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

Extract 1.

Deputy Eoghan Murphy:     I thank Mr. McDonagh for his opening statement and the witnesses for coming to today’s meeting. I note from Mr. McDonagh’s statement that with the recent transfer of close to €2 billion, all of the loan acquisitions are now complete. Mr. McDonagh says the total portfolio is now at €74.2 billion and NAMA has paid €31.7 billion for that, and by the end of the fourth quarter of this year all loans will have been acquired, due diligence will have been done and all business plans will have been agreed. Is that correct?

Mr. Brendan McDonagh:  That is true for our major debtors.

Deputy Eoghan Murphy:     So, we are moving into a new phase for the agency. Would that be correct?

Mr. Brendan McDonagh:  Yes.

Deputy Eoghan Murphy:     Would this be the time to bring new members on to the board?

Mr. Brendan McDonagh:  That is a consideration for the Minister for Finance, with whom the power of appointing new members rests. The Deputy will be aware that a board member recently resigned so there is, currently, one vacancy on the board. That is a matter for the Minister.

Deputy Eoghan Murphy:     Has Mr. McDonagh made a recommendation to the Minister to bring new people on to the board?

 Mr. Frank Daly:  Chairman, may I answer that question?

 We have not made recommendations. The Deputy is probably aware that the board initiated a review of NAMA by Mr. Michael Geoghegan, who is a well known international figure. He was chief executive of HSBC and has direct and relevant experience in the type of operation in which NAMA is engaged. We took the view that we had reached the stage where we had taken all the loans across, which was a major operation, and, as the Deputy observed, we were now moving into a different phase of our operation. It was, therefore, timely to get someone to come in and look at NAMA. We asked Mr. Michael Geoghegan to give an objective assessment of the agency with a particular focus on reviewing the overall progress of the agency to date, ensuring that we had the requisite skill at senior executive level, and at the board, for the next phase of our work and that we had appropriate structural relationships between the board and senior management. We were delighted that Mr. Michael Geoghegan undertook to do this, and particularly grateful that he declined any fee for the work. That speaks volumes for his interest in and support for the recovery of the Irish economy. I know he is deeply interested in that. In terms of the structure of that exercise, it was agreed with Mr. Geoghegan that he would have full private access to each board member and senior executive, that he would provide a verbal briefing to the board on completion and that he would also provide a verbal briefing of his findings to the Minister for Finance. Mr. Geoghegan met with the Minister at an early stage in the process.

 It was agreed that Mr. Geoghegan’s findings would remain confidential. However, there are two issues I would like to address in that regard. It is important to point out that Mr. Geoghegan acknowledged the significant progress made by the agency. He was struck in particular by how far the agency had progressed without any significant crisis moments, as often accompanies undertakings like this in other countries. He was also positive about the skill set of the agency and its inherent capability to deliver on its objectives into the future. Mr. Geoghegan did make proposals in relation to skills and in regard to where the key strategic focus of the agency should be in the future. He has discussed these with the board and Minister, both of whom are currently considering them.

Deputy Eoghan Murphy:     Was Mr. Geoghegan asked by NAMA or the Minister to undertake the review?

Mr. Frank Daly:  We would have initiated contact at board level. I spoke to the Minister about this at an early stage and he was enthusiastic about it. He then met Mr. Geoghegan.

Deputy Eoghan Murphy:     Did NAMA ask the Minister to get some in to take a look at the agency?

Mr. Frank Daly:  The Minister had always indicated to me that he wished to have someone look at it. It was at the end of the day a mutual arrangement. We would have identified Mr. Geoghegan as a person who could do the review.

Deputy Eoghan Murphy:     Mr. Daly stated that Mr. Geoghegan had commented favourably on the significant progress made by the agency. He also said there would be significant changes in the structure of the agency. What are those changes?

Mr. Frank Daly:  I did not say there would be significant changes to the structure of the agency.

Deputy Eoghan Murphy:     No. That was stated by Mr. Geoghegan.

