Martin Mansergh (Tipperary South, Fianna Fail)

I thank Senators for the opportunity to contribute to this important debate on the draft business plan of the interim National Asset Management Agency, NAMA. I look forward to hearing the views of Members during the course of this debate. Today is the final day of Committee Stage deliberations on the National Asset Management Agency Bill 2009 by the Select Committee on Finance and the Public Service, with Report Stage to be taken in the Dáil next week. The Bill will come to the Seanad shortly afterwards, giving Senators a fuller opportunity to debate and tease out its provisions with the Minister for Finance. It is important that there is no undue delay and that the legislation completes its passage through the Oireachtas by the first half of November.

Before dealing with the details of the draft business plan, I will briefly mention some of the more general issues relating to NAMA and the banking system, which set the background against which the plan was drafted. There is no disputing that one of the key essentials for our economic recovery is a healthy and functioning banking system that will serve the needs of the broader economy. We are all aware of the necessity to position ourselves to take advantage of the economic upswing that will inevitably occur in the global economy. In the absence of a properly functioning banking system, our economic recovery simply will not happen.

The establishment of NAMA will represent another decisive step by the Government in support of the banking system. The agency will acquire certain bank assets which are at the root of the current systemic difficulty, and their removal from bank balance sheets will facilitate the restructuring of credit institutions which are of systemic importance. At all times the Government's overarching objective has been to facilitate the flow of credit to ensure that Ireland is well placed to benefit from the global economic recovery when it occurs. It goes without saying that the Government has also sought to protect the interests of the taxpayer to the maximum extent possible. In managing its portfolio of acquired assets, NAMA will have a commercial mandate to obtain the best possible financial return for the taxpayer and will be given all the commercial powers it requires to achieve this. The Government is firmly of the view that the establishment of NAMA is the most cost-effective option from the taxpayers' perspective to ensure a properly functioning banking sector that can carry out its vital economic role.

In view of the responsibility that NAMA will carry, it is important that the organisation sets out a business plan that informs the public as to how it intends to achieve its objectives over the course of its lifetime. From a transparency and public confidence perspective, it is important that the markets, media, informed commentators and the public have the opportunity to examine the targets NAMA has set for itself, as well as the assumptions underpinning those targets. The NAMA business plan will not be published until the NAMA legislation is enacted and the board appointed. This means that the formal requirement for such a plan has not yet arisen. Nevertheless, recognising the need for transparency at all stages of the process, the Minister for Finance instructed the interim NAMA managing director to draw up a draft business plan setting out how the agency will carry out its functions and duties on the basis of the information already available to him.

The Minister acknowledges that the plan is a key element in informing the debate on the NAMA legislation as it progresses through the Houses. That is why he ensured that copies of the draft plan were distributed to all Members of both Houses towards the end of the Second Stage debate in the Dáil some weeks ago. That was the earliest possible opportunity to do so after he received his copy. Publishing a draft plan is an unusual step for the Minister to take. He did so as proof of his determination to ensure to the maximum extent possible that there will be full transparency and accountability in the way NAMA operates. He stressed that a more detailed business plan will be prepared by the NAMA board once the legislation is in place.

The data on which the plan is based are provisional in nature. The estimates are based on data provided by the five credit institutions that have stated their intent, and are most likely, to engage with the agency, namely, Allied Irish Banks, Anglo Irish Bank, Bank of Ireland, Educational Building Society and Irish Nationwide Building Society. However, definitive figures will not be available until NAMA has had the opportunity to assess in forensic detail the loan books involved. The draft plan emphasises that much of the information relating to the prospective NAMA loan book portfolio is based on provisional aggregate data provided by the institutions themselves. The interim managing director and his team have not had direct access to individual records and are unable to verify the accuracy of the data until such time as NAMA conducts its own due diligence on an individual loan basis. The loan book details will be liable to further adjustment once the agency begins its detailed analysis and due diligence exercise, following its establishment on a statutory basis.

The interim plan deals with operational planning matters required to ensure an efficient asset valuation and transfer process, the establishment of NAMA and the key governance structures of the agency. It also addresses various areas that are critical to the success of the NAMA initiative, including purpose and objectives; key parameters of the NAMA portfolio; preparatory work carried out to date; work programme to be undertaken until June 2010; operating governance structure; asset valuation and transfer process; credit management and servicing arrangements; and key risks facing NAMA. Despite the extensive pressures involved in its preparatory work, the interim team has produced a most informative and helpful report, for which it should be commended.

One of the key areas of the debate since the Minister for Finance announced his proposal to establish NAMA has been the price to be paid for the loans. The draft business plan affirms that the agency provisionally expects to pay some €54 billion for loans with a book value of €77 billion. The €77 billion figure comprises some €28 billion in loans for land purchase, €21 billion in development loans and €28 billion in loans where there is a strong association with land and development loans. The €54 billion provisional price, which is effectively the long-term economic value that can be expected to be realised over the lifetime of NAMA, implies an estimated aggregate discount of 30%.

Based on information provided by the institutions, the average loan to value ratio, LTV, is estimated to be 77% across the entire portfolio. This figure assumes that the loans NAMA will acquire were authorised over a period of several years and that not all loans were advanced at the peak of the property cycle. Therefore, for some institutions, the LTV is likely to be lower and for others higher. It is estimated, again based on the provisional figures provided by the institutions, that €9 billion of the €77 billion consists of rolled-up interest. This means that €68 billion in loan principal was originally advanced, which suggests that the aggregate value of the underlying real estate was €88 billion when the loans were originally advanced. The current market value on property loans being transferred to NAMA, estimated at €47 billion, represents a fall of approximately 47% on the original €88 billion. This includes overseas markets where declines are expected to be less severe than in Ireland.

