The Minister for Finance in the supplementary budget of 7 April 2009 announced a proposal to establish the National Asset Management Agency (“NAMA”).  NAMA will be a commercial semi-state entity which will operate under the governance, direction and management of the National Treasury Management Agency.  The stated objective of establishing NAMA is to provide the banks with a clean bill of health to strengthen their balance sheets, to considerably reduce uncertainty over bad debts and, as a consequence, ensure the flow of credit on a commercial basis to individuals and businesses in the real economy. While full details of the initiative have not been published, an indicative term sheet and a question and answer sheet on it have been published by the Department of Finance and are available at these two links: indicative term sheet and questions and answers sheet.

 

It is proposed that certain assets will be transferred into NAMA and NAMA will pay for those either in government bonds or in government guaranteed bonds issued by NAMA.  The loans which will be covered are loans secured on development land and property under development.  In addition, the largest property backed exposures of all the banks in the scheme will be transferred.  It is indicated that the institutions which will be covered by the initiative will be those which are regarded by the Government as appropriate for inclusion having regard to the structure of their loan book, their access to support, their ownership structure and their relative importance to the national economy. 

 

The price at which these loans will be acquired is yet to be determined.  The loan books of each of the banks which are covered by the proposal will need to be reviewed.  It is notable that land development loans outside of Ireland will be eligible to transfer to NAMA subject to consideration of the legal issues involved.  In particular, reference is made to the fact that UK exposure is a significant part of the various banks’ total land and development portfolios and therefore will need to be included in the transfer to NAMA as part of the overall solution.

 

The Government has indicated that the value of the assets on the books of the various banks to which the initiative will be applicable could be in the region of €80-€90 billion.  However, it has also stated that a valuation process will be gone through and an appropriate discount will be applied to these loans to reflect the value of the loans and the risks being transferred to the state. The banks will have to take an appropriate write-down in the value of the loans.  In addressing the possible impact of these write-downs on the banks’ capital ratios, the Government has indicated that while such write-downs will undoubtedly affect individual banks’ capital positions, there will be a corresponding reduction in “risk weighted assets” as a result of the transfer of the loans to NAMA. In addition, the Government has pointed out that market expectations of capital requirements for the “cleansed banks” will be different to those who will not go through the process and there may be opportunities for banks to generate core capital through balance sheet restructuring. However, the impact on individual banks cannot be established in advance of the valuation of the relevant loans.

 

The Government has signalled that it will consider putting more capital into the banks where necessary, but that there is a limit to the extent to which such injections can be by way of preference share issuance (as occurred with the recent recapitalisation of Bank of Ireland and is proposed in relation to Allied Irish Banks).  In such circumstances, the Government will consider taking equity stakes in such banks, presumably by way of subscription for ordinary shares, which could result in the dilution of existing shareholders of those banks and could ultimately result in the State acquiring significant interests in those banks.

 

Finally it should be noted that existing terms and conditions of the loans transferred to NAMA will remain in place and the legislation to give effect to the initiative will provide for a power to require the transfer of the loans to NAMA.