Mr. Frank Daly:  He suggested some areas where there could be structural changes and a broadening of skills, which suggestions we are currently examining.

Deputy Eoghan Murphy:     A member of the board recently departed stated on departure that Mr. Geoghegan had come in to review the structures of NAMA and that the result of that would be significant changes to the structure of the agency, which would be a watershed in the life of NAMA.

Mr. Frank Daly:  That was the opinion of one board member. The proposals are being considered by the board and Minister. I do not believe the outcome will be that stated by the former board member as referred to by Deputy Murphy.

Deputy Eoghan Murphy:     Is that former board member incorrect in terms of how he perceived what Mr. Geoghegan was at NAMA to do and what he was recommending?

Mr. Frank Daly:  Everyone has a different perception of a person’s presentation in a company. Mr. Geoghegan’s review of the agency is useful to the agency and Minister. It is being discussed by the board. Mr. Geoghegan was adamant that the most appropriate way to deal with his suggestions was, first, to have them considered by the board and then the Minister, which is what we are doing.

Deputy Eoghan Murphy:     Will Mr. Geoghegan’s recommendations be published?

Mr. Frank Daly:  The understanding with Mr. Geoghegan, and the basis for his undertaking the review, was that his recommendations and analysis would be confidential. He has been at pains to remind us in NAMA that that was the basis on which he engaged in this exercise. 

Some of the suggestions put forward by Mr. Geoghegan were internal procedural ones, which are matters for the executive and board. Obviously, if there are any changes of significance they will emerge following consideration of the review by the board and Minister.

Deputy Eoghan Murphy:     As I understand it, Mr. Geoghegan made a number of recommendations. Does Mr. Daly support all of those recommendations?

Mr. Frank Daly:  I would have no great problem with most of them. There are one or two which I would like to discuss with my board colleagues and the Minister. I have already discussed these with Mr. Geoghegan, who fully accepted that they are only suggestions based on his discussions over a fortnight with members of the board and executives. The board discussed fully the suggestions put forward. Mr. Geoghegan fully accepted these were issues for discussion and that someone coming into the agency for a fortnight would not necessarily get everything right. It was a useful review, one which will be valuable to the agency in the future.

Deputy Eoghan Murphy:     Can we expect significant changes in the structure of the agency?

Mr. Frank Daly:  The Deputy can expect some changes to the structure of the agency. However, if he is speaking of structural changes in the sense of the legislation behind NAMA, Mr. Geoghegan did not make any suggestions in that regard.

Deputy Eoghan Murphy:     That is not what I am speaking of. Perhaps Mr. Daly would comment on what structural changes will take place.

Mr. Frank Daly:  I would prefer not to. As I stated, it was agreed that Mr. Geoghegan’s recommendations would be confidential. They are currently being discussed by the board and considered by the Minister, which is the appropriate way to deal with them.

Deputy Eoghan Murphy:     I understand that the concern was expressed in the review that should Mr. McDonagh leave the agency there would be a significant loss to NAMA in terms of institutional knowledge gained since its inception and that recommendations were made to put in place something for a potential successor should Mr. McDonagh leave any time in the near future.

Mr. Frank Daly:  I hope that Mr. McDonagh has no intention of leaving.

Mr. Brendan McDonagh:  I would not leave.

Mr. Frank Daly:  Mr. McDonagh might perhaps change his mind after three hours here. I fully agree that Mr. McDonagh is hugely invaluable to the agency. It is the responsibility of any board, in particular the chairman of a board, to ensure there is a succession plan in place. That is not a new idea in NAMA or a matter that needed review. We have had that in mind for some time. It is good corporate governance to have that in place.

Lest Mr. McDonagh gets nervous, we are not putting someone in—–

Deputy Kieran O’Donnell:     That is a vote of confidence for the CEO from the chairman of the board.

Mr. Frank Daly:  It is absolutely a vote of confidence. What we are doing is good prudent management and corporate governance.

Deputy Eoghan Murphy:     It was stated following the review by Mr. Geoghegan that NAMA had too many accountants on its board.

