Insight

NATIONAL ASSET MANAGEMENT AGENCY ACT 2009

(November 2009)

On 22 November 2009 the President of Ireland signed into law the National Asset Management Agency Act 2009 (the “Act”). The enactment of this legislation is part of a strategy to stabilise and strengthen the Irish banking system (together with the state guarantee in respect of certain bank liabilities, the recapitalisation of Allied Irish Banks and Bank of Ireland and the nationalisation of Anglo Irish Bank).

The Act effects the establishment of the National Asset Management Agency (“NAMA”), the purpose of which is to acquire, manage and realise impaired land and development loans (and associated loans) on the balance sheets of certain credit institutions who participate in NAMA. The Minister for Finance (the “Minister”) has indicated that NAMA will purchase loans with a book value of approximately €77 billion for approximately €54 billion.

The following is a brief overview of certain provisions of the Act and related materials.  It should be noted that although the Act has been signed into law, it will come into operation on such day or days as the Minister may appoint by one or more orders.  In particular NAMA will only come into existence on an “establishment day” to be designated by the Minister.  We expect this day to be designated imminently.

How will NAMA operate?

NAMA will be a separate independent statutory body with its own board of directors appointed by the Minister. It will have a Chief Executive Officer as well as staff assigned to it by the National Treasury Management Agency (the “NTMA”).  The NTMA will also be responsible for providing NAMA with such business and support services and systems as are determined to be necessary or appropriate by the board of NAMA after consultation with the Chief Executive of the NTMA.

NAMA will have extensive and far reaching powers to acquire, manage and realise eligible bank assets (ie the loans and other assets to be prescribed as eligible for purchase by regulation by the Minister) and the underlying property and property related assets upon which such loan assets are secured.  Its stated purposes include dealing expeditiously with the assets acquired by it and protecting or otherwise enhancing the value of those assets, in the interests of the State.  Its remit is to obtain the best achievable financial return for the State having regard to:

1. the cost to the Exchequer of acquiring bank assets and dealing with acquired bank assets;
   
2. NAMA’s cost of capital and other costs; and
   
3. any other factor which NAMA considers relevant to the achievement of its purposes.

It is important to note that acquisitions of bank assets may be made by a “NAMA group entity” rather than by NAMA itself.  The references in this document to acquisitions by NAMA should be interpreted as including references to acquisitions by NAMA group entities.  In essence, a NAMA group entity is defined as meaning a subsidiary of NAMA or any other body corporate and any trust, partnership, joint venture or other similar arrangement established by NAMA for the purpose of performing any of its functions.  

Which credit institutions will participate in the NAMA arrangements?

The Act provides that any credit institution (which term would include Irish banking subsidiaries of non-Irish banks) may apply to the Minister, within 60 days of the establishment day of NAMA, for it and its subsidiaries to be designated as participating institutions. Where the Minister is satisfied that certain conditions have been satisfied, the Minister may designate an applicant credit institution as a participating credit institution, after consultation with the Governor of the Central Bank and the Financial Regulator.  The matters that the Minister must be satisfied with include:

1. the applicant credit institution must be systemically important to the Irish financial system; and
   
2. the acquisition of bank assets from it or its subsidiaries must be necessary to achieve the purposes of the Act having regard to a range of factors including the resources available to NAMA and the support that is available to or has been received by or might reasonably be expected to be made available to the applicant or its subsidiaries from the State or any other EU member state or a member of the group of the applicant.
   

It is currently anticipated that the following credit institutions will become participating institutions in the NAMA scheme (however, this will not be confirmed until a later date):

• Allied Irish Banks, p.l.c;

• Anglo Irish Bank Corporation Limited;

• The Governor and Company of the Bank of Ireland;

• The Educational Building Society; and

• Irish Nationwide Building Society.

Where an institution has applied to participate in the NAMA scheme, the application will be deemed to include all its subsidiaries unless certain subsidiaries are excluded by the Minister.  An applicant credit institution may include in its application a request to exclude particular subsidiaries.  It will be a matter for the Minister to decide if any such subsidiaries should be excluded.

What assets may be acquired by NAMA?

