Questions to Nama – Public Accounts Committee, Wednesday 26th October 2011.

Extract 3.

Deputy Eoghan Murphy:     I appreciate the opportunity to make another point. I wanted to ask a couple of questions in regard to risk management and they tie-in, in some way, to the targets we have for reducing the NAMA debt, paying it down between now and 2019. Is there a risk management committee?

Mr. Brendan McDonagh:  Yes.

Deputy Eoghan Murphy:     How many times did it meet in 2011?

Mr. Brendan McDonagh:  It generally meets bi-monthly but it can meet more often if there is an issue involved.

Deputy Eoghan Murphy:     Does a member of the board chair that committee?

Mr. Brendan McDonagh:  Yes, it is chaired by Dr. Steven Seelig.

Deputy Eoghan Murphy:     I refer to upward only rent reviews for existing leases, the proposed legislation and the potential 20% hit for some of the properties in the portfolio. What is the committee doing in regard to the legislation?

Mr. Brendan McDonagh:  In terms of—–

Deputy Eoghan Murphy:     In terms of the possible change.

Mr. Brendan McDonagh:  Not only the risk committee but the board is aware of the potential financial impact and we have written to the Minister with regard to the impact on the NAMA portfolio. A legislative change is driven by a Government decision and there is nothing we can do about it because it is an extraneous factor.

Deputy Eoghan Murphy:     Was the propose of that letter to the Minister to recommend against bringing in that change?

Mr. Brendan McDonagh:  No. It was to point out to him that if the Government is going to make the decision, there is likely to be a financial impact on the NAMA portfolio and it is our duty to refer to the possible financial impact.

Deputy Eoghan Murphy:     Does that mean we would have to review these targets for paying down the debt?

Mr. Brendan McDonagh:  If there was widescale change and one applied 20% in terms of the NAMA Irish assets, then it could potentially be couple of billion euro. That is a couple of billion we would not be able to recover.

Deputy Eoghan Murphy:     So we would not be able to meet these targets.

Mr. Brendan McDonagh:  We would not be able to pay back all the NAMA debt. One might meet one’s near term targets but when one has sold all the assets, there will be a difference between the amount of bonds outstanding and no assets left.

Deputy Eoghan Murphy:     My understanding is that it would probably require a renegotiation with the troika.

Mr. Brendan McDonagh:  At that stage, it depends on where Ireland is. If Ireland gets out of the troika programme by the end of 2013, which is the objective of Government, then, effectively, it will not involve the troika.

Deputy Eoghan Murphy:     I am not a property expert but is there a way we could draft the legislation so that the large investment vehicle properties in the NAMA portfolio would not come under the removal of this upward only review for existing leases but that small businesses or shopowners would be included? I have been trying to think of how one could draft legislation in that regard.

Mr. Brendan McDonagh:  The report in the newspapers recently, which I am sure the Deputy saw, said that it would be based on a proven inability to pay and that if one was a big multinational, it would be very difficult to prove inability to pay. That would benefit smaller bodies with trading difficulties. It is up to the Government as to what way that will be dealt with. There might be a sensible way to go about it.

Deputy Eoghan Murphy:     If it were to go that way it would be preferable from NAMA’s perspective.

Mr. Brendan McDonagh:  The Government will make that decision. My personal view is that would not be unreasonable.

Deputy Eoghan Murphy:     Continuing with risk management, the current proposal is to change bankruptcy laws and reduce the term to five years. My understanding is that will be enacted next year. How does that affect NAMA with regard to the number of debtors being dealt with?

Mr. Brendan McDonagh:  At present a number of debtors are probably looking at overseas bankruptcy laws and considering moving their centre of main interest to the UK and trying to get out in 12 or 18 months. That is not easy to prove either and it is not as straightforward as people think. Currently somebody is facing bankruptcy for a minimum of 12 years, so moving it to five years would be sensible for the economy in the overall national context.

Deputy Eoghan Murphy:     I agree that the term should be shorter. My point relates to the debtors who are here and either not dealing with NAMA or reluctantly engaging. Once the term is changed to five years, possibly next year, by 2017 those people could be back in business, although NAMA would still be in operation and taking the hit for the taxpayer.

