Ireland is rapidly being sold to the United States. To be specific, thousands of the ‘bubble’ property loans that brought down the Irish banks are now in the hands of US investment funds – and in some instances the properties themselves are owned by these funds after administration proceedings against borrowers. NAMA (the National Asset Management Agency) had sold €18bn of assets – including €13bn of nominal value loans – by the end of last year. The overwhelmingly majority of buyers of these loans were US funds. (See box.)
Discounts on the face value of the loan portfolios are large – and sometimes massive. In the case of the sale of the main portfolio of NAMA’s Northern Ireland portfolio, the buyer paid just 27.3% of the face value of the loans. And Ulster Bank sold its NI portfolio for a mere 15% of its nominal worth.
Clearly, the US funds are confident that property values will rise again over the medium term – as indeed they have already begun to in Dublin. But some funds may have a more short-term agenda. In many instances, funds probably believe the properties are worth more than the discounted loan value.
Many hundreds of Irish businesses – both in the Republic and the north – are now in the position of having borrowings that were taken out with Irish banks, but which are now owned by US investment funds. Aidan Clifford, technical director of ACCA Ireland, suggests the finance directors of these debtors should assess the business model of their new creditors. He explains: “Some US funds are happy to sit back and allow the company service the loan as per the original loan contract, but as there are no future business opportunities for the US fund, they will want to recover their money on the single current loan rather than building a longer-term relationship.
“It is important to get out the loan agreement and read the contract terms and conditions and especially the loan covenants. It is common for a business lender to overlook breaches of loan covenants, but a vulture fund will not overlook such breaches and a breach usually renders the loan repayable immediately. Covenants might be as simple as the production of audited financial statements within a set time frame or certain financial ratios.
“The second thing to consider is to immediately speak to a corporate insolvency practitioner. There are certain ways of protecting your business, but the directors may need to make their move prior to the vulture fund making theirs.”
Deloitte’s Padraic Whelan, head of its Real Estate and Infrastructure Group, makes similar points. “The finance director will have a new lender so should proactively engage post the transaction, as indeed should the new lender. Both parties will have a strategy and depending on circumstances, it will be a matter of working out solutions. If there is a level of equity underlying the secured debt, it might be acceptable to refinance the loan with a bank. A stressed situation will still require the co-operation of the borrower and it may well be necessary to work toward right-sizing the debt to the best extent possible through a level of asset realisations – timed appropriately.”
Damien Murran, EY’s associate director for Restructuring, Transaction Advisory Services, agrees. He says: “Whether loans are performing or non-performing, I would advise the FD to engage immediately with the new lender. The relationship for both parties remains governed by the loan and mortgage documentation in place, so in this respect neither parties’ rights have changed. Therefore where loans are performing it will be business as usual, so it will be important for the FD to build a working relationship with the new lender, as they would have had prior to their loans being sold.”
Murran argues that the engagement of US funds in Irish property ownership is good for the Irish economy. “I believe it is positive for capital cycles that US investors have acquired assets in Ireland as it will provide a natural cycle of exit and asset replenishment,” he says. Whelan takes the same view. “US funds have invested for many years in European countries and are now contributing significantly to Ireland’s return to growth,” he argues. “It’s a vote of confidence in the country, which is regarded as one of the best countries in the world to do business.”
But anxieties have been expressed about whether this process is in the interests of the Irish economy. Following the sale of vast quantities of property debt in Northern Ireland to US investment fund Cerberus, the House of Commons Northern Ireland Affairs Committee suggested earlier this year that “the Northern Ireland Executive should keep a close eye on the relationship between Cerberus, the partial successor to NAMA, and businesses in Northern Ireland”. Noting that Northern Ireland First Minister Peter Robinson described the Cerberus acquisition of the NAMA portfolio of Northern loans as “excellent news”, the MPs responded “it is still too early to say whether this was indeed excellent news for the NI economy”.
AB asked two of the largest fund investors for answers to key questions about their intentions regarding Irish assets. Lone Star did not respond. Cerberus issued a detailed statement explaining its business model. It said: “The firm’s preferred outcome is to keep the owners and tenants in place, establish a true value for the property, stabilize the asset and deliver value for shareholders, owners and tenants. Cerberus’ team has a deep understanding of the property market and how to operate assets in order to increase their value…. The majority of the Project Eagle properties and loans are now performing significantly better because of the careful, case-by-case approach that Cerberus have taken. The feedback from borrowers and tenants regarding their working relationship with Cerberus has been overwhelmingly positive.”
Despite this, it is understandable that debtors will be nervous when the major creditor changes. Engagement and co-operation seems to be the best policy to keep the borrowings going.
The Great Sell-off
NAMA had generated receipts of €17.9bn from disposals of property-based loans and other assets by late 2014. It has another €1.6bn of loan portfolios on sale on the open market at present.
