Across the Irish Sea, speculation has swept through the commercial property market that NAMA has pulled its next non-performing loan (NPL) portfolio, €235m Project Club, “amid general concerns that borrowers are teaming up with potential buyers which is undermining the reputability of NAMA’s processes,” reported NAMA Wine Lake yesterday.
This seems a particularly grey area to disentangle, with various sources confirming that NAMA did indeed have real fears over the integrity of further single-borrower NPL sales, while more are adamant Project Club remains on track.
Of course, the position of NAMA is not to comment on live NPL sales.
Single-borrower NPL sales processes, where the underlying borrower is widely-publicised in the public domain, are significantly more vulnerable to a scenario where one bidder secures the co-operation of the underlying borrower to gain a superior due diligence advantage over competitors.
Project Club has been on standby until NAMA closed Project Aspen with Starwood Capital.
However, NAMA cannot prevent those planning to bid to engage in their own pre-NDA due diligence through an open dialogue with the underlying Project Club borrower, Eamon Duignan.
Only when the data tape is sent to bidders will they be required to sign an NDA which includes a clause prohibiting any dialogue with the borrower.
As Michael Noonan, minister for finance, stated in the Irish parliament recently: “I am advised by NAMA that it cannot preclude market participants from approaching debtors to discuss their property assets or to indicate potential interest in acquiring either properties or loans.
“Nor can NAMA preclude debtors from engaging with such potential purchasers. To do either would be counterproductive and could stifle normal commercial discussions in the property market and in particular could discourage international investors from exploring acquisition possibilities in Ireland.”
Therefore, NAMA is powerless to protect against Patron Capital Partners “having an involvement” with Eamon Duignan, as cited by NAMA Wine Lake yesterday, indicating that this was “unsubstantiated talk”.
Regardless of the accuracy of the specifics, the broader point is that any single-borrower NPL sale is exposed to one bidder gaining a first-mover type advantage in securing the co-operation of the sole underlying borrower – before signing NAMA’s NDA.
From which exclusive borrower co-operation, a prospective bidder could have a chance to talk to tenants, asses their intensions, gain knowledge on any received property offers, aiding a superior understanding on asset and portfolio value, and will also be able to gain insight with regards to planning matters, for potential asset conversion plays.
NPL portfolio bidders tend to factor into their pricing an element of discount – separate to what is deemed required due for asset quality and loan impairment – which specifically accounts for a level of uncertainty and lack of information.
To put it bluntly, bidders in bed with borrowers should be able to get rid of any discount for uncertainty and lack of information.
Of course the investor base competing here – private equity funds, hedge funds, and increasingly broader consortiums including niche property specialists – are all highly professional organisations, all likely to be seeking the same first-mover advantage.
When it becomes apparent in the market as to who has secured the best information, as is inevitable in real estate markets, the likely outcome is that the majority of the rest of the potential bidders will step aside, leaving the first-mover, effectively, in a one-horse race, which would cripple NAMA’s aim of securing price-tension for the deal.
All of which somewhat calls into question the viability of the single-borrower NPL sale process, if the overriding primary consideration is best possible principal recovery for NAMA and, ultimately, the Irish taxpayer.