Noonan and Nama must decide how to play their hand
'You've got to know when to hold 'em, know when to fold 'em. Know when to walk away and know when to run."
Country singer Kenny Rogers gave some pretty straightforward advice when singing about playing poker. The dilemma of knowing when to take your winnings (or losses), versus stick around for something better, is now faced by Finance Minister Michael Noonan and the executives at Nama.
The rapid sale of nearly €20bn of IBRC loans by the bank's liquidators has shown just how enormous the appetite is from mainly international buyers for Irish assets. Liquidator Kieran Wallace had €21.7bn of loans to sell. Anything he could not offload would transfer to Nama. Just €2bn of unsold loans will now transfer to the State agency.
Nama, with tens of billions of assets to sell, has already accelerated its disposals as buyers appear from everywhere. Noonan has asked for a review of the agency which would outline the options for the future. These include a faster sell-off or finding mechanisms to allow Nama to retain an interest in the longer-term value of some of its assets.
In the current window of positive appetite for the Ireland recovery story, Nama could probably find buyers for an enormous chunk of its portfolio. Just two weeks ago, it sold the entire Northern Ireland package of loans in one go.
This is money in the bank but naturally raises the question that if Nama held off, could it get more for the taxpayer? This is the dilemma.
Here are some arguments for selling quickly:
1 Take whatever money is going for these assets because it is guaranteed cash in the bank. The prices being attained right now are not fire-sale prices, but in fact a lot better than they would have been two years ago. Nama is legally prohibited from selling assets at below the value it carries them on its books. That is why it had to write down a lot of assets after it bought them. Anything it sells is at least equal to or above the value of that asset on its books.
2 Holding off might bring in more money as assets are developed, but it leaves the risk of the Irish taxpayer carrying these loans for longer. Every loan or asset Nama sells today reduces the potential exposure of Irish taxpayers to further losses down the road. Selling now de-risks the Irish State. What if the euro crisis returns or there is a big economic shock abroad that would collapse the value of these assets in a couple of years? We might be kicking ourselves that we didn't sell.
3 Irish banks, including AIB, hold several billion Nama bonds. The sooner Nama sells up and goes away, the sooner these bonds get paid back. That will naturally increase the value of AIB as the State seeks a buyer, because it won't be owed a lot of money by Nama.
4 De-risking the Irish State by selling as much as possible now, carries another positive consequence. The fewer the risks buried within the State's books, the easier it is to borrow money on international markets cheaply. A rapid sale might not realise as much money today as it could in the future, but it could contribute to reducing the cost of borrowing on international markets, which saves the State money.
Reasons not to sell too soon:
1 The banking crash has already cost taxpayers €64bn. If Nama can bring in more money for the taxpayer by retaining an ongoing interest in assets, then it would be foolish to give that possible profit away.
2 Mainly international buyers are falling over each other to buy these assets. Why should they get all of the profit from buying them?
3 If Nama itself turned into several large Real Estate Investment Trusts (REITs) it could attract massive international capital, while realising an enormous potential profit into the future (as long as things continue to go well).
4 Nama could use its significant resources to co-develop sites with private sector interests and retain a slice of the profit. Sell it and all the profit goes to the international buyer. The agency would also be assisting the rebuilding of the property and construction industry in the process. REITs are floating on the stock market, using the proceeds to buy cheap assets, and their shares are going through the roof. Nama could do the same thing.
Since its inception, there have been contradictions at the heart of the Nama project. It might seem galling for taxpayers to see Nama sell assets at low prices to international buyers, and watch them bag the profit.
However, those buyers are also taking a risk. What if the market were to turn down again?
The State would be left with billions in unsold assets.
There are good arguments on both sides here, but the Irish public has already paid a massive price from speculation and risk-taking in the property market.
We don't want to do it again.
If there is an opportunity to get rid of as many Nama assets as possible, and at the same time for the agency to make a profit, then surely it should be grabbed with both hands.
Noonan and Nama should take the money and run.
Sunday Indo Business