This article was first published in the May 2016 Ireland edition of Accounting and Business magazine.

The sale of non-performing loans to so-called vulture funds is not merely continuing, but looks set to accelerate. Both Ulster Bank and Danske Bank are expected to sell portfolios of debt over the coming weeks and months.

Danske Bank is the latest bank reported to be preparing the sale of a significant portfolio of non-performing debt, comprising credit card accounts, overdrafts and personal loans. Previously known as the National Irish Bank, Danske has withdrawn from the personal banking market in the Republic. While the bank did not confirm a potential sale, it did not explicitly deny the possibility. A spokesman for Danske Bank’s head office in Denmark said: ‘There are no plans to sell this book at the moment, so we cannot confirm these rumours.’

Ulster Bank has previously sold portfolios of non-performing commercial loans and is currently looking to sell another. Where, in the earlier tranches, the borrowers were large property development businesses, this time the borrowers include many SMEs and medium-sized farm businesses. According to borrowers, they were given just 30 days – until the end of March – to explain if they could repay or refinance their loans, or else accept that the debt would be sold on to a third party.

The Irish Farmers’ Association described the situation as ‘completely unacceptable’. Its national chairman Jer Bergin reported on a meeting with Ulster Bank’s senior management, where the IFA requested clarification of the situation: ‘Ulster Bank outlined that 75% of the potential loan book sale would comprise loans seriously impaired and in debt recovery proceedings. The remaining 25% of loans are in a debt management unit, which contains a wide range of circumstances.’

‘Completely unacceptable’

The Ulster Farmers Union also met with Ulster Bank. UFU president Ian Marshall said: ‘We made clear in those discussions that this is a completely unacceptable way to treat farm clients, and have pressed the banks to enter into face-to-face discussions with the farmers affected. We have also urged any UFU members receiving these letters to contact us. We have urged the banks to show more imagination in their approach to challenging times – to discuss with farmers the circumstances that created the difficulties and what they, as farm families, want for their businesses, so that both parties can work towards an acceptable outcome.’

An Ulster Bank spokesman responded: ‘Ulster Bank is in contact with a number of business customers – who are outside current arrangements or in arrears and under special management in our problem debt management unit – to discuss the potential inclusion of their debt in a future Ulster Bank loan disposal process together with their options for repaying or refinancing their debt in advance of any such process. They are not mainstream customers; they are in our problem debt management unit, and this action is part of the bank’s strategy to manage non-performing loans.’

Cerberus is likely to be one of the funds interested in bidding for loan portfolios that come onto the market. It has previously acquired Ulster Bank loans, as well as the Project Eagle portfolio of NAMA debts connected to Northern Ireland. 

Mick Wallace TD has been a prominent critic of the Project Eagle sale arrangements and was also an Ulster Bank debtor, whose loans passed to Cerberus as part of Project Aran. At the beginning of this year he became the first person to lose a business through a court action for debt non-payment initiated by Cerberus. Promontoria Aran, a Cerberus subsidiary, appointed Mícheál Leydon of Outlook Accountants as liquidator to M&J Wallace, after successfully petitioning the high court to have the company wound up. Wallace had entered into a €2m personal guarantee with Ulster Bank to back a loan for his Italian Quarter development on Dublin’s Ormond Quay.

Less patient, more aggressive

It has been widely reported that the acquiring funds are typically less patient and more aggressive in debt recovery than were the original lenders. Bell & Co, a Belfast accountancy firm specialising in insolvency advice, represents several clients with debt in the NAMA Project Eagle portfolio sold to Cerberus. In written evidence to the Northern Ireland Assembly’s finance committee investigating NAMA’s sale, it accused Cerberus and its debt collection adviser Capita Asset Services of ‘a very apparent unwillingness to negotiate, move forward/meet to discuss things amicably and commercially’. 

Bell & Co continued: ‘We are often presented with overinflated valuations and an unrealistic concept of what can be achieved by individuals in terms of the provision of funds for settlement... There have been many instances in which we have been told that the valuations, supposedly obtained by Cerberus, show that the value of the security will cover the level of indebtedness in full. This directly contradicts what our clients have been told by the experts they have instructed – ie RICS valuers – whose conclusion very often is that the security assigned equates to only a small percentage of what is owed, in many instances less than 50%. These, however, are being entirely disregarded by Cerberus and their instructed advisers.’

