FINANCE minister Brian Lenihan will unveil a discount or 'haircut' on the value of toxic property loans of around 30% in the Dáil on Wednesday. The move is set to trigger a huge cash call for the country's banks which could cost the state at least €10bn and see the government ultimately take a majority stake in AIB.
Although the price Nama is likely to pay is being kept secret, informed sources expect Lenihan to reveal that the government wants to move about €85bn of loans into Nama at a discount to book value of 30%.
"It will be in and around that figure," one senior source told the Sunday Tribune yesterday, adding that, in some cases, land would actually be discounted to below agricultural prices because the cost of clearing the land to make it suitable for agriculture had to be factored in.
While the haircut on the loans will be around 30%, Nama will effectively be paying an average of just under 50% of the original value of the properties. That is because in the majority of cases, the loans only equate to 75% of the original property price.
A 30% discount on the loans will mean the government paying €59.5bn, though in the form of bonds rather than cash.
The state-backed Nama bonds, issued to the banks in exchange for the loans, will push up the state's national debt to over 110% of GDP.
The discount has been arrived at after Lenihan's advisors – including HSBC Bank and property valuer John Mulcahy, previously of Jones Lang LaSalle – studied Europe's worst property downturn of the last 20 years in Finland, when overall property prices fell by up to 50% from peak to trough.
However, it is understood some development land has dropped by 70% in Ireland according to models used by Nama. This is balanced out by other land banks, particularly those held outside Ireland where the fall in value is likely to be much less.
While Brian Lenihan is expected to make it clear that the government "stands behind" the banks following the discounting on the loans, it is now possible that he will not, as previously expected, provide detailed information on the precise capital requirements of individual banks.
It is understood Lenihan would like to provide this information, but he is being advised that it may to be too early to definitively come up with a precise calculation.
AIB, the country's largest bank, is expected to have approximately €25bn of its loans moved to the agency. If this is discounted at 30%, it could leave the bank requiring over €3.5bn in fresh capital. The injection of funds into AIB by the government would take the form of ordinary shares, leaving the state with majority control of the bank.
A stake of over 70% was being discussed last week by the Department of Finance, although AIB has shareholdings in US lender M&T Bank and its Polish operations to sell to reduce government control.
Bank of Ireland, which has lower property exposures than AIB, will have approximately €17bn of property loans moved into the agency.
The 75% LTV is a lie. Every five years of interest roll up adds roughly 28% onto the loan principal. Developers do not pay interest on development loans until development projects generate income from unit sales. While the LTV ratio may have been 75% at inception, by the time the development goes from planning to marketing several years of rolled up interest have accrued. Like mortgage agreements, LTV on development loans is only ever measured at the inception of the agreement.