Project Aspen had a par value of €800m and was reportedly sold by NAMA for €200m to a US consortium of Starwood Capital, Catalyst Capital and Key Capital, with NAMA retaining a 20% stake in the joint venture. The loans were made by the Bank of Ireland, mostly to companies connected to property developers David Courtney and Jerry O’Reilly. They financed a central Dublin Garda station, several supermarkets and Sandymount’s Merrion Gates.
Project Club had a par value of €250m and was reportedly sold by NAMA for €70m to CarVal Investors, a US based distressed investment fund. The properties underpinning the loans are retail sites and development land within Dublin, including the Navan Shopping Centre and the Fairgreen Shopping Centre.
Project Holly had a par value of €373m, which was reportedly bought from NAMA by US based distressed investment fund Lone Star for €220m. The underlying property portfolio includes offices, hotels and land in Dublin and Meath, which had been financed through loans to the McGarrell Reilly Group. Tenants include Airbnb.
Project Tower had a par value of €1.75bn and was purchased from NAMA by US private equity firm Blackstone for €1.1bn. The portfolio includes loans on student accommodation and other properties in Ireland, the UK, Germany and Spain entered into by Michael O’Flynn.
Project Eagle had a par value of £4.5bn and was purchased by US distressed asset investors Cerberus Capital Management for £1.2bn. The portfolio is a disparate collection of loans to borrowers based in Northern Ireland, which were secured on properties in Northern Ireland, Great Britain and the Republic.
Hypothekenbank Frankfurt sold its Project Opera portfolio of Irish loans to US investment companies Kennedy Wilson and Varde. The underlying properties include the Dublin head offices of KPMG and the Bank of Ireland. Kieran Wallace and Eamonn Richardson, KPMG’s liquidators of IBRC, sold the former Irish Nationwide portfolio of residential loans, packaged as Project Sand and with a face value of €1.8bn, to Lone Star, Oaktree and others. They sold tranches of the Project Stone portfolio of Anglo Irish commercial real estate loans to various funds, including Deutsche Bank, Goldman Sachs, Lone Star and CarVal. The Project Evergreen portfolio of Anglo Irish corporate loans, which included a loan to Arnotts department store, was sold by the IBRC administrators to Lone Star. Lloyds sold its Ulysses portfolio to the US based Pimco fund, its Project Phoenix, containing home loans, to US private equity fund Apollo Global Management and a portfolio of corporate property loans to Cerberus. Lloyds and IBRC have both sold loan portfolios to Lone Star. Ulster Bank has sold loan portfolios to Cerberus, Lone Star and another US fund, Bain Capital. The Ulster Bank portfolio of NI loans with a face value of €1.4bn was sold to Cerberus for €200m.
Northern Ireland’s drama
The UK’s National Crime Agency has been brought in by the Police Service of Northern Ireland to investigate NAMA’s sale of Project Eagle, the main portfolio of its Northern Ireland commercial loans. The loans had a face value of £4.5bn, but were sold for £1.2bn. Irish TD Mick Wallace claimed in the Dail that £7m from the deal ended-up in an offshore bank account, in part, he alleged, to pay Northern Ireland politicians or parties. All the North’s leading politicians and parties have denied the money had been intended for them. It subsequently emerged that the former managing partner of Belfast law firm Tughans , Ian Coulter, had opened a bank account in the Isle of Man, holding £7.5m, which Tughans claims was done without approval from other partners in the firm. That money is now held by Tughans. Ian Coulter said the funds had been transferred into an Isle of Man bank account by Tughans’ finance director, acting on Coulter’s instructions. “The reason for the transfer is a complex, commercially – and legally – sensitive issue and has been explained to my former partners at Tughans,” he said. Coulter added that no money had gone, or would go, to any politician. He says he did nothing wrong. Cerberus denies any knowledge of the £7.5m being taken out of a fee paid by Cerberus to its lawyers, Brown Rudnick, which it shared with Tughans. In a statement, Cerberus said: “Cerberus is deeply concerned by the allegations and inferences that have recently been made in Northern Ireland related to the sales process for Project Eagle. First and foremost, Cerberus has not been accused of any wrongdoing…. We have made it clear to all parties that we welcome any investigation into these concerns and will fully cooperate with any legal or regulatory authority…. [T]o Cerberus’ best knowledge, no improper or illegal fees were paid by Cerberus or on its behalf by the firm’s advisors.” A spokesman for NAMA said: “NAMA is fully satisfied that the Project Eagle sales process delivered the best possible return that could have been achieved for Irish taxpayers.” NAMA told the Dail’s Public Accounts Committee that an earlier bid from Pimco for the portfolio had been disqualified when Pimco disclosed it was to pay fees’ of £15m to be split three ways between Brown Rudnick, Ian Coulter and Frank Cushnahan – a former member of NAMA’s Northern Ireland advisory committee. Pimco says it voluntarily withdrew from bidding. Frank Cushnahan’s lawyer said his client “firmly denies any wrongdoing and will fully co-operate with any police investigation”.