Mr. Frank Daly:  That was a headline in one of the newspapers, which I saw. Deputy Murphy is dragging me in – I know where this is going – to talking about the recommendations of the Geoghegan review, which I do not want to do. In fairness, Mr. Geoghegan engaged with us on the basis that his recommendations would be confidential.

Deputy Eoghan Murphy:     I will step back from that issue.

Mr. Frank Daly:  In case there are accountants in this room – I am sure there are – I did not hear Mr. Geoghegan say to us at any stage that there were too many accountants on the board. Obviously, Mr. Geoghegan had views on where NAMA should be going in the future, all of which are being discussed by the board and considered by the Minister.

Deputy Eoghan Murphy:     How many members are on the board of NAMA?

Mr. Frank Daly:  Nine.

Deputy Eoghan Murphy:     How many of them are accountants?

Mr. Frank Daly:  Three. Previously four members of the board were accountants.

Deputy Eoghan Murphy:     The figures I have are that previously five members and currently four members of the board are accountants. Does that include Mr. McDonagh?

Mr. Frank Daly:  Mr. McDonagh’s background is in accounting. The CEO is an ex-officio director. Of the non-executive directors, three are accountants. Previously four of the non-executive directors were accountants. Mr. Stewart was an accountant.

Deputy Eoghan Murphy:     Were there previously eight ex-officio directors?

Mr. Frank Daly:  There are nine members on the board, including two ex-officio members, Mr. McDonagh as CEO and Mr. John Corrigan, who is the chief executive of the NTMA. As such, there are seven non-executive directors, including myself as chairman. Of those seven, three are accountants and accountants with other experience also.

Deputy Eoghan Murphy:     Does Mr. Daly believe the board comprises enough expertise in terms of managing assets and property portfolios?

Mr. Frank Daly:  I believe a board should always comprise a wide range of disciplines and experience. Leaving aside the Geoghegan review, one of the people with a particular discipline has left. There is a vacancy and it is an opportunity to have somebody with what I would not necessarily call property experience. At the end of the day, we need somebody who is experienced in what we are at, which is the management and the disposal of assets, and who has a knowledge of the market and workout I suppose. That is the sort of skillset. I would not like the Deputy to think there is not a wide range of skills on the board. I believe there is. When one looks beyond the board to the senior management team and the 200 people in NAMA, there is a wide skillset and experience in banking, finance, legal, property and asset management. I would put that all together as a team that is working in NAMA. There is an opportunity for the Minister.

Deputy Eoghan Murphy:     Is there anyone particular in mind to fill that gap?

Mr. Frank Daly:  Obviously, I would always think about names when there are vacancies but I would keep them to myself and for my discussions with the Minister.

Deputy Eoghan Murphy:     Has Mr. Daly made recommendations as to who might be appointed in place of—–

Mr. Frank Daly:  No. I have not made recommendations.

Deputy Eoghan Murphy:     To continue with the opening statement, Mr. Daly sought clarity in regard to the priority for NAMA in respect of the loans, the outstanding debt and the pursuit of debtors. Section 10(2) of the NAMA Act states that NAMA is required to operate so that it obtains the best achievable financial return for the State. There has been some debate recently as to what that means. If we go back to the foundation of the agency, the former Minister, the late Brian Lenihan, said that the amount a borrower owed would not change because of the transfer of the loan from the bank to NAMA. Recently, a communications company speaking on behalf of NAMA said that the priority of NAMA is to recover the amount paid for the loans. Indeed, developers have said publicly that they will pay back what NAMA paid and nothing else. There is a bit of conflict there as to whether NAMA is pursuing the €70 billion plus or the €30 billion plus. It is difficult to resolve this.

Mr. Daly said NAMA’s minimum target is to recover what it paid for the loans. Indeed, he has plans to do that and they are set out in the report taking us to 2019 when 100% of the NAMA debt will be paid down. Will NAMA get anything back beyond the minimum targets?

Mr. Frank Daly:  It is in Mr. McDonagh’s statement.

