value of our assets while at the same time have wider benefits in terms of the money we can make available to revitalise the construction industry, which is in deep distress, and the overall economy.
Mr. Brendan McDonagh: The qualifying investor fund is a response to us trying to attract international capital into Ireland to buy assets. A number of the sovereign wealth funds and major pension funds do not want physically to own property, but they want to be able to invest in Irish property. They believe that there is an opportunity for them to make money over time. They want a vehicle that is known internationally and is tax transparent. That is why we have gone about setting up a qualifying investment fund which will be completely independent of NAMA. We are sponsoring the set-up of the fund on the basis that this international capital would buy shares in this vehicle, and that vehicle - the QIF- would start bidding for assets in the Irish market. It would not be restricted to bidding for just NAMA assets; it could also bid for other assets in the market. In the absence of bank finance, it is another mechanism to try to stimulate transactions in the market.
Deputy Mary Lou McDonald: Mr. McDonagh was asked earlier about the level at which NAMA had bought the assets. He said in his initial statement that there would have been little point in NAMA paying less than the long-term economic value of these loans. He went on to say that NAMA paid as much for the loans as was allowed under state aid rules, no more, no less. Therefore, NAMA paid the maximum it could pay.
Mr. Brendan McDonagh: At this stage the Commission is still auditing the figures. We bought the loans in different tranches from the banks, but in the tranches reviewed to date, the Commission has been happy with the valuations we have put on them. Until the Commission completes the process, I cannot definitively tell the Deputy, but I believe that we did this in accordance with European Commission approval.
Deputy Mary Lou McDonald: Does Mr. Daly think it is right that NAMA is exempt from the Freedom of Information Act? We have been promised that freedom of information provisions will be restored and extended. Does Mr. Daly think NAMA should be covered in those provisions?
Mr. Frank Daly: I have spoken on this, so perhaps I will reiterate what I said. I have a very positive view on freedom of information. NAMA is a commercial body and almost everything we have been discussing this morning would reinforce that view. We are operating in a very competitive market. We are competing with the other banks, which are deleveraging at home and abroad. We are competing and trying to sell property. We deal with private equity funds and sovereign wealth funds. The sensitivity of much of the information and data that we have is very important to get the best return for the taxpayer. My concern with extending freedom of information would be that nothing should put a constraint on us in terms of getting the best return for the taxpayer. However, I am at pains to say that this is a Government decision and a policy decision, as the Chairman pointed out. If the Government decides to apply freedom of information provisions to NAMA-----
Mr. Frank Daly: I have not had a particular conversation with the Minister, but we have made our views known to the Department of Public Expenditure and Reform, which I understand is the sponsoring Department.
Deputy John Deasy: It has been repeated in here six or seven times that the goal of NAMA is to get the best possible return for the taxpayer. Mr. McDonagh mentioned the 80-20 deferred payment initiative that NAMA has put together, which I understand is a deferred mortgage payment plan. He also said to Deputy O’Donnell that he expected the domestic market to increase by 20% by 2020. That was his estimate of the appreciation of the assets. NAMA began the 80-20 scheme a couple of months ago by selling 115 houses in three counties. At a speech a couple of weeks ago, Mr. Daly spoke about prices in Dublin levelling out and possibly increasing in some places. My question is this. Why is NAMA selling so many properties if we are at the bottom? If we are going to appreciate at 20% over eight years, then surely the taxpayer will get better value if we waited a little while and sold those properties at a later date. I understand NAMA has contingent liability and loans to service, but if that is the case and these are NAMA’s estimates, why does it not wait? If NAMA has massive housing banks, would we not be better off holding off?
I look at what banks and local authorities are doing. I got a response last week to a question I posed on how they are dealing with people in arrears. The Government is reissuing guidelines to local authorities and a new code is being put together. The banks are talking about parking mortgage debt for a period of time for individuals who have problems. NAMA has come up with this 80-20 initiative. Should it have held off before putting these houses on the market? If the witnesses believe there will be a 20% increase in the value of the agency’s assets, why do we not wait for a while?
Mr. Brendan McDonagh: We have a broken property market at the moment. We also have a broken capital market, because banks are not providing finance. One could certainly take the view that we should hold on to everything and sell it in 2018, 2019 or 2020, but we have to be realistic on the size of the market and what the market can absorb. The peak of the market, in terms of transactions, was reached in 2006 when every single bank was lending and both domestic and foreign banks were operating in the market. At that time there was only €3 billion worth of commercial property transactions in the market, while €4 billion was spent on land - much of it speculative - and about €40 billion was lent by the banks for residential mortgages. That means the market was worth about €47 billion. In 2011, according to the figures, there was only €200 million worth of transactions and €30 million was spent on land, while €2.4 billion was drawn on domestic mortgages last year. Therefore, the market in 2006 was worth €47 billion while the market in 2011 did not even reach €3 billion, so we have a completely different market.
