There is brisk business being conducted right now in the trade of Irish loans, which might be surprising to some of you. As a nation of property-crazed maniacs, most of us tend to have an understanding of bricks and mortar, the buying and selling of homes in particular. A smaller group of you will be familiar with the buying and selling of commercial property, and a smaller group still, with development of both existing property or fresh undeveloped sites. But the trade of loans will be a whole new business to the vast majority, even if those selfsame loans are secured on the focus of our national obsession, property. This blogpost looks at the business and the most prominent recent trades.
Bloomberg reported on Friday last that €140m of loans had been sold by Lloyds Bank to a US investment management company, Canyon Capital Advisors. The loans are reported to relate to Limerick businessman Tom Moran’s hotel group which includes the Red Cow Inn and Bewleys-branded hotels. The Moran Hotel Group is reported to have a debt mountain of €693m overall. The €140m of book-value loans sold to Canyon, were originally advanced by Bank of Scotland (Ireland) which closed itself to new business in 2010, and is now running down its loan book, partly in conjunction with asset manager, Certus. Although not confirmed, Bloomberg claim that Canyon bought the Moran Hotel Group loans at a 70% discount, that is, paid just 30c in the euro. If confirmed, it is but the latest in a long line of major disposals of Irish loans, some of which are detailed below.
There was speculation that NAMA was readying for sale in 2013 a major portfolio of loans, perhaps with a value of up to €1bn, secured on Irish property but regardless whether that is correct or not, NAMA confirmed in a parliamentary question last October 2012, that it has, since inception in 2010, sold nearly €2bn of loans. NAMA is very coy about its loan sales activity and refuses to provide a breakdown but also refuses to reveal its procedures which might give us comfort that it is maximizing prices on our behalf. The view on here is that the Maybourne, Mulryan and Dennis loans would account for the majority of NAMA’s loan sales to date. Loan sales distinguish themselves from refinancing, for example, both David Daly and Bill Durkan have refinanced loans out of NAMA, that is, they convinced other lenders to lend them the funds to repay their loans to NAMA though now, they have loan obligations to the new lenders.
There has also been speculation that NAMA has been readying a billion euro US loan portfolio for sale through US loan sales company, DebtX. NAMA denied the story at the time, late last year, but speculation has persisted.
IBRC has already reportedly engaged UBS to advise on the imminent disposal of €2bn of corporate loans – business loans, mostly to Irish businesses. AIB recently pulled the sale of €125m of loans secured on UK property after bids fell short of expectations. Earlier this year, Permanent TSB pulled the sale of €8bn of UK mortgages for the same reason.
Outside Ireland and the UK, there has already been over €10bn of loan sales in North America by Anglo, AIB and Bank of Ireland.
Legal difficulties in selling loans
Minister for Finance, Michael Noonan responded to a parliamentary question after the AIB/EBS sale of loans to Lone Star to say that borrowers would continue to be covered by their existing loan contracts, but some of the buyers are completely unregulated in Ireland.
In the UK when NAMA sold the €800m of Maybourne loans to a company controlled by the billionaire Barclay twins, the vehicle set up by the Barclays was Maybourne Finance which had the single objective of acquiring these loans. Paddy McKillen went to the UK’s High Court and claimed that his loan terms with Anglo, now IBRC, stipulated that he should be consulted before loans were sold and that there was a restriction on the type of company that could acquire his loans. Paddy was successful in the UK’s High Court but the judgment was appealed and NAMA won the appeal, Paddy then sought application for a further appeal but was unsuccessful with the judges, in part, saying, because NAMA was a foreign matter, the matter that Paddy said was at issue wasn’t worthy of court time in the UK! It seemingly remains open to Paddy to seek to have the matter determined afresh in the Irish courts.
What drives trade in loans?
