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Archive for May 22nd, 2010

Kim Bielenberg in the Independent today has produced and written what might be one of the most incisive expositions during the property bust on the real lives of fallen developers – or “project facilitators” as NAMA are said to be calling them. He describes a meeting with “former property baron” Simon Kelly, son of Paddy Kelly. The family of property developers is now bust to a significant extent. Simon though is showing how to make lemonade from lemons by becoming a consultant to other developers being pursued for debts.

To those who are outraged at outward displays of wealth by developers who are supposed to be in distressed financial straits, Simon is reported as saying “The banks don’t want builders to go bankrupt because then they lose control of their assets. And there is no point in them seizing the cars, because they are just a drop in ocean when compared with the debt.”

Some in the general public might also be vexed at Simon’s advice to developers facing ruin “Don’t let the bank blame you for it. This was a breakdown in the system involving developers, bankers and politicians.” He is of course right.

There are three points of note in the article:

1. Banks don’t want to bankrupt developers because if they do, the banks may lose control of their assets.

2. Developers (who to a man are well… men) have transferred assets to their wives and according to Simon, they should have been doing that from the start. The legality of some of these transfers may be tested by NAMA.

3. Developers are turning to lawyers and consultants to seek advice, they’re not idiots and those at NAMA charged with recovering debts will certainly have their work cut out, and I predict some compromise deals that will be distasteful to some at NAMA.

UPDATE: the curious comment that “The banks don’t want builders to go bankrupt because then they lose control of their assets” had several interpretations. Firstly it might be saying that banks don’t want to crystallise losses – at present they have a loan on their balance sheet which might not have any provision against it and accrued interest may be adding to it (and the bank’s income). If the bank calls in the loan (and bankrupts the developer) then the bank will have to write off a loss, which may be exacerbated if the asset is sold at a firesale price as a distressed asset. If this interpretation – that banks would lose control over their balance sheet – is correct then it adds emphasis to the call from the Financial Regulator last Thursday for banks to realistically recognise the value of their loans. It also calls into question present day oversight by auditors and implies they are failing in their obligation to ensure the financial statements of a company represent a “true and fair” view of the company’s situation.

A second interpretation of the banks “not wanting to lose control” is that if they do attempt to bankrupt a developer then a Trustee in Bankruptcy is appointed whose actions are directed by the bankruptcy court and those actions might not be in the interest of the banks.

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