Deputy John Deasy: I have a fair idea of what is going on. I read the newspapers and realise how bad it has become. The Government gives mortgage interest relief. It did so in the last budget and has brought in new schemes. I understand the position. Let me ask a different question. The 80:20 initiative was rolled out in May. How has it gone?
Mr. Brendan McDonagh: Of the 115 properties for sale, we have sold 45 worth approximately €9 million. These properties had been for sale for three and a half years and no one was interested in them . We are satisfied that 45 of them have sold. We believe it is all about giving confidence to the market and allowing people to trade at price levels that they are prepared to pay. The big issue - the Chairman made reference to it recently - is that we favour a price register for residential and commercial property because it would bring transparency to the market. There are still people who ask whether a given house sold for €200,000 or €170,000. It is still opaque and we support anything that will bring transparency. The purpose of the 80:20 initiative was to bring transparency to the market and get some transactions going. We did this on a pilot basis. We said we would do it for 750 properties. To date, we have launched 115. It is small scale.
Mr. Brendan McDonagh: No, our position is that if all these properties were sold today, we might get approximately €2.7 billion. We expect that figure to rise to €3.5 billion by the time we dispose of them between now and 2020.
Mr. Brendan McDonagh: Properties incur costs in terms of security, heating and so on. Many of our properties are apartments and there are no sales in this area. By and large, people are not interested in buying apartments. They are interested in family homes. Pending their sale, we are working hard to try to rent them. We have rented out more than 9,000 properties through our debtors, which is generating €90 million in annual cash flow, which was not being generated when we took over the loans.
Deputy John Deasy: What is the position on the commercial property register? Mr. Daly referred to the Property Services Regulatory Authority recently. Has NAMA been in contact with the authority with a view to publishing a commercial register?
Mr. Frank Daly: The authority is aware of our view. We have started with a residential register. My understanding is that it is due to be published sometime this year, although I am unsure of the exact date. We will apply the same logic to the commercial property register. The more transparency there is, the better because more knowledge will be available from an informed source. I realise there are many indices and tables with information on house prices and so on. However, this compiles data from official, believable and credible sources on the value of property in particular streets and locations. The system works well in the United Kingdom, including Northern Ireland, although I do not think it applies at street number level. It works successfully in the United States, as well in certain states. It is possible to search online to get the value of a particular property. Our view is that the more certainty people have about the way prices are going and what is being paid, the more likely it is they are to have confidence and engage in the market.
Deputy John Deasy: Has the model or roll-out of the 80:20 initiative worked well enough for NAMA to roll it out further? There were 115 houses initially and there was a 45% take-up. Will a larger number of houses and stock be included in this scheme?
Mr. Brendan McDonagh: At the start we envisaged that the scheme would apply to approximately 750 houses throughout the country. We launched it with 115 properties, mainly in Dublin, County Meath, the commuter belt of Dublin and Cork. We envisage extending it later this month with a further 100 or 150 houses. We will do it on a phased basis and believe it is working well. It has generated interest in property where there was none previously. The important point is that these are not apartments but family homes.
Mr. Brendan McDonagh: Our scheme is modest in the scheme of things. It is for someone looking for a starter family home. This is the market the scheme is aimed at; it is a particular type of market. Ultimately, the buyer will make the decision. He or she can either buy the house elsewhere or buy a house in the NAMA scheme. The initiative is modest and the purpose is to generate some confidence in the property market.
Deputy John Deasy: I understand the case of Battersea power station is in the High Court. Can NAMA provide an up-to-date position? I do not expect the deputation to comment on anything current, but what is the position on appointing administrators? With whom is NAMA negotiating?
Mr. Frank Daly: This question arose at the beginning of the meeting. Given that court proceedings are in train today and will continue for a further day or two, it is our view that we should not discuss it.
Mr. Brendan McDonagh: That issue was raised when the legislation was going through the Oireachtas. The advice of the Attorney General at the time which was raised in the Dáil debate was that constitutionally the legislation could not be extended. At the time there was an effort made to extend it.
Deputy Sean Fleming: Previously, we were discussing some of the larger NAMA debtors. Could debtor A approach NAMA and buy a loan from debtor B at a discount? Could debtor B then take over the loans of debtor C at a discount and could debtor C, in turn, take over the loans of debtor A? Does Mr. McDonagh understand my question?
Mr. Brendan McDonagh: Theoretically “Yes” but in reality “No” because we would ask debtor A where he had got the money and why could he not first pay off his own debts. Why would NAMA as a secured lender allow the existing debtor to increase his exposure-----
Mr. Brendan McDonagh: Such a plan would require the debtor to put up some equity and I ask who would give the debtor this equity. NAMA would be very interested to know who was providing this equity or whether the debtor was using equity which had not being declared to NAMA.