Mr. Brendan McDonagh:  The reality is there is €74 billion worth of debt and we have paid €31.7 billion for it. The valuation methodology basically resulted in the value of the property being equal to the value of what was paid for the loan. If one looks at the value in terms of securing the loans, that is what it was worth by reference to November 2009. Obviously, we would have taken a substantial impairment in 2010, as the Deputy will have seen, as a result of fall in asset values.

I have said before that we will pursue debtors for the maximum amount we can. If they have unencumbered assets and have done asset transfers, we will pursue those to get them back on top of selling the assets over time to get that amount of money back.

In our experience of having gone through almost €27 billion by value of the €31 billion we paid for the assets in terms of debtors business plans, and we have done a number of things like asset searches in terms of debtors, there is no pot of gold out there that we have found to date, that is, that there is a huge amount of assets in addition and that if one sold all the properties and used the money to pay off the loans, these developers have a huge amount of money syphoned off. There will obviously be exceptions where guys have but from our experience to date, there is not a huge pot of gold out there.

However, what one is looking at in terms of NAMA is that we are in a very depressed economic cycle at the moment. Asset values overseas have recovered substantially from November 2009 and we are doing well in terms of those properties and are achieving more than what we paid for them. Obviously, asset values in Ireland have gone down since November 2009. Members will all see the indices. They are down about 20%, whether one looks at the commercial or the residential.

The reality is that over the life of NAMA, if we get economic recovery in Ireland and in Europe, and given that 93% of our assets are in Ireland and the UK which are the two main markets, then effectively one would expect that when one looks at the asset values today compared to what one can realise over time, and on the basis that one can realise them over time because NAMA is supposed to have a seven to ten year life, one would expect that those asset values would hopefully recover and one would get back more than what we paid for them.

In terms of debtors, we would pursue debtors to get back every single penny, as I said in my statement, but if it comes to a point where one knows the debtor has nothing left, why would one, on behalf of the taxpayer, bring a guy to court where one would just be gratuitous and waste taxpayers’ money when one knows he has no assets left. If he has assets, and we understand he has assets, we will pursue every single penny.

Deputy Eoghan Murphy:     I see plans for debt reduction targets. They are the minimum targets NAMA hopes to achieve but I do not see any plans for the best achievable targets. I do not see any plans for doing better than that. Mr. McDonagh talks about incentivising developers but the reality is that if one incentivises a development to help NAMA achieve more than what it paid for the loan and the incentive is that he makes a profit on that, it is not really a profit if NAMA still intends to pursue him for the rest of the debt for which NAMA paid the banks, unless it is admitting that it will not pursue him beyond that. If he achieves a greater target for NAMA than what it paid for the loans, NAMA will pay him a profit and say “Thank you”.

Mr. Brendan McDonagh:  No. Effectively, the way things are set up is that the amount of incremental income that a potential debtor could earn would be quite small. We generally set the targets up to around 10% above what the value of the properties are and when they achieve above that, effectively 90% of any excess of that comes to NAMA and up to 10% goes to the debtor.

Deputy Eoghan Murphy:     Does the debtor pay off the remainder of the loan? What is the profit for him?

Mr. Brendan McDonagh:  It could potentially be a profit for him but, effectively, if he helps us to achieve greater value for the assets, the alternative for us is a cost benefit analysis if one is trying to run a commercial business. If the guy brings value to managing the assets and helps us to achieve a greater return, that is in the best interest of the taxpayer. That is the commercial objective of what we are supposed to do. If he is not, then we appoint receivers. When we appoint receivers, effectively, the receivers have no knowledge of the assets and they are very expensive. We must have this trade off the whole time in terms of achieving the best return for the taxpayer.

It is important to understand that, effectively, if a debtor has borrowed €100 million and the asset is worth €50 million and one can get €60 million back over a number of years, that is a lot better for the taxpayer than just getting €50 million. We are always pushing for the highest amount we can get back.

