Conor Houlihan (pictured), a partner with law firm Dillon Eustace in Dublin, says Ireland’s National Asset Management Agency scheme to acquire distressed assets from five Irish banks highlights not only opportunities for international investors in the country’s domestic market but the longstanding use of Irish vehicles to structure distressed acquisitions around the world since the 1990s.
Ireland’s well-documented property-fuelled boom has come to a crashing halt, leaving billions of euros of distressed assets on the loan books of the major Irish banks. As a result, Ireland is becoming a focal point for buyout and distressed investment activity with individual assets now changing hands at discounts of 50 per cent and upward.
In an effort to repair the Irish banking system, late last year the Irish government established a specific asset management body, the National Asset Management Agency (NAMA), to acquire approximately EUR81bn face value of eligible assets from five Irish banks: AIB, Bank of Ireland, Anglo Irish Bank, EBS Building Society and Irish Nationwide Building Society. The overall portfolio size has recently been reduced, to exclude loans of less than EUR20m, in order to expedite the transfer process. It is estimated that this exclusion of smaller-scale developers will reduce the face value of the overall portfolio by EUR6.6bn.
Investment opportunities are emerging in relation to not only NAMA-related assets but other assets remaining on the balance sheets of the NAMA participating banks, as well as the loan books of non-NAMA Irish banks.
Of course, pricing is a key issue. Although the NAMA valuation methodology is prescribed by law, the discount or haircuts applied to date on these assets may be instructive. The weighted average discount for the loans acquired in tranches one and two was more than 50 per cent and for certain institutions was more than 70 per cent. Obviously certain assets within these portfolios suffered even higher discounts.
So what exactly is NAMA supposed to do with these assets? In a nutshell, its primary goal is to protect and enhance the value of the asset, and to do so in the interests of the state and the Irish taxpayer. Since acquiring the assets, NAMA has been engaging with debtors to assess their viability based on business plans that borrowers are required to prepare in good faith.
Where a borrower is not paying its loans, and is not able to produce a sufficiently compelling case in its business plan, it seems likely that NAMA will foreclose on the secured property.
What does this mean for investors, and where do the opportunities now lie?
Clearly, market factors will influence the timing of asset sales. However, NAMA has indicated that it will not engage in the “speculative hoarding of assets”.
In some cases, it may make sense for NAMA to make an additional investment in assets that it acquires, for example, if it was felt commercially viable to complete a particular property development.
In such cases, NAMA has indicated that it will proactively seek joint venture partners. Indeed, since the announcement of the establishment of NAMA there have been numerous approaches and expressions of interest to the Irish ministry of finance, to NAMA and to the banks themselves, from distressed debt investors and advisory firms looking to provide capital and/or expertise.
At this stage, there is relatively little public information available on the specific opportunities offered by NAMA or indeed other potential sellers of distressed assets. However, it is clear that such opportunities exist. Given that there appears to be a good supply of potential buyers for such assets, the absence of a clear inventory of opportunities may be restraining deal-flow. The completion of those sales that are currently in the pipeline may be important to convince the markets and build momentum.
As the economic recovery becomes more protracted, the scope for banks to continue to “pretend and extend” may wane. Investment opportunities in the near future may take the form of joint ventures, individual loan/asset or portfolio sales, securitisation, collective investment schemes or some other form.
In many ways, NAMA can be seen as an attractive counterparty for a distressed asset buyer. For one, the extensive valuation and due diligence process that has been undertaken by NAMA should result in a more efficient and reassuring process for the buyer.
Secondly, there are a number of tax exemptions that arise which will be attractive to outside investors investing through a joint venture structure with NAMA (no matter how small NAMA’s shareholding). For example, no transfer taxes arise on transfers of assets to the joint venture, it can receive interest on acquired loan assets free of interest withholding tax, and there is no group relief clawback for capital gains tax purposes.
As a jurisdiction in which to invest, Ireland has a common law legal system that is similar in many respects to Britain’s. This makes it somewhat familiar and predictable for certain investors. The Irish system can have attractions for investors. For example, the relatively short protection period afforded by our examinership process (100 days), while increasing the intensity if buying/investing in a company in examinership, brings a degree of certainty in relation to timing.
Nevertheless, Ireland is a relatively new market for most distressed investors. As such, whether the strategy is passive trading of debt, active management and resolution of NPL portfolios or the turn-around of single-credits, buyers will need to know the nuances of this market. Many buyers already have such knowledge while others are in the process of learning. This will be an essential ingredient to the development of a universally beneficial strategy for dealing with Ireland’s impaired loan problem.
Moreover, as an onshore European Union and OECD member with an extensive double tax treaty network, which facilitates the avoidance of withholding taxes on income from investments in a wide range of countries, Ireland is now seen as a jurisdiction in which to establish vehicles for investing in distressed financial assets.
Many of the leading domestic and international banks, distressed/credit/special situations investors, private equity funds and hedge funds have availed themselves of the favourable Irish regime to structure the acquisition and/or financing of their investments efficiently.
A variety of Irish structures are being used including regulated collective investment schemes, special purpose vehicles or combinations of both.
The growth in the use of Irish vehicles in distressed acquisitions has tracked the emergence of distressed opportunities around the world since the 1990s. For example, an Irish fund structure was used in connection with the first public auction of Korean non-performing debt organised by Korea Asset Management Corporation and, thereafter, Irish vehicles were used by leading global distressed asset buyers throughout the 1990s for numerous acquisitions and financings of distressed assets in Asia.
Closer to home, since the early 2000s hundreds of Irish SPVs have been established in connection with the financing, acquisition and/or resolution of distressed investments in Europe. Numerous portfolios of European loans, in Germany, Spain, the UK and elsewhere, have been financed, acquired and/or refinanced using Irish SPV structures.
Recent events in the global debt markets have done nothing to diminish the reasons for using Irish vehicles in connection with distressed acquisitions and, with a significant quantity of distressed assets remaining on bank and other balance sheets, it seems that the demand for such structures is likely to remain strong.