Background

Ireland’s National Asset Management Agency was established to cleanse Irish banks of (largely distressed) land and development loans and restore confidence in the Irish banking sector. NAMA expects to purchase loans with a book value of approximately €81 billion for a consideration of approximately €40.5 billion (a figure which is acknowledged to be higher than the current market value of the loans). These figures are dramatic in the context of Ireland’s relatively small economy and the comprehensive nature of the powers afforded to NAMA reflects the complexity of the government’s proposed scheme.

Loans

The range of bank assets eligible for acquisition by NAMA is quite broad and potentially extends beyond development loans and related security.  It is not only distressed loans that transfer under the scheme. A significant portion of the loan books being transferred to NAMA is made up of performing loans (perhaps up to 25%). The geographical breakdown of the loan book is understood to be 66.3% in Ireland, 30.1% in Great Britain, 0.4% in North America and 3.2% in continental Europe. The loan acquisition process is now underway.

Banks

All credit institutions operating in Ireland were invited to apply to participate in the NAMA scheme. Allied Irish Banks, plc, Anglo Irish Bank Corporation Limited, Bank of Ireland, The Educational Building Society and The Irish Nationwide Building Society applied and were accepted into the scheme, on the basis of their systemic importance to the Irish financial system.

Valuation

A controversial aspect of the scheme is the transfer value placed on the loans transferred to NAMA. Using the concept of “long-term economic value”, NAMA determines a value that could reasonably be expected to be obtained in a stable financial system, when the current crisis in financial markets has passed. This valuation methodology implies that NAMA is paying a premium over the current market values of the loans.

Consideration

The consideration for the transfer of the bank assets consists of government-backed bonds issued by NAMA. The scheme also provides for the issue of subordinated debt securities, as a mechanism for achieving a degree of risk-sharing between NAMA and the banks. The proportion of the total consideration that will be in the form of subordinated debt will be approximately 5%. 

Powers

Once an eligible bank asset is acquired, NAMA “steps into the shoes” of the participating bank and as such, NAMA may exercise all the rights and powers of the transferring bank to pursue the original borrower. In addition, NAMA has a unique range of powers and tax exemptions to enable it to overcome legal and other impediments to the fulfilment of its functions.  For example, assets transferred to NAMA will benefit from a range of exemptions from certain rules of law that might otherwise invalidate loans or related security (such as registration requirements).

Foreign Jurisdictions

The laws of jurisdictions other than Ireland will govern a significant portion of the loan assets to be acquired by NAMA (over 30%) and the scheme includes special provisions to deal with these. If the law governing the transfer of the loan asset permits the transfer, then the bank is required to do all that is necessary to effect the transfer.  However, if the relevant governing law does not permit the transfer, then the bank is required to do all that is permitted under such laws to transfer the greatest interest possible in that asset to NAMA and to hold the asset for the benefit of and to the direction of NAMA under a trustee relationship.

Timing

The European Commission approved the scheme in February 2010 and NAMA commenced the process of loan transfers in March 2010, starting with the loans made to the most indebted borrowers.

Contributed by Stephen Keogh.