The Act provides that the Minister may, after consultation with NAMA, the Governor of the Central Bank and the Financial Regulator, and considering the purposes of NAMA and the resources available to the Minister, designate classes of bank assets as classes of eligible bank assets. The principal assets which NAMA is established to acquire are non-performing development land financing arrangements. However, a certain portion of the assets to be acquired will not be impaired and the draft NAMA business plan indicates that approximately 40% may be cash generating.

The categories of bank assets which may be eligible bank assets is broadly defined and includes all types of debt financing, derivatives, debt factoring facilities and guarantee facilities.

It will also be possible for NAMA to acquire loans which are not development loan financing arrangements where they are owed by associated debtors (such as group companies to, or partnerships involving, the principal debtor) and the total amount of indebtedness in respect of such facilities owing to a participating institution is such that, in the opinion of the Minister, acquisition by NAMA is necessary for the purposes of the Act.  The Act also contains a further general and broad sweeping “catch all” provision allowing NAMA to acquire “any other class of bank asset of a participating institution”  where, in the opinion of the Minister, after consultation with the European Commission, such acquisition is necessary for the purposes of the Act.

New loans that entered the balance sheet of a participating institution after 31 December 2008 will not be eligible for acquisition by NAMA. However, where a loan was provided on or prior to 31 December 2008 but the security in respect of it was only provided after that date, the loan will still be eligible for inclusion.  Also, renegotiated or refinanced loans which were “on balance sheet” prior to this date may also be eligible for inclusion.    

Loans that were provided as part of a syndicate will be eligible for inclusion.  In effect, NAMA (or the relevant NAMA group entity) will acquire all of the rights and powers of the relevant participating institution under the syndicated loan document and other relevant contracts and will be bound by all of the obligations of that participating institution (unless any such obligations are excluded in the “acquisition schedule” that is drawn up).  Therefore it would seem that NAMA/the NAMA group entity will acquire any such asset subject to the provisions of any existing inter-lender, intercreditor or other priorities documents that may be in existence.  One of the codes of practice that is to be put in place under the Act will deal with “the manner in which NAMA is to take account of the commercial interests of credit institutions that are not participating institutions”.  We believe that this code may, amongst other things, confirm that NAMA will continue to comply with existing inter-lender/intercreditor/priorities arrangements.  

Lastly it is worth noting that the draft NAMA business plan indicates that land and development loans with a value of less than €5 million held by Anglo Irish Bank, AIB and Bank of Ireland and their associated commercial loans will not transfer to NAMA.  It states that this limit will not apply to EBS and INBS.

How are foreign assets to be acquired by NAMA?

As a significant portion of the bank assets to be acquired by NAMA will be governed by laws other than those of Ireland, the Act contains specific provisions in relation to how these “foreign bank assets” will be acquired.

Where the foreign law governing the foreign bank asset permits the transfer or assignment of such asset, the participating institution is required to do all in its power to give effect to such transfer or assignment. Where the relevant foreign law does not permit the transfer or assignment of the foreign bank asset,  the participating institution is required to do all in its power under such laws to transfer the greatest interest possible in the asset to NAMA and shall hold the bank asset in trust for NAMA and for the benefit and to the direction of NAMA.

How will eligible bank assets be acquired?

The Act provides for NAMA to obtain detailed information from the applicant credit institutions or the participating institutions in relation to the eligible bank assets. NAMA may direct that such information is to be certified as accurate and complete jointly by the chief executive officer and the chief financial officer of such institutions. NAMA can also request additional information and explanations from such institutions on any bank asset. Where a debtor, associated debtor, guarantor or surety of a credit facility has been notified that the credit facility is an eligible bank asset, such person is required to co-operate and, in good faith, promptly furnish to the participating institution any requested information.

In determining whether to acquire a particular eligible bank asset, NAMA may take into account a number of factors including the value and adequacy of the security that is part of the bank asset. A participating institution may challenge the designation of a bank asset as eligible whereupon the Minister may refer the matter to an expert reviewer. However, the Minister will ultimately determine whether or not a bank asset is eligible.