The firm claimed that Cerberus initially told debtors there would be room for debt forgiveness, but always rejected the requested plans for debt repayment with the same formulation of words: the proposals did not ‘sufficiently address the outstanding debt in its entirety’. Bell & Co argued that clients are then given an ‘unreasonable deadline’ to put forward alternative proposals, which ignore the reality that clients are unable to repay the debt in full. The firm provided eight examples to the committee of clients’ difficult experiences, with some suffering what the firm described as ‘unbelievable stress’ as a result.

Requests for comment from Cerberus and Capita remained unanswered as we went to press. In a letter to the committee Cerberus said it ‘takes its responsibilities as an investor and lender very seriously, acting within the framework of local laws and taking account of local cultural practice, endeavouring to develop and maintain positive relationships’.

Gareth Graham told the Northern Ireland Assembly’s finance committee of his experience of Cerberus, which bought his debt from NAMA. Graham was a director and shareholder of several property and other businesses, including Lehill Properties and its subsidiaries AD Enterprises, Fernhill Properties and STH 500, whose loans were taken over by Cerberus.

‘We have always been regarded as good borrowers, and, before the crash, during the crash and, indeed, to this very day, none of our companies has ever missed a single interest payment, whether to Bank of Ireland, NAMA or Cerberus,’ Graham said.

‘We have been aggressively treated by Cerberus.’ According to Graham, proposals to repay Cerberus by selling properties – either very quickly, or more gradually to realise a higher sale price – were rejected. 

In March last year, EY was appointed administrators to Lehill Properties and STH 500, which Graham challenged in a legal action. That action was settled this year, with Graham allowed to retain control of the companies; he paid the legal costs of Cerberus and took out advertising in several newspapers in which he made clear that ‘I am content that Cerberus is not, and was not, involved in any illegal conduct’.

But some debtors are supportive of Cerberus. Property developer Paddy Kearney told the assembly’s finance committee: ‘[NAMA] did its best to intimidate and frighten me into destroying my business without any regard for the 100-plus jobs or families who depended on that business for their livelihood. NAMA declined two fully funded offers from me that were well in excess of the actual value of the assets at the time, and well in excess of the figure it eventually accepted from Cerberus. The arrival of Cerberus, as far as I’m concerned, was a big positive for Northern Ireland. Cerberus offered a commercial solution, a mechanism to save my company and hundreds of jobs, and an opportunity for me to rescue and rebuild the business I had spent a lifetime constructing. Cerberus was commercial, but NAMA was not.’

A NAMA spokesman said: ‘NAMA’s primary objective was to maximise the return to Irish taxpayers. Without commenting on particular debtors, this sometimes led to robust engagement with debtors whose objective was to maximise their own return.’

The derelict 11-acre Royal Exchange site in Belfast is an example of the positive impact of vulture funds. Leaside Investments – a partnership between property development companies William Ewart and Snoddons Construction – had planned a retail and office scheme on the site that was expected to generate 3,000 jobs. Ulster Bank’s loan on the development was bought by Cerberus, which has now sold the site to Castlebrooke Investments. The site will hopefully now be developed.

But for those borrowers whose debts have been newly bought up, there is no disguising that these are worrying times. Hughes Blake, a Dublin accountancy firm, suggests that some SMEs in the Republic should consider going into examinership to protect themselves where their debt has been acquired. 

Neil Hughes, managing partner at Hughes Blake, explains: ‘Assets – particularly property assets – that underlie the loans are rising in value, and the funds will increasingly look to unlock capital by forcing them to be sold. The impact of this can be considerable, with tenants and employees suffering the consequences. Certain players in the market are known for their aggressive and predatory style of doing business; others are more mindful of the social issues around their actions. SME operators would be well advised to research the owner of their loan. We would recommend that all companies in this situation adopt a cautious approach and plan for a scenario whereby the fund moves against the business.

‘In the future weeks and months, it is likely that we will see SMEs in this situation move to place the business into examinership as a means of fending off the advances of the private equity funds. As a tactical manoeuvre, this can be a valid approach, which could result in the saving of jobs. A lack of awareness by borrowers as to who their new lender is and what their intentions are means that, should a private equity fund seek to trigger a repossession of their assets, SMEs could lose the window in which they can apply for examinership. For a generation of business owners unused to dealing with such international funds – and who took out their original loan with an Irish lender – we have seen numerous examples where the risk of being caught by surprise is very real.’

Borrowers need now to anticipate action that may be taken on recovery and to take advice. Meanwhile, advisers may need to gear up to meet the likely demand.

Paul Gosling, journalist