Deputy Eoghan Murphy:     NAMA will not pursue that person if he helps it to make a profit on what it paid for the loans from banks.

Mr. Brendan McDonagh:  Provided he has fully co-operated with us and he has done what we asked him to do. If he has not done so, then he gets nothing.

Deputy Eoghan Murphy:     If he helps NAMA to achieve a profit, it will not pursue him any further.

Mr. Brendan McDonagh:  Not where we have captured the majority of the actual income that could be potentially be realisable. When we look at the actual assets today, the danger, to be frank, is that if the markets stay as they are, we will not recover what we paid the banks for the assets because of the difficult economic conditions. One has to look at it in the round of actually working out the assets over seven to ten years.

Deputy Eoghan Murphy:     Is NAMA still planning to make a profit? Mr. McDonagh mentioned the market being down.

Mr. Brendan McDonagh:  Yes. The market is at a point in time. The history of markets has been that they recover. The question is where we will sit when those markets recover. We have to make these decisions every day. If it is a good asset, does one sell it today or does one believe one should hold it for 12 months and maybe get a better price? The board, in its own policy which is published on the website and in its annual report, is, effectively, that we are not into speculation and the view is to try to take a neutral view on the markets. The markets are the markets and they ultimately determine what one will get for the assets.

Deputy Eoghan Murphy:     The market is down 20% or thereabouts since 2009 when the loans were secured and by 2013 NAMA hopes to have paid back 25% of NAMA debt paid down – €8.1 billion. Is that still expected?

Mr. Brendan McDonagh:  Absolutely, and we have plans to achieve that. In headline terms, to pay off €7.5 billion, which is our bottom line cash target, we would have to generate just over €9 billion in sales because in the meantime we have to pay bond interest on the bonds we have issued.

Deputy Eoghan Murphy:     What percentage of those sales come from overseas assets?

Mr. Brendan McDonagh:  Probably close to 70%.

Deputy Eoghan Murphy:     It would be correct to say that NAMA is offloading the portfolio of overseas assets before coming to the Irish portfolio.

Mr. Brendan McDonagh:  The reality is that where the liquidity and demand are. As the Deputy will be aware, there is no huge demand for Irish assets in the residential sector, where we have a €4 billion exposure.

We have noticed things picking up. There were about 25 transactions a month during 2010 in terms of house sales. The first nine months of this year have averaged about 100 units per month. It is not substantial but it is four times more than what it was in 2010 because people perceive there is value. As the Deputy will be aware, a lot of people are sitting on the sidelines and wondering when is the right time to buy. That is reflective of us working through the business plan process with the debtors.

We need to tell them they will not get €400,000 for a house any more because such prices are at 2007 levels. People were able to do that for three or four years because the banks did not want to do anything about it. However, we tell people a house is worth €200,000 at which is the price it is put on the market. Our experience has been that when we permitted developers to reduce prices, sales took place. The market is very price sensitive.

On the commercial side, even at the peak of the market in 2006, 99 transactions took place, even though everyone thinks that year was knock the lights out type of territory. There were €3 billion worth of investment transactions in the Irish market but they were all Irish buyers and we know the reason, namely, because they were all getting money from the banks to buy assets from each other. In 2010 there were about €325 million worth of commercial property transactions but only about €79 million involved German funds which came into the Irish market. In the first six months of 2011, €150 million worth of transactions took place, €100 million of which came from NAMA when we sold the Google building.

Last year 1.4 million sq. ft. of office space was rented out in Dublin. This year approximately 1.6 million sq. ft. could be rented. There are underlying factors which show that there is starting to be a shortage in what we call grade A office space in Dublin. Some of our sites we have planning permission for future development and there may be opportunities to develop strategic locations in order that we have assets to generate cash flow after 2013. The major issue is that we have to hit the €7.5 billion target because it is part of the Government and troika programme and the memorandum of understanding.

The reality is that it is easier to generate cash if one sells all the good, income producing assets first. One has to make sure one is selling a mixture of assets. The demand and liquidity relate to overseas assets and there is not a huge demand or liquidity in the Irish market, which we are trying to address.

