BA 01 10 Implications of NAMA for Northern Ireland Introduction 1 NAMA (the National Asset Management Agency) is being established by the Irish Government to take over the loans of Irish covered financial institutions involved in the land and property arena. This includes three major financial institutions with a significant presence in NI and in GB, namely Anglo Irish Bank, Bank of Ireland and the First Trust/Allied Irish Bank. Other Irish financial institutions are also covered, while there is still scope for additional institutions to decide to participate in NAMA. NAMA will operate as an independent commercial entity under the aegis of the National Treasury Management Agency. We also understand that some operational issues are still evolving. 2 NAMA will acquire eligible bank assets from the participating financial institutions, broadly defined to cover almost any loan, though the NAMA Business Plan (published in October) indicates it is intended to apply primarily to property related loans. The participating institution is obliged to produce a full list of all its eligible bank assets and this is given to NAMA which has full discretion to select those eligible bank assets from that list which it wishes to acquire. These are then transferred by way of an Acquisition Schedule being served on the financial institution in the UK the Acquisition Schedule will not have direct effect and so an equitable type transfer is more likely. NAMA legislation what does it mean for UK businesses? 3 Under the NAMA legislation Irish covered financial institutions are obliged to provide the NAMA Executive with details of all land and property loans on their books including loans to UK businesses. This applies even if the land and property developments are solely within the UK. We understand the UK Treasury has not raised any major concerns about the operation of NAMA, and indeed is supportive in principle. NAMA is in effect stepping into the shoes of participating institutions and cannot simply set aside the terms of the underlying documentation this is particularly so outside the ROI where the NAMA Act has no statutory Correspondence address: Scottish Amicable Building 11 Donegall Square South, Belfast BT1 5JE T: 02890 101100
authority. Thus the fundamental nature of the borrower s financing arrangements should be unaffected. 4 Many companies in Northern Ireland are likely to be impacted by the creation of NAMA some are still unaware of its direct impact upon their operations. Our understanding is that the criteria at present is if there is a land / property loan in excess of 5 million in notional value then that loan and all associated loans could be transferred into NAMA if the NAMA Executive agrees following the provision of detailed information on the loan status to that body (this threshold applies to Bank of Ireland and First Trust). For the other banks participating in NAMA (including Anglo Irish Bank) all of their land / property loans will be transferred (this is set out in the existing NAMA Business Plan). Consideration is being given to reducing the 5m threshold to 1 million although this may involve too great a workload for the new institution in the initial period clearly if this lower threshold was to be set there would be a very significant increase in the number of local companies impacted by the proposals. 5 The loans to be transferred to NAMA include performing as well as non performing loans. In addition the land / property aspects might only represent a small portion of the total facilities that will be transferred to NAMA. For example a UK business could have 5 million (Euros) only in land and property assets and 50 million in other business loans and facilities (with the same financial institution) and yet all these facilities may be transferred to NAMA. We understand that many trading businesses in Northern Ireland, which have invested in property/land over the last decade and with loans with an Irish financial institution participating in NAMA may find all their banking arrangements transferred. However it is very unclear whether this arrangement will be widely used in practice. 6 Clearly this could have implications for all GB/NI-based businesses which meet these criteria. However we believe NI-based companies might find it more difficult to respond to this situation eg by seeking alternative funding sources to replace existing credit facilities due to the much more significant boom and bust in the property market in NI and the over-exposure to the property market by other local financial institutions this is likely to be a less significant issue in GB. 7 Other loans that can be transferred to NAMA are loans that have been made to what are termed associated debtors of a NAMA debtor eg those parties which have acted in partnership with a NAMA debtor. 8 We recognise that NAMA has an important and extensive role to play in helping Irish financial institutions restructure their balance sheets and assist in improving credit availability, as well as in helping individual companies to reconstruct their finances. However there is a vital need to improve communications on NAMA s precise role within the UK and how it will operate in practice. Issues for UK businesses arising in respect of NAMA 9 The implications of NAMA are therefore significant for any company which meets the criteria set out in Para 4 above, yet we are concerned that the full implications of this are not widely understood, and significant uncertainties remain. The consequences and issues for companies to address include:
- Companies may be drawn into NAMA even though they have performing loans and pose no or minimal risk to the financial institution there is a concern that this could be potentially damaging to their reputation if NAMA is perceived as a holder of nonperforming loans - Trading companies who find themselves drawn into NAMA could find that their ability to access future project or working capital finance is impaired at this stage it is unclear how NAMA will address this issue - Taxation issues there may be issues with withholding tax - Other issues eg what impact on personal guarantees, are there data protection issues with transferring loans, etc Clearly at a time when the Northern Ireland economy is emerging slowly from the recession it will be very unhelpful to find that many companies are being additionally burdened or constrained by such issues. Removing the uncertainty associated with NAMA and how it will operate is clearly important. These issues are set out more substantially in the following paragraphs. Reputational risk 10 GB/NI businesses with performing loans, who are principally UK-based with no significant connection to the Republic of Ireland, will not wish to have their banking facilities transferred to an Irish Government agency which is associated with managing impaired loans. 11 In addition those GB/NI businesses which are not in default may believe that they could suffer reputational damage if all their borrowings are transferred to NAMA. This will be a particular issue until it becomes much clearer in the wider business community that NAMA does indeed include performing loans, as well as non-performing loans. Again effective communications will be critical. 12 The Irish Department of Finance will be able to produce a register of NI companies whose loans could be transferred to NAMA. This will be shared with Northern Ireland appointed representatives on the NAMA Advisory Council and will thus give an understanding of the scale of the impact of NAMA in NI. Access to further finance uncertain 13 From a continuing operational perspective the transfer of all loans to NAMA could adversely impact a GB/NI company s future credit requirements in respect of project finance and additional working capital as there is a lack of clarity over NAMA s ability to provide additional