What some of the audience on here might wonder, is why anyone would sell or buy a loan; after all, if John gets a loan of €1,000 from Bank A and agrees to pay that back with 4% annual interest over a period of three years, then why would Bank A want to sell that loan, and why would Bank B or Investor B want to buy it. There are a number of factors which drive the loan sales business – Bank A might want the €100 back right now and not in three years, and if it can’t get €1,000 it might accept a discount, Bank A might doubt that it can get the €1,000 back from John and it doesn’t want to deal with chasing the debt or repossessing an underlying asset, or Bank A figures it can get more from selling the loan now than it can get from John. In the case of Ireland, during the credit and property boom of the 2000s, lending by Irish banks got completely out of kilter with deposits held by banks and we had lending that was in some cases more than 200% of deposits; under the auspices of the bailout Troika, that percentage is to come down to 122.5% by the end of 2013, but that target may slip.
In practical terms, most buyers of loans get the loans at a discount to their face value, and as businesses, the buyers hope to earn a profit from better management of the loan, or should the loan be foreclosed and underlying security seized, that the consequent disposal will yield a profit. That’s the market – there was a special status buyer of the Maybourne loans and it is ultimately after control of the Maybourne group of hotels in London.
Who are the players?
There are the original lenders which are mostly banks and building societies, but following the acquisition of €74bn of book-value loans for €32bn, NAMA has become a potentially major player. In There are buyers which comprise a mish-mash of other banks, private equity and general investment companies, property companies and the odd special purchaser as in the case of the Maybourne loans. There are then, a host of intermediaries from lawyers to consultants offering advice and completion services including due diligence and verification of property titles. Then there’s the sales and marketing; in the recent sale of €21m of face-value loans relating to Paddy Kelly’s loans secured on the Hotel Phoenicia in Valletta, Malta, property services company Jones Lang LaSalle was engaged to market the loans. There are also auction companies – or “trading exchanges” – like DebtX in the US and HLIX in the UK. And some of the buyers seek finance for purchases, so there is a further hierarchy of providers of financing. NAMA was setting up so-called Qualifying Investor Funds in Ireland to transfer some loan and property assets but the status of these plans is now uncertain in light of the recent ministerial announcement to introduce Real Estate Investment Trusts to Ireland.
Political issues with the disposal of loans
We should be questioning NAMA’s disposal of loans. NAMA doesn’t need the cash right now, it has until 2020 to work out its loans. NAMA is supposed to be a specialist asset manager where most of the underlying security is property, so if NAMA is selling its loans to another loan manager, then we are entitled to ask what is NAMA lacking. And NAMA should now be a specialist in loan recovery, foreclosure, asset tracing, and in all the other specialisms particularly needed with distressed loans.
If 99.8% state-owned AIB did indeed sell the €660m of Irish loans secured on Irish commercial property to Lone Star at a 60% discount, we are entitled to ask why. Of course, AIB has so-called “deleveraging” targets where it must dispose of loans under the deal with the bailout Troika, but why didn’t AIB simply dispose of the loans to NAMA which is, after all, set up for that very purpose and has a spare €22bn of unused NAMA bonds – provided for under the European Commission-approved NAMA Act which allows the issuance of €54bn of bonds, of which only €32bn have to date been issued – which only cost the Agency 0.75% per annum. Why did this State give Lone Star a reported €410m discount on AIB loans if NAMA was available as a receptacle which would have another eight years to deploy its expertise in working out the loans?
What is baffling on here is the almost-complete lack of political oversight in the disposal of loans, it seems politicians don’t understand these disposals to be of state assets just like our stakes in Aer Lingus, Bord Gais Energy or the ESB.
In the case of NAMA, we have instances where there is a perception of developers benefitting from the loan sales; Donal Mulryan is understood to be working as a consultant with the buyer of his loans, Morgan Stanley and it shouldn’t be a surprise if his annual rewards are far higher than the €200,000 cap that applies at NAMA. There is also a concern that NAMA will sell loans to a third party who might sell them back to the original developers.
UPDATE: 6th January 2013. It is being reported today that NAMA has offered for sale loans relating to the Adare Manor hotel and complex in Limerick for sale, and that 20 bids have been received. “At least” €13m is needed to secure it, says Tom Lyons in the Sunday Independent. The Limerick Leader provides extensive background on the loans here and says the disposal is tied to embattled 53-year old US investor, Tom Kane’s financial woes.