ANALYSIS:A separate company will buy and manage Nama's debts to avoid a breach of EU rules
PRIVATE INVESTORS will own more than half of Nama’s (National Asset Management Agency) property loans, but the taxpayer will guarantee 95 per cent of their purchase price, under the scheme that the Government intends using to keep the €50 billion liability off the State’s books.
Once it is established, Nama, the agency that will take control of Irish banks’ property-backed loans, will create a separate company – known as a special purpose vehicle (SPV) – to buy and manage the debts.
Private investors will own 51 per cent of the SPV in return for a €51 million investment. Nama will own the remaining 49 per cent in return for investing €49 million, giving the SPV €100 million in capital.
The mechanism will allow the Government to exclude Nama’s €50 billion-plus liability from the national debt, and avoid a serious breach of the EU’s stability and growth pact, which limits the amounts that euro-zone states can borrow relative to the size of their economies.
The SPV will be a separate entity to Nama and will have its own board, although this will include representatives of the asset management agency.
According to a Government memo circulated to the Dáil this week, Nama will have a veto over all of the SPV board’s decisions. This is because the Government is guaranteeing 95 per cent of the €54 billion in bonds that the State will provide to purchase the banks’ property loans.
A Department of Finance spokesman explained yesterday that there will be other checks and balances to safeguard the taxpayers’ and State’s interests, but added that the detail of these will be worked out when the SPV itself is established. This will not happen until the Oireachtas passes the Nama legislation.
Although the Government’s memo indicates that private investors will be represented on the SPV’s board, the department’s spokesman said that this may not necessarily happen.
Private investors have to own more than half the SPV – and thus its assets – in order to comply with EU guidelines that will allow the Government to exclude Nama’s liabilities from the national debt.
It is not clear just who the private investors will be, but the department indicated yesterday that the cash is likely to come from the financial markets. Its spokesman said that it is not possible to say whether any group, including the Irish banks who will benefit from Nama, can be specifically included or excluded.
If the property loans can be managed profitably, then Nama and the private backers will be paid a yearly dividend, tied to returns from Irish Government bonds. Once the entire operation is finished, the SPV will be wound up. The Government’s memo says that the investors, that is Nama and the private backers, will only be repaid their €100 million if the resources are there.
If the loans are ultimately profitable, they will be repaid their capital plus 10 per cent – €10 million – once the SPV is wound up. This means that the private backers will be repaid their €51 million, plus €5.1 million, plus any dividends they will have received along the way. Any further profits over and above these amounts will be returned to the exchequer.
However, if the property loans are not profitable, Nama and the private investors will lose their €100 million.
When it first proposed establishing Nama in April, the Government believed that the State would have to account for the €50 billion Nama liabilities on its own balance sheet.
However, after lobbying from the German and French governments, the EU Commission and its statistics agency, Eurostat, came up with guidelines that would allow member states take liabilities related to schemes to rescue their banks off their balance sheets.
A French rescue agency, known as SFEF, which has issued close to €500 billion in bonds this year, is using a similar mechanism to the Nama SPV.
A Eurostat letter to Bill Keating, a director of the Central Statistics Office (CSO), confirms that the mechanism proposed by the Government complies with the guidelines that the EU has set out. The Department of Finance warns that this is just a preliminary finding, but it does not believe that Eurostat’s final decision will differ greatly.
The department’s spokesman stressed yesterday that the Government is not trying to “disguise” the debt by taking it off the State’s balance sheet. “We are still saying upfront that the liability is there,” he said.
