Celtic workout

The Irish government this week started one of the world’s largest property workouts when it began buying discounted real estate loans from the country’s banks.

After first being muted one year ago, the National Asset Management Agency – Ireland’s bad bank – revealed on Tuesday it would spend a total of between €40 billion and €50 billion buying up property loans, with discounts for the first tranche coming in at an average of 47 percent.

The haircut is greater than initially expected, and at first glance, the transfer to what is effectively a giant work-out shop should be great news for real estate opportunity funds eyeing NAMA as a potential source of deals.

After bailing out Ireland’s banking system following years of “lousy property lending to speculators and property developers”, as the Financial Times’ Lex column described the situation, the government and the public want their share of any potential future gains.

However, opportunity fund managers should understand there is more to this bad bank than just economics. Politics are also involved.

After bailing out Ireland’s banking system following years of “lousy property lending to speculators and property developers”, as the Financial Times’ Lex column described the situation, the government and the public want their share of any potential future gains – should there be any. Moreover, they certainly don’t want to see the nation raided by “vulture funds” making a killing out of their distress.

Indeed, anyone can feel the simmering anger of the public and elected politicians through the comments of Ireland’s finance minister Brian Lenihan to Reuters this week: “Those who brought us to this position have a lot to answer for.”

Of course, it's an issue that is being mirrored in the US.

The US banking regulator, the Federal Deposit Insurance Corporation, is painfully aware that dozens of firms made fortunes in the 1990s as the Resolution Trust Corporation sold off pools of assets in the wake of the savings and loans crisis. However, the government lost roughly $124 billion for their efforts, according to the FDIC. Now though the FDIC has learnt its lesson and is retaining a 60 percent interest in its structured sales, while private investors are taking a 40 percent interest at the same time as managing the venture.

According to people familiar with Ireland’s NAMA, the bad bank has already delivered a very clear message to many opportunity investors that have made the trip to Dublin eyeing a potential sack full of distressed loans: “We won’t be holding a fire-sale.”

NAMA has basically bought the loans at par values, relative to today’s property markets, with a 10-year plan to dispose of those assets. Full recovery – even over-recovery – of taxpayers’ money is a critical part of its business plan.

Details of how NAMA will eventually dispose of its assets will emerge over time, as it starts evaluating the loans it has taken over. The Irish workout, therefore, will be a slow, cautious and deliberate one, not a buyer’s paradise.