NAMA will then prepare acquisition schedules setting out the bank assets to be acquired by it which will be delivered to the participating institutions. NAMA may also specify the general terms and conditions of the acquisition. The acquisition schedules will set out the assets to be acquired, the acquisition value and the date of acquisition. The acquisitions will take effect on the stated acquisition date notwithstanding any legal or contractual restrictions to the contrary.

Unless otherwise provided in an acquisition schedule, NAMA will upon an acquisition taking effect, become entitled to the benefit of certificates of title, solicitors undertakings, legal opinions, powers of attorney and a wide range of other documents held by or issued by the benefit of the participating institution.  Also any “relevant contracts” will be assigned to NAMA (again unless otherwise specified in an acquisition schedule).  These are contracts which relate to a bank asset and to which the participating institution is a party or in which it has an interest.  However only contracts which have been disclosed to NAMA will be “relevant contracts”.

Once the amount payable to a participating institution in respect of its bank assets is determined, debt securities shall be issued and transferred to that institution by way of consideration for the transfer.  The Act contemplates these debt securities being issued by NAMA or a NAMA group entity or indeed by the Minister himself.  The Act also contemplates the Minister guaranteeing any debt securities that are issued by NAMA or a NAMA group entity.  The debt securities that may be issued include subordinated debt securities and these can form part of the consideration for the acquisition of bank assets.  These may be linked to the financial performance of NAMA in its totality and not any part or parts of the acquired portfolio.  Also these subordinated debt securities shall not exceed 5% of the aggregate total portfolio acquisition value.  They are to be issued on a pro-rata basis to the participating institutions.  

Within 60 days after the acquisition of a bank asset from the participating institution, such institution is required to make reasonable efforts to notify the relevant debtor(s)/guarantor(s)/associated debtor(s) of the acquisition.

What protections/safeguards have been provided for NAMA in the Act?

There are a number of provisions of the Act which have been put in place with a view to enabling NAMA to overcome certain legal obstacles that would otherwise inhibit its ability to carry out its functions and realise the best value it can from the assets it acquires.  For example: -

• The Act provides that an acquired bank asset will not be invalidated or rendered void as against NAMA or a NAMA group entity or their successors in title as a consequence of the operation of a variety of statutory provisions.  These include Section 60 of the Companies Act 1963 (the ban on the provision of financial assistance), Section 31 of the Companies Act 1990 (which amongst other things prohibits the giving of guarantees or security in connection with loans made to directors or persons connected to directors) and Section 286 of the Companies Act 1963 (which, amongst other things, provides for charges given by insolvent companies with a view to preferring a creditor over other creditors being in certain circumstances deemed to be fraudulent preferences and therefore invalid).  

• Acquired bank assets (including therefore charges) will not be invalidated or rendered void or voidable on the grounds that their creation was ultra vires or as a consequence of the provider having been insolvent at the time that the charge was given or as a consequence of the directors of the giver of the charge ceasing to have the power to create the charge.  Also a charge will not be rendered void by reason of the fact that the consent of a party required for the creation of the charge may not have been obtained.  

• A registerable charge which is acquired by NAMA where particulars of the charge have not in fact been registered with the Companies Registration Office will not be rendered void as a consequence of the failure to register.  Also where such a charge has not been stamped or is insufficiently stamped, this will not render it inadmissible in evidence or unenforceable.

• NAMA will not be obliged, under any relevant legislation, to become registered as the owner of a charge acquired by it.  However this will not relieve NAMA from any obligation to register it may have under any foreign law.

Will NAMA operate through the establishment of special purpose vehicles?

The provisions of the Act would enable special purpose vehicles (“SPV’s”) to be formed by NAMA for the purpose of acquiring, managing and disposing of bank assets as well as issuing the debt securities to be issued to the participating institutions in question.  Certain statements made by the Minister recently indicate that it is envisaged that NAMA will establish one or more SPVs for this purpose.  It would seem that there may be one master SPV which is to be fifty one per cent owned by private investors who will invest €51 million in that entity.  NAMA will invest €49 million and own the remaining forty nine per cent.  This master SPV may in turn own SPVs that are established to deal with each participating institution.  We understand that it is envisaged that these investors will receive an annual performance linked dividend as well as a return of their capital on the winding up of the master SPV if the capital is available to be returned to them at that point (plus an uplift of ten per cent in their investment if a profit has been achieved).  The precise details as to how the arrangements with these investors will operate have yet to be disclosed.  