It is clear therefore that banks and borrowers will take a significant hit on the original book values of the loans and the underlying collateral. The €54 billion payment estimate represents a 15% uplift on the €47 billion current market value estimate. When subordinated debt, which is 5% of the total, is taken into account, it is estimated that the required recovery in asset prices for NAMA to break even is only 10% over ten years, which is an achievable target. Tables in the draft plan provide further breakdowns on the NAMA loan portfolio, geographical breakdown and cash flow projections. In terms of the breakdown as between institutions likely to participate, 37% of the NAMA portfolio is expected to include loans acquired from Anglo Irish Bank, 31% from Allied Irish Banks, 20% from Bank of Ireland, 11% from Irish Nationwide Building Society and the remaining 1% from Educational Building Society. Some 67% of the underlying assets will be based in Ireland, 6% in Northern Ireland and 21% in Britain, with the remaining 6% spread across the rest of Europe and the United States.

I will deal now with the estimated net present value of NAMA over its lifetime, in other words, the current best estimate of the ultimate outcome of NAMA in purely financial terms. The interim team estimates that NAMA will return a positive net present value of €4.8 billion over its anticipated lifetime. This is based on several criteria, including the fact that approximately 40% of the loans that will be acquired are income generating. The interest rate assumptions used in the plan are derived from market consensus rates available on the Bloomberg service and are based on six-month EURIBOR forward rates for the first five years and the forward five-year rate for the 2016 to 2020 period.

A significant amount of information is provided in the plan concerning the underlying assumptions that led to this projection. This brings me back to the point I made earlier about enhanced transparency. The agency has published its underlying assumptions for all to see and examine, which can only assist the debate. Furthermore, the plan includes sensitivity analyses which stress test some of the core assumptions. One of these analyses is that the assumed default rate of 20% on the €77 billion book figure would have to rise to 31% for NAMA not to make a profit. A separate part of the plan outlines several key risks facing the agency, which will be monitored by the board and its risk committee to ensure appropriate risk management policies are in place.

An important part of the plan outlines how NAMA proposes to value and acquire loans. It is intended that the largest ten to 15 borrower exposures will be transferred to NAMA by the end of this year. The Minister qualified this statement in the Dáil yesterday by saying that this could be delayed into January. It is also expected that the 100 highest exposures, which account for almost 50% of the €77 billion aggregate book value, will have been transferred by the end of February 2010. The transfers will continue in tranches based on the size of exposure up to June or July 2010.

The plan outlines the key stages in the valuation and acquisition process. These include the obligation on participating institutions to ensure that all collateral has been valued by professional external valuers in line with NAMA guidelines, which includes a duty of care to the agency. Another key stage is the appointment of a legal services panel to review the due diligence data provided by each of the institutions. Where defects in title or security are identified, NAMA may refuse to acquire the loan concerned or discount the loan value appropriately. The appointment of an audit co-ordinator to collate valuation and due diligence data of loans and to prepare a draft acquisition of schedules to be approved by NAMA for each participating institution is another important stage in the process.

The plan anticipates that a core team of 30 will be required to manage the immediate loan valuation and acquisition process on the establishment of NAMA and that this will later rise to a core of approximately 75. The Minister for Finance stressed the importance of NAMA moving quickly to establish itself and immediately having the resources available to it to valuate and transfer the largest loan exposures. It is intended that the largest 100 to 150 borrowers will be managed directly by NAMA, with each of these borrowers having to submit a detailed business plan within a specified period of the loans being acquired by the agency. If the business plan is rejected and a borrower is assessed as being no longer viable by the NAMA credit committee, NAMA will take whatever action is required to protect the value of its security. Where a plan is approved, the borrower's subsequent performance will be monitored closely to ensure no deviation from the targets in the plan.

For borrowers outside the top 150, NAMA will make an early determination as to each borrower's credit-worthiness, and the agency will take appropriate action with regard to the larger and more impaired of these exposures. The important point here is that NAMA will not operate in practice as a bail-out mechanism for developers who have operated irresponsibly. NAMA will treat them as borrowers who continue to owe the full amount of their loan. The draft plan recognises the duty of the agency to maximise taxpayer returns and the Government's expectation that it will use the range of powers available to it under the Bill to meet that objective. Any developer whose bank loan is purchased by NAMA will have to repay NAMA, just as they would have had to repay the bank originally.

There has been much talk about the need for accountability. The draft plan outlines the extensive provisions in the NAMA Bill regarding the accountability and reporting requirements which will apply to the agency when it is established. These requirements include the submission of an annual statement to the Minister for Finance before the start of each financial year, which the Minister will then lay before the Houses of the Oireachtas; the submission to the Minister of the agency's annual accounts which will be subject to audit by the Comptroller and Auditor General and will be reported to the Oireachtas; and the submission of quarterly reports to the Minister, which the Minister will then lay before the Houses of the Oireachtas. The chairman and CEO of NAMA will be required to appear before the Committee of Public Accounts and any other committee appointed by the Oireachtas to consider matters relating to NAMA, whenever they are required to do so. The reporting requirements are extensive and comprehensive. This is as it should be given the scale of the portfolio that NAMA will hold.

I consider the draft business plan produced by the interim NAMA team as a substantial body of work which casts a significant degree of light on the targets of the agency, the way it will organise its business and the assumptions that underpin its targets. While a more detailed plan will be published under the authority of the NAMA board once the agency is established, this draft plan provides detailed information, albeit on an aggregate basis, that has further informed the debate so far. The aim of publishing the plan in draft form was to enhance transparency to the greatest extent possible and in that regard it has been successful.