Irish banks will receive part of their payment for loans transferred to National Asset Management Agency (Nama) in subordinated debt as part of an amendment introduced by the Government.
The Nama Bill, which was published today, contains amendments to a draft version issued over the summer including a risk-sharing mechanism to ensure the banks share in the risks involved in the €90 billion scheme. Last night the Green Party claimed credit for many of the changes.
Nama has been designed to relieve the banking sector of up to €90 billion worth of property loans, many of which are underperforming, in an attempt to clean up the balance sheets of Irish banks so they can increase their lending businesses and individuals.
Using subordinated debt to pay for part of the loans will allow Nama suspend payments to the banks if it cannot realise the full value of properties underlying the loans because this is a lower class of debt.
By partly paying the banks in subordinated debt and suspending payments due on that debt in the event Nama makes a loss, the banks are still held partly responsible, with the aim of reducing the risk to the taxpayer.
Shares in Bank of Ireland and AIB, which had tracked higher earlier this morning, were up 9 per cent and 4 per cent respectively in Dublin at 3pm.
AIB and Bank of Ireland have already received €3.5 billion of State capital each, translating into a 25 per cent indirect stake in each.
Another risk-sharing element is a provision that all or part of the payment for an asset being acquired by Nama may be withheld if, for example, the rate of recovery in the property market does not meet expectations.
Nama will use the long-term economic value when acquiring loans, according to the Bill, although the agency and the Minister for Finance have discretion to determine a value between the market price and the long-term economic value.
Nama will pay for the loans it takes from the banks by issuing bonds paying 0.5 per cent over the European Central Bank rate, leading to coupon of 1.5 per cent based on current interest rates.
Minister for Finance Brian Lenihan said this afternoon the plan was the State would buy these loans at a “substantial reduction and pays for them with bonds which are very aggressive in terms of the banks because of the very low interest rate”.
This system would incentivise banks to manage their assets and added additional protection for the taxpayer in the event of a drop in valuation, Mr Lenihan told RTÉ's The News at One, after the Bill was published.
“What I am providing on the downside, in order to protect the taxpayer, that it is not just one single right valuation, that there is a spectrum of valuations and that the first slice is at the risk of the bank.”
More detail on the risk-sharing mechanisms will be outlined by the Minister in the Dáil next Wednesday when the debate on the proposed legislation begins.
During that debate Mr Lenihan will announce details of the “haircut” - or discount - that is to be applied to the loans being transferred to Nama.
Mr Lenihan said that because each individual loan required a separate valuation, the figure he will provide to the Dáil next week will be an estimate. He said there was no “single right valuation;” rather there was a spectrum of valuations and stressed the banks would be the first to take any losses.
The Minister also said “all borrowers will be pursued by Nama for their debts” and that any “involvement by borrowers in the development or completion of properties acquired by Nama will be subject to strict limits and controls”.
The concept of risk-sharing was originally put forward by the incoming governor of the Central Bank, Prof Patrick Honohan.
Mr Lenihan also expressed frustration with some contributions on the agency from Opposition politicians and commentators, describing them as “endless debates about how many angels dance on the head of a pin”.
“I am actually open to constructive amendment . . . . that is why some of these amendments have been introduced. I am prepared to introduce other amendments,” he said.
The Minister denied there would be any “sweetheart” deals for developers once Nama starts disposing of assets, saying there was no “question of bailing them [developers] out as is being constantly misrepresented.
“Once Nama is established and enforcement proceedings start you are going to see a large number of developers exposed to the public view for their insolvency.”
Analysts noted the changes introduced in the Bill but said they were more political and made little difference to investors.
"The issue is more a greater certainty of Nama going ahead rather than a good deal or bad deal for shareholders from these amendments," said Stephen Lyons, analyst with Davy Stockbrokers.
"If you look at a lot of the attributes of the amendments/agreements, there are some populist measures . . . such details don't change the investment case for the banks, but they certainly help appease the junior coalition partners."
Other provisions in the Bill make it a criminal offence to lobby Nama with only a borrower authorised to deal with Nama directly. It also reduces the amount Nama can borrow to fulfil its functions from €10 billion to €5 billion.
Another change is that Nama will be required to report to the Minister quarterly, rather than annually, and the Comptroller and Auditor General will review the progress of Nama every three years.
Mr Lenihan also said he would bring forward plans to make windfall gains on rezoned land subject to capital gains tax at a rate of 80 per cent.
As this is a tax change it cannot be included in the legislation for Nama and will have to be included in a Finance Act.
Political pressure from the government's junior coalition partner forced Finance Minister Brian Lenihan to change draft legislation creating a state-run Nama that soothes concerns about the cost of cleaning up the aftermath of a devastating property crash.
"The Bill contains a number of important changes that will allow Nama to achieve its goal of stabilising the banking sector and restoring the flow of credit to business and consumers while minimising the risk to the taxpayer," Lenihan said in a statement after publishing the legislation on Thursday.
Despite the changes, which will allow Nama to suspend payments to the banks if it is not able to realise the full value of properties underlying the loans, shares in AIB and Bank of Ireland rose in hope the legislation will now pass through parliament.
Bank of Ireland was trading up 8 per cent and AIB was nearly 5 per cent stronger in a broadly flat market.
Shares in both banks had fallen around 18 per cent each in the past week and a half on fears Lenihan's junior coalition partners, the Greens, would obstruct passage of the bill.
But the changes to the legislation, after weeks of pressure from the Greens, should help Lenihan get the Bill through parliament in the face of opposition party hostility.
Under Lenihan's initial plan, the banks would have been paid for their loans "at a significant discount" in bonds, guaranteed by the Government, which could have been cashed in with the European Central Bank.
By partly paying the banks in subordinated debt and suspending payments due on that debt in the event Nama makes a loss, the banks are still held partly responsible, reducing the risk to the taxpayer.
AIB and Bank of Ireland have already received €3.5 billion of state capital each, translating into a 25 percent indirect stake in each company.
Depending on the size of the discount Mr Lenihan demands on the book value of the property loans, AIB and Bank of Ireland may need a further bailout from the government.
The Minister will give a flavour of that discount, and the capital impact on the banks, when he introduces the Nama legislation to parliament on September 16th.
Much of the other changes to the legislation, including an 80 per cent windfall tax on rezoned land and greater transparency, were announced late on Wednesday.
Mr Lenihan also said he would introduce new measures to prohibit a bank CEO from immediately becoming chairman and would propose limits on cross directorships in the banking sector.