What valuation methodology will be used in order to determine the price at which assets will be acquired?

NAMA may agree to acquire a bank asset for an amount determined by reference to its “long term economic value”, as determined by it. In determining such value, NAMA will have regard to certain factors, including the market value of the underlying property in question, the market value of the bank asset, and the long-term economic value of the property.  

The long-term economic value of property will, under the provisions of the Act, be a value as determined by NAMA that it “can reasonably be expected to attain in a stable financial system when the crisis conditions prevailing at the passing of this Act are ameliorated and in which a future price or yield of the property is consistent with reasonable expectations having regard to the long-term historical average”.  

The market value of a bank asset will depend on the value of the underlying property but other factors will be relevant such as whether the relevant loan is performing or not and the creditworthiness of the relevant borrower.  

The Act states that the market value of a property will be determined by NAMA by taking into account submissions from the relevant participating institution, any market value determined by it for a similar property and valuation reports.  

NAMA may, if it considers appropriate and after consultation with the Minister and subject to regulations made by him, determine that the acquisition value of a bank asset be either (i) its market value or (ii) a value (between its long-term economic value and its market value) that NAMA considers appropriate, having regard to a number of factors including recent EC guidance on State aid. The Minister may make regulations providing for, amongst other things, that the long-term economic value cannot exceed the respective market value by such fractions as the Minister determines by regulation. The draft regulations that have been published indicate that this fraction will be one quarter, therefore, the long-term economic value of a piece of land cannot be more than 125% of the market value.  These regulations also cap the fraction by which the aggregate of all long term economic values of land of a participating institution exceed the aggregate market value.  This is capped at one-fifth.

The Act also provides that where NAMA determines that the long-term economic value of the property comprised in the security of an eligible bank asset is less than the market value of such property, NAMA will not acquire such bank asset.

Will credit institutions be in a position to challenge valuations of bank assets as determined by NAMA?

The legislation contemplates that a participating institution may, within a prescribed time frame, challenge the valuation allocated to a bank asset.  In such cases, NAMA may (i) remove the bank asset concerned from the relevant acquisition schedule, (ii) revoke the acquisition schedule or (iii) continue with the acquisition in accordance with the acquisition schedule.

A participating institution may also challenge the total portfolio acquisition value (ie the total acquisition value of its transferred assets) if it is of the opinion that the aggregate market value of the portfolio acquired from it exceeds the total portfolio acquisition value and on the basis that it has already challenged the valuation allocated to acquired bank assets which comprise not less than 12.5% by value of the total portfolio acquisition value.  Disputes of this nature will be referred to a valuation panel for review which will report to the Minister.  The Minister ultimately makes the determination as to the total portfolio acquisition value.

Will the participating institutions have to pay a surcharge?

The Act contains certain provisions relating to the imposition of a surcharge on participating institutions. It provides, amongst other things, that where an underlying loss has been incurred by NAMA (as shown in the reports and accounts sent to the Minister as required under the Act) and the Minister is of the opinion that such underlying loss is unlikely to be otherwise made good, then legislation may be enacted providing for the imposition of a special tax by way of surcharge on the profits (if any) of the participating institutions. A surcharge will not become payable until either (i) 10 years after the passing of the Act, or (ii) NAMA is dissolved or restructured, or there is a material alteration of NAMA’s functions, whichever last occurs.

What outsourcing arrangements will be put in place by NAMA with the participating credit institutions?

The Act provides that the participating institution from which NAMA acquired or intends to acquire a bank asset will, unless otherwise directed by NAMA, continue to perform “relevant services” in respect of the bank asset. The term “relevant services” includes management, administration, restructuring  and enforcement services.  