facilities. NAMA is empowered to do a range of activities including lending additional funds and there is some commitment to provide such funding with an official being appointed - but this still leaves considerable uncertainty. 14 NAMA will be prepared to allow companies to use surplus security, held by NAMA, to secure new loans from banks. This would have to be approved by NAMA on a case by case basis. 15 Furthermore the potential transfer of all the loans to NAMA may interrupt the current banking relationships which could adversely impact the GB/NI business going forward. Without an understanding of the business and its history/markets etc we may find NAMA taking much more clinical decisions, rather than pragmatic ones. It does appear that while NAMA will have a direct hands-on approach with large borrowers it is likely that smaller loans will continue to be administered by the participating financial institution. NAMA may also seek to sell on transferred loans to third parties. In such a scenario GB/NI borrowers may find themselves dealing with entirely new lending institutions in relation to existing loans, and this might impact on commercial lending relationships. Clarity on this situation would be extremely welcome. 16 There may also be an impact on credit checks once loans are transferred to NAMA how will credit rating agencies deal with this situation. 17 The response from the Irish Department of Finance is that loans transferred into NAMA should not be seen as carrying an additional risk, in fact NAMA provides greater security. Communication will be undertaken with the major credit ratings agencies. The Department of Finance in Dublin also see s a role for the Advisory Council to publicise the remit and activities of NAMA within Northern Ireland to ensure that stability and confidence are maintained. Taxation issues 18 As NAMA is not a registered UK bank withholding tax may apply on interest payments. This might be overcome by NAMA registering as a UK resident entity. This is not likely to happen as EU State Aids exemption would be compromised 19 The Irish Department of Finance believe that this will not be an issue and should be covered under the Double Taxation agreement between UK and Ireland. DFP are working with HM Revenue and Customs and the Department of Finance, Dublin to get confirmation of this. If there is an issue, a protocol letter of some form would need to be put in place to address which should not be insurmountable 20 There is confusion as to whether interest payments will be tax deductable (a legitimate business expense) if NAMA is not a registered UK bank. 21 HMRC provided a response to this query on 10 th March as follows The tax position is that the allowability of interest as an expense when calculating taxable profits does not depend on whether or not the interest is paid to a UK resident. Even though the interest is now being paid to a non-resident its treatment as a tax deduction is unaffected
Other issues 22 Data Protection - the provision of GB/NI customer information to NAMA in order for its Executive to determine if it wishes to accept the loan could be in breach of UK Data Protection Legislation although the bank may have sought an override of this legislation from the customer in its loan documentation. We understand that all facility letters contain a right to transfer to third party which may overcome this issue early clarification on this matter would be welcome. Should this not be the case there could be potential for protracted legal negotiations and expense if the customer refuses consent to the provision of information in order to pre-empt the transfer of assets 23 Personal guarantees clarity is required as to whether these will also transfer to NAMA. A situation could arise where a loan is sold on at a lower value to NAMA, but leaving NAMA in a position to come after the customer for the outstanding loan value. 24 NAMA has no powers to seize Northern Ireland-located assets under it s existing RoI legislation. It could not do so without a court order from a NI court. Concluding Remarks and Action required 25 As the legislation and regulations are currently drafted then GB and NI-based businesses (including several major NI companies) with performing loans with Irish covered institutions could be adversely impacted by the proposed legislation in terms of reputational damage, tax disadvantages and interruption to current banking arrangements and future facilities. The legislation clearly gives rise to significant uncertainties and risks. GB based companies caught by this legislation may find it somewhat easier to secure alternative financing arrangements which could prevent their inclusion in the NAMA regulations eg by reducing loans on properties/land to less than the threshold established. 26 A critical first step is to raise awareness of the role and operation of NAMA in NI and GB to ensure there is a much fuller understanding of how it will operate and the consequences and impact on businesses affected. Engagement with companies may in itself raise additional issues to those highlighted in this paper. Additional material could also be added to the NAMA website under frequently asked questions (www.nama.ie). 27 The Irish Department of Finance / NAMA will organise an education programme of events in Northern Ireland. We have the facility to suggest the type of information / guidance that should be made available on the website. 28 Consequently the UK Government and the Northern Ireland Executive/ Assembly should seek to minimise any negative implications and indeed consider whether exemptions from the NAMA legislation for GB/NI businesses who have loans with Irish financial institutions participating in NAMA should be sought.
29 The NI Advisory Board, as part of the NAMA board, will be in place by mid March. This is being chaired by NAMA board member Peter Stewart, Managing Director of O Donovan Stewart. The Finance Minister has agreed with Minister Lenihan that some NI appointees should sit on the board. The final composition will be agreed and announced by Mid March. This will provide another communication channel for NI businesses to raise concerns. 12th March 2010 Correspondence address CBI Northern Ireland Scottish Amicable Building 11 Donegall Square South Belfast BT 1 5JE Tel 028 9010 1100