Deputy Eoghan Murphy:     I do not see the mixture. NAMA is hoping to make €8.1 billion by 2013, which would be only 25% of what it would have to pay off. Some 70% of that figure comes from overseas assets. We know those markets are increasing in value. Therefore, it might make more sense to hold on to them.

My worry is that we will make the first target in 2013 but will be unable to make other targets after that because we would be left with only 30% of the overseas assets. The rest would be from the Irish market, a market which is in decline and could potentially decline further when Lloyds Bank and RBS come here and aggressively get rid of their property portfolios which are equal to what NAMA has. The market is about to be flooded. Prices are already down 20%. If banks come in, as they intend to, prices will decrease further.

Mr. Brendan McDonagh:  The Deputy is completely right. We are looking very closely at the banks which are trying to deleverage into the Irish market and what they are doing. A certain element of dumping is taking place in the Irish market. There are fire sale auctions. The prices obtained compared with the rebuilding costs, which are very low, are causing issues.

The reality is that we have to make trade-off decisions every day in terms of which assets we sell and which we do not. We spend a lot of time looking at assets which are not currently cash flow producing but which could if we put in additional working and development capital to turn them into finished assets to make them available for sale and rent. We are not running blindly into selling all the good assets.

Some of the prime assets we have in overseas markets are returning to yields slightly lower than those at the top of the market previously. Some property in the centre of London has returned to yields of 4%. No one has yet been able to tell me that if we hold on to such properties for 12 months or two or three years, the yield will go below 4%. They were at 5.5% or 6% when the UK market was in difficulty in 2009 but they have made a strong recovery. It is the best price one can get. There is a constant trade-off in terms of trying to figure out whether something makes sense.

Deputy Eoghan Murphy:     When NAMA is making those deals and getting rid of assets in foreign markets, is it trying to put them together in portfolio deals and match them with Irish properties?

Mr. Brendan McDonagh:  We have looked at that and spent a lot of time talking to potential investors. We are trying to get foreign capital to buy foreign assets in the NAMA portfolio because all the sovereign wealth funds and private equity firms like assets in Frankfurt, Berlin, London or New York. When one tries to get them to come into Dublin, they see the Irish economy is in a bailout programme which is not an easy sell. They were pushed out of the Irish market for about ten years because Irish buyers were overpaying for assets. It takes a lot to convince such buyers to come back into the market.

We have asked them if they are interested in a UK asset, whether they would consider buying an Irish asset with it. They are quite polite but they tell us it will affect the price because they will pay less for the UK asset to compensate for the Irish asset because they only want the overseas assets. We are trying to find out what will attract such buyers to Dublin.

One thing which works quite well in the US is vendor finance for commercial assets. That means the buyer of an asset puts in 30% equity and takes a loan over five years. From our point of view it turns an existing loan for a building which might not be performing into a performing loan. We have quite a good covenant and still retain our first charge. It effectively turns a loan into an income-producing loan. Such measures interest buyers.

Another structural change in the Irish market which we do not have in overseas markets is the high rate of stamp duty. It is 6% here but it is just 1% in the UK. When one is a foreign investor and deploying capital, all these things are taken into consideration by potential buyers. We spend a lot of time trying to incentivise people to come into the Irish market. It will be a slow burner but the mood music has changed. In 2010, as we went into the IMF, many people tried to bottom fish. They thought Ireland was out of money and desperate to sell assets at any price. We set up NAMA to ensure that we would be in a very strong position all the time and we will not take prices we do not want to accept. We keep telling them we are in a strong position. Effectively, they are opportunists. More fundamental buyers look at the quality of the asset, the state of the economy, the leaseholder and the asset, the strength of the covenant and they compare that in terms of where they expect the return will be. Irish investments assets are currently yielding anywhere between 8.5% and 10.5%. Any yield shift down, or improvement on that, makes a huge difference to the valuation. People are beginning now to say that Ireland is a recovery story. We are seeing a great deal of interest