The Resolution Trust Corporation was a US federal agency which was faced with similar issues to Nama. Could it offer lessons for Ireland?

THE SCALE AND complexity of assets held by the National Asset Management Agency are the biggest hurdles to completing its business plan by the end of 2019. Within the portfolio, there is an assortment of residential, commercial, hospitality, land and agricultural property assets, with various degrees of issues and considerations attached to each.

In addition, the assets are geographically spread across various countries including Ireland, the United Kingdom, Germany, France and the United States. The task of putting a strategy in place for these properties and loans will require significant resources to be deployed by all parties over the coming years.

As recent as the late 1980s, the US experienced a similar meltdown within its banking industry, resulting in the formation of the Resolution Trust Corporation (RTC). In 1989, the RTC was established to deal with the 747 financial institutions that had either closed or would collapse over the following six years. The RTC’s aims were threefold:

1) Sell distressed bank assets to recoup as much money as possible for the US taxpayer.

2) Minimise the impact of such transactions on local property and financial markets and minimise further erosion in values.

3) Maximise the availability and affordability of residential property for low and moderate income individuals and families.

The RTC created a number of different sales vehicles including the Small Investor Programme (SIP) to meet the needs of investors with moderate levels of investment capital, as well as a Multiple Investor Fund (MIF) for the larger investors/funds. Under these larger funds, the RTC established limited partnerships and selected certain private sector entities to be the general partner of each MIF.

The key characteristic of these portfolios was that they consisted of mainly commercial loans, some of which were performing but the majority were either under- performing of non-performing. “The good, the bad and the ugly” assets associated with these loans were effectively bundled together for sale.

Investors were given only generic descriptions at the time of selection. Once chosen, the assets were then delivered into separate pools of mortgages over time. The price paid for the assets was determined by the Derived Investment Value (DIV), which was an estimate of the liquidation value of assets multiplied by the percentage discount applied by selected party.

In each case, the RTC retained a limited partnership interest in the MIF, with the general partner engaged as asset manager to ultimately liquidate the portfolio over time. After the repayment of financing debt (most often provided by the RTC), the profit was then divided between the general partner and the RTC as limited partner, in accordance with their percentage ownership of the fund.

Another aspect of the RTC was Land Funds. These were set up specifically to deal with large tracts of development land which were undeveloped and required long-term workout plans. Within this programme, the RTC selected private sector entities to be the general partners of 30-year term limited partnerships.

The general partner typically invested 25 per cent of the implied value of the fund. The main difference between this fund and the MIF was that the general partner had the authority to engage in long-term development, as opposed to short- to medium-term asset liquidation.

The general partner had overall control of the fund, with net cash flow from the fund distributed in proportion to the respective contributions of the general partner and the RTC (25/75 per cent) up to the point where the RTC recouped its initial “investment” with the balance thereafter shared on a 50/50 basis.

Between 1989 and 1995, the RTC resolved mortgage and property assets valued at approximately $394 billion (€297 billion). Overall, the programme was considered a successful mechanism for disposing of assets and recovering funds. However, some critics of the scheme argue that it did not obtain particularly high returns on the assets sold. This criticism could be somewhat explained by the speed in which the RTC completed its task.

In Ireland, Nama has a projected life span of 10 years to deal with a nominal value of €72.3 billion of loan assets, including large provincial land banks with limited prospects of development in the short to medium term. When one bears in mind that the Irish property investment market transacted approximately €3 billion of domestic assets at the peak of the boom in 2006, it is a realistic expectation that it will take more than eight years from today to wind down Nama under the current business plan.

By considering alternative means of deleveraging, such as an RTC-type model, it would mean that debt rather than real estate is transacted. The buyers of these debt portfolios would have the responsibility to deal with the property assets covered by the debt they have purchased. There are many overseas private equity, institutional and hedge funds which specialise in debt purchase.

The recent successful sale of the former Anglo Irish Bank and Bank of Ireland US loan books demonstrated the appetite for pure debt deals. The key to replicating this in an Irish context is to create portfolios comprised of Irish, UK, European and US assets to create the right balance of short-, medium- and long-term opportunities for potential purchasers, thus allowing investors a blended return over the life of the fund.

Given the scale of the task facing Nama, this might be worth considering.

Robert Murphy is a chartered surveyor and director of Murphy Mulhall which specialises in office agency and investment property