Third party servicing is also provided for. A questions and answers document, which forms part of the supplementary documentation made available by the Department of Finance, indicates that where an outsourcing in respect of a bank asset is made with the participating institution from which NAMA acquired the bank asset, the persons dealing with the bank asset in such participating institution cannot be the same persons who dealt with the bank asset prior to its acquisition by NAMA.

What enforcement powers will NAMA have?

NAMA has been given specific statutory powers in order to facilitate enforcement of security or the sale of eligible bank assets.  These include the following: -

• NAMA will have the power to appoint a statutory receiver.  It will not be possible for a company to seek the appointment of an examiner or a liquidator with a view to displacing the statutory receiver.

• NAMA will be able to apply to the High Court for a vesting order in respect of land charged in its favour if (i) it has acquired a bank asset that is secured by a charge over land, (ii) its power of sale has become exercisable and (iii) NAMA forms the view that it is unlikely that the sum secured by the charge can be recovered by a sale within 3 months after the application.
  
  In effect this amounts to a power of foreclosure. In other words NAMA can acquire an outright ownership of land, rather than just retain a charge over it.  The chargor’s equity of redemption in the land concerned (and the interest of any other chargee) will be extinguished.  However, a charge holder with a prior ranking charge or charge ranking equally with the NAMA charge will have an entitlement to be paid the amount secured by its charge or the value of the land (whichever is the lesser).  

• NAMA may compulsorily acquire land in certain circumstances, upon application to the High Court, where in NAMA’s opinion, it is necessary to effect the sale or development of land.  The questions and answers document referenced above indicates that this is primarily directed at resolving difficulties which would arise due to the creation or retention of so called “ransom strips”.  In other words, if NAMA needs to acquire a piece of land in order to enable access to the charged land, it would have the power to do so in certain circumstances.

• Certain easements over adjoining lands are imposed by statute, where it is reasonable to assume that the parties intended that such easements were to be given to the land which NAMA acquires.  There is great uncertainty as to the potential extent or nature of any such easements, and whether or not they apply in any particular instance.   

• NAMA will have the ability to dispose of charged assets (or indeed loans purchased by it) to any person notwithstanding any contractual restrictions or other legal restrictions that may apply.  Therefore contractual restrictions on disposals contained in loan documents will be disapplied.

• NAMA will have the ability to convey land that has been mortgaged in its favour in such a way so as to extinguish the interest of any other person holding a mortgage or charge on the land – other than a charge which has priority to the interest of NAMA.  Where the interest of a chargee or mortgagee is extinguished, their interest attaches in the same order of priority to the proceeds of sale received by NAMA.  Also a receiver appointed to the property of a company by NAMA will not be obliged to sell any property at any particular time or at all.   

• NAMA will have the ability to apply to the High Court to seek a declaration that a disposition of any asset of a borrower, associated borrower or guarantor is void if it can show that the effect of the disposition was to defeat, delay or hinder the acquisition by NAMA or the NAMA group entity of an eligible bank asset or to impair the value of an eligible bank asset or any associated rights that NAMA would have acquired but for such disposition.

When must Nama be notified of proposed sales

• Where a NAMA debtor proposes to dispose of lands which, if sold separately from land which NAMA has an interest in, would result in the land which NAMA has an interest in not realising its full value, then before any such disposal, the NAMA debtor must first notify NAMA.  NAMA then has the opportunity to exercise its compulsory acquisition powers, or take such other action as it deems appropriate.

Are there restrictions on parties who may acquire NAMA assets?

• Where a party is in default on a NAMA loan, and NAMA proposes to dispose of the lands held as security for that loan, the party in default, and certain related entities such as corporate vehicles or associated companies, are prohibited from acquiring that asset.  In addition, the Minister may make regulations prohibiting or restricting parties, being persons directly or indirectly connected to a defaulting debtor, from acquiring assets from NAMA.

What is the windfall tax?

•  The Act introduces changes to the Taxes Consolidation Act whereby if the zoning of land changes (and not just from agricultural zoning, but also from say residential to commercial), then on a sale of that land an 80% windfall tax will apply. This compares to a 25% rate where the zoning has not changed. This provision is likely to have a very significant effect on land values, and development land values in particular.

This briefing provides a broad summary of the matters referred to above.