Mr. Brendan McDonagh:  There will not be too many debtors waiting until 2017 for a decision to deal with us. Most of the decisions on the debtors will be made by the end of this year and early next year. There will be a decision on which to work with and by 2017 there will not be much difference.

Deputy Eoghan Murphy:     So a change in the bankruptcy laws is not being taken into NAMA’s calculations.

Mr. Brendan McDonagh:  Not at present but we will operate the process on the way things are. If people next year decide that with new bankruptcy laws they will declare themselves bankrupt, they may be out of commission for five years rather than 12 years. People make that assessment based on where they are in life. If a person is 40 it might be worth going bankrupt as that person could get back in business by the time he or she is 50. If a person is 50 and facing bankruptcy, there might be a different perspective. Many of these people would admit to over-borrowing but that does not necessarily mean they are bad people. These people may be entrepreneurial in nature and come back. The bankruptcy laws are a call for the Government but on a personal level, I believe they should be examined.

Deputy Eoghan Murphy:     I agree and believe the term should be shorter than five years. Is it correct that NAMA is dealing with approximately 180 debtors?

Mr. Brendan McDonagh:  The top 188 debtors would make up close to €62 billion par debt.

Deputy Eoghan Murphy:     NAMA would know these people, their age profile and circumstances.

Mr. Brendan McDonagh:  Yes.

Deputy Eoghan Murphy:     Would it not be prudent to look at them now and try to identify those who may be at risk of declaring bankruptcy under the new bankruptcy laws next year? Any impact on the NAMA business plan would be indicated.

Mr. Brendan McDonagh:  The reality is that those people have made assessments and we have already examined whether debtors want to co-operate with us. Most people want to co-operate and have a future for all sorts of reasons. They believe they can reinvent themselves and create a life. They want to work out the assets. Others do not care and would think that they borrowed money and it is gone. Receivers would be appointed in that case. We would make that assessment, as would others, but much will come down to individuals deciding that there is nothing in it.

Deputy Eoghan Murphy:     It is not something the risk committee is considering.

Mr. Brendan McDonagh:  No. All we can deal with is the current position of a debtor. It is more appropriate for the credit committee which is looking at the cases and assessing whether the debtor will use credit appropriately.

Deputy Eoghan Murphy:     My last point stays on the risk issue. There is movement by Lloyds and RBS to offload Irish assets quite quickly. How much is involved in this in terms of the combined loan books?

Mr. Brendan McDonagh:  One can consider the public information that is available. With Lloyds there is €30 billion par and the last figures I have indicate that it has taken approximately 56% provisions, which is like the NAMA discount. Effectively, it has approximately €15 billion of assets. My understanding of its accounts is that its portfolio of €30 billion par breaks down to €10 billion in construction and development loans, like the NAMA portfolio, a third is residential mortgage debt, and another third is SME-type lending, much of which is related to the hotel sector where there is quite significant exposure. With RBS I have heard rumours – although nothing officially – that the deleveraging target is approximately €15 billion par, and assuming a 50% write-down, that is approximately €7.5 billion. There are others operating in the market. ACC and Danske Bank are there with a couple of billion euro in their portfolios. We should not forget that Anglo Irish Bank is deleveraging the Irish market at the same time. The deleveraging market is very competitive.

Deputy Eoghan Murphy:     If the banks in Europe are capitalised, some of the terms may mean they would have to get rid of assets in Ireland as well. We do not know what will happen. My concern is that the market will be completely flooded. Taken together, the loan book of those banks, before they make their own write-downs, would be greater than that of NAMA. How do we compete with that and not realise a further drop in the value of Irish assets here?

Mr. Brendan McDonagh:  That is something we constantly think about. We are watching what they do and they watch us. We are trying to be first up and best dressed, doing what we can to sell our portfolio. Ireland is a small market and when there is no lending and companies are withdrawing from the market, it is very difficult. The risk is to the down side.

Deputy Eoghan Murphy:     They are managing these assets by putting together geographical portfolio deals. They are managing to sell what they view as assets which are underperforming in Ireland. They are being packaged with other elements. That is working but we are not doing it.

Mr. Brendan McDonagh:  We are watching what they are doing in the market. They are not doing as much as the Deputy thinks.

Deputy Eoghan Murphy:     My understanding is they are about to do much.