Deputy Sean Fleming: My point is that many of those who are NAMA debtors may be beginning to do well in other countries and they are happy to stay there but they might see an opportunity to come back to Ireland. This is the reason for my earlier question about the personal guarantees.
Mr. Brendan McDonagh: If the debtor has fulfilled his commitments to NAMA and he has fulfilled the legal agreements signed between us, NAMA does not do vengeance. We want the debtor to fulfil those commitments if he wishes to return to start again.
Mr. Brendan McDonagh: He is working with us and helping us to realise the assets so that we can pay down as much of his debt as possible. If he then starts a new business and does well in it - because anyone is allowed a new start - and he then wants to buy assets, that is life.
Deputy Sean Fleming: For example, if NAMA is trying to come to an arrangement with a debtor who wants to clear some of his loans with NAMA and he offers a profit to NAMA to the amount of what the loan cost NAMA to take over. Does NAMA just negotiate with that debtor? For instance, if NAMA has taken over a debt of €10 million for €5 million and if that debtor subsequently offers NAMA €7 million would this be accepted?
Mr. Brendan McDonagh: If the value of the assets was still only €5 million today and he offered €7 million as a settlement of his debts, this is common practice in banks all over the world. It is the commercial practice. If the assets were clearly worth more than €7 million then NAMA would not accept that offer of €7 million.
Mr. Brendan McDonagh: There are two points. The guidance note issued by NAMA is on our website. It states that assets should be offered on the open market. For example, a debtor approaches NAMA and wishes to make a settlement and, for example, he says he has resources and he has borrowed €10 million and the assets are worth €5 million and he offers NAMA €7 million and he supplies a full up to date statement of his affairs. He declares these are all his assets and that he wants to be out of NAMA. If NAMA regards his offer of €7 million as commercially viable, then we would settle. This would be the best option for the taxpayer. If he had assets of €10 million we would not accept an offer of €7 million.
Deputy Paschal Donohoe: I have two brief questions. I refer to figure 3.4 on page 51. This shows the business plan completion status by group. NAMA has helpfully provided a breakdown of all the debtors by average nominal debt per debtor. My question is about the debtors with a gross debt in excess of €1 billion - there are 12 of them. Has NAMA agreed business plans with all those 12 debtors?
Mr. Brendan McDonagh: Yes, all the major debtors have provided business plans. We have received approximately 791 business plans which we have analysed. Only in very few cases did NAMA agree with the debtor’s business plans proposals.
Deputy Paschal Donohoe: My second question relates to the connection management agreements, CMAs, which are described in page 63. Mr. McDonagh said that at the end of 2011, seven debtors had signed CMAs. How many have signed up to now?
Mr. Brendan McDonagh: I do not have those exact figures to hand but I will revert to the Deputy with that information. There could be 15 with a full restructured debt. Letters of support are effectively a step down and 435 debtors are in this category. Disposals account for approximately 350 debtors and these are under way but yet to be completed. These make up the figure of 800.
Mr. Brendan McDonagh: Yes. Some of these debtors are very complex. For instance, a debtor may have a couple of billion of euro worth of debt. One debtor’s debts are currently being restructured. He has almost €2 billion worth of debt and the legal documentation has to cover nine jurisdictions. This takes time and we want to get it right.
Deputy Paschal Donohoe: A constant theme of the questions from my colleagues has been the concern that there can be one set of rules for the ordinary people we represent and another set of rules for people who are at the top, the people whom NAMA is dealing with. This was crystallised in the discussion about the conclusions of NAMA’s asset searches which discovered assets which had not originally been declared to NAMA. This means individuals had broken an oath given to NAMA. I urge NAMA to do everything possible to progress the legal work in order to bring these investigations to a conclusion. I refer to individuals who have forgotten to declare properties and commercial assets such as parking spaces and crèches and race horses or a horse of some type. These are cases which cause concern and I know Mr. McDonagh shares those concerns.
Mr. Brendan McDonagh: I assure the Deputy I will address those concerns. NAMA has a policy of being tough but fair. However, if a person is disingenuous with us, we adopt a completely different attitude. We know what we have to do and we are aware of our responsibilities. I assure the Deputy that if people knowingly provide misinformation we will pursue them.
Mr. Seamus McCarthy: I wish to return to the point made by Deputy Fleming at the outset about the delay in the completion of the financial statement. I hope and I think NAMA also hopes that we have dealt with all the key issues arising in the first two years and that there will not be a similar delay next year. We will do everything possible and I am sure we will receive the same co-operation from NAMA. In planning for the 2012 audit we must also be mindful of the need to carry out the section 226 assessment which will be carried out some time in the beginning of 2013 and this will be factored into the plans. This will ultimately result in a report by me which will be presented to the Dáil.
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