Brendan Mcdonagh, who heads the agency set up to help recapitalise Ireland's troubled banks, admits its task is not easy, but says it is making progress.

It is just over a year since the creation of the National Asset Management Agency (Nama), a key part of Ireland's response to its banking sector difficulties. Nama is unusual among financial institutions in that it very quickly had to acquire a large balance sheet, which it will now work assiduously to eliminate. In parallel, a whole new organisation has had to be created, staff recruited and procedures and controls developed - all in the public eye.

The more successful Nama is in dealing with its assets, the closer it will be to extinction. To understand that paradox is to understand the conditions that gave rise to the policy decision to create the agency. By 2008, the Irish banking system had lent far too much to one sector of the economy (property) and too much to a relatively small number of borrowers within that sector. Banks were paralysed as the economy contracted both in Ireland and internationally. And as impairments were inevitably building up, they knew their capital would be depleted.

Nama was formally established by Ireland's minister for finance, Brian Lenihan, in December 2009 (after legislation was enacted), in order to cleanse the banks of these riskier property-related exposures, allowing them to recapitalise and return to their core business of lending to and supporting businesses and households. As a disinterested party, Nama would then work out the acquired loans over an expected life of 10 years and, in time, be wound up.

That point may yet be some way off, but the agency has already achieved its first major objective in the removal of 11,000 property-related loans with an aggregate nominal value of approximately €73bn from the balance sheets of five Irish lenders. A detailed loan-by-loan due diligence by Nama as part of the acquisition process to date revealed a troubling picture of poor loan documentation, assets not being properly legally secured and inadequate stress-testing of borrowers and loans. This is reflected in the consideration of €31bn paid by Nama for the loans, representing an overall discount of 58%.

Nama has forced the upfront recognition of those losses by the banks concerned. The temptation to blame the messenger for bringing bad tidings is understandable, but the fact remains that the losses were already a reality for these financial institutions as the capital markets had already made this assessment. The banks would have to be recapitalised in any event, with or without Nama. However, Nama brings one key tool to the banks, and that is a liquidity mechanism. Dr Peter Bacon, who recommended Nama to the Irish government, stated that blaming Nama for bank losses is akin to blaming a thermometer for a patient's high temperature. The Nama process has put the troubles of Ireland's banks firmly in the international spotlight, and it would certainly have been much easier to ignore this problem in the hope that time would heal the banks' self-inflicted wounds. However, I believe it is preferable to confront a problem head-on.

The benefits to the banks of the Nama process are significant. It has reduced the banks' risk-weighted assets and removed from their balance sheets loans that generally could not be used as collateral to access liquidity with central banks or market counterparties. In exchange, they received government securities which can be used for such purposes.

Nama will also acquire additional loans of up to €16bn as part of the EU-International Monetary Fund programme of financial support for Ireland, bringing its overall portfolio close to €90bn. This will delever the banks further and help bring clarity and greater certainty.

The next phase

Nama is now focusing on the second and longer phase of its operations - managing its sizeable portfolio of assets and recovering for the Irish taxpayer as much as possible of the moneys owed by debtors.

Nama has acquired loans not properties. This point is often misunderstood. Some two-thirds of the assets backing those loans are located in Ireland with the remainder outside Ireland. There are three distinct categories of assets: undeveloped land and unfinished developments that account for approximately 55%, and investment assets making up 45% of the portfolio.

Having removed these loans from the banks' balance sheets, Nama's expected lifespan of up to 10 years gives it the ability to take a longer-term perspective on borrowers and assets in so far as it makes commercial sense to do so. Acquiring a borrower's loans from all five of the participating Irish lenders confers an added advantage - a bird's-eye view of a borrower's aggregate position from which to better assess their overall viability.

After their loans have been acquired by the agency, borrowers will be asked to produce business plans in accordance with a Nama template that sets out detailed and credible targets for reducing their debt. Nama will then assess each borrower's viability more rigorously than the original lending banks have done to date and will bring a much-needed realism to this task: realism about the current level of supply of property, about the prospective demand for both finished and unfinished developments, about the sales prices or rents that can be achieved and about the extent to which investor funding will be available in the future for the property sector. These plans must provide for significant reduction in their debt over a three- to five-year timeframe and, for most debtors, this means submitting a list of assets that ultimately will be sold or refinanced to raise cash and to repay Nama debt.

Nama is acutely aware of the potential impact on property markets where its assets are located, not least its own domestic market. A fire sale, however, would not be in Nama's commercial interests. It is imperative that any disposal of assets will be undertaken in a phased and orderly manner.

Another of the challenges facing the agency in relation to its portfolio of assets is how to deal with loans advanced for developments that have not yet been completed. For those projects judged to be viable, Nama has the flexibility to enter into partnerships or joint ventures in order to ensure their completion, as long as it makes commercial sense to do so. As for those projects deemed unviable, demolition will have to be considered. But there are other options, and Nama intends to be innovative in terms of looking at possible alternative uses for both completed and uncompleted developments.

Nama can also advance up to €5bn to provide working capital and other funding to borrowers. This is a significant amount of firepower, but it is still a limited resource that must be used prudently.

The right path
It will probably take Nama most of this decade to play its full part in addressing the problems built up during the previous decade. Ireland did have a credit boom but there were also real and lasting gains made by the Irish economy during those years. Ireland has demonstrated enormous flexibility as an open economy. It has thriving technology, biotechnology and pharmaceutical industries that evolved independently of the real-estate bubble. There was a significant investment in infrastructure that has hugely improved road and rail networks in the region. Those years also saw the return of tens of thousands of young Irish people who brought back valuable skills and experience earned overseas. While some may leave again, most will stay.

I am also heartened by the fact that Ireland faced up to the legacy of years of injudicious lending by its banks and that it has opted for a painful acknowledgment of the problem. Nama is an extraordinary project both in terms of the challenges it faces and its ambition and determination to overcome them. Since March 2010, Nama has authorised the disposal of €1.6bn of assets, in many instances working with banks whose loans have not been acquired by the agency. It is by no means a panacea for all of Ireland's current difficulties but it is a fundamental prerequisite for returning Ireland's banking system and economy to health. The right path is not always the easiest one. Time will judge Nama.

Brendan McDonagh is chief executive of Ireland's National Asset Management Agency

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