Some 11 years on from the economic crisis of 2008, the sale of Irish loan books to so-called ‘vulture funds’ is still causing uncertainty for many borrowers, including those whose family business, family farm or even family home may be vulnerable. We sit down with John Keating and Jennifer Downing of CDS Law & Tax for expert insight into why this is still happening, and advice on what to do if you are among those affected.
More than a decade after Ireland’s business and banking sectors were rocked by the 2008 economic crash, the effects continue to reverberate. In the case of the five Irish ‘pillar’ banks – Bank of Ireland, Allied Irish Bank, Permanent TSB, KBC Bank and Ulster Bank – the continued sale of non-performing loans to so-called ‘vulture funds’ is a matter of concern for a large tranche of borrowers, among them many with reason to believe a resolution to their banking affairs had already been reached.
“We’re not just talking about large commercial developers and investors here,” explains John Keating, Commercial and Banking Advisor with CDS Law & Tax. “The people affected by this are ordinary, decent Irish businessmen and women, a lot of them lot of whom thought they had dealt with their debt issues by entering into settlements with their banks during the period of 2014 to 2018.”
“Some of these are what we would call accidental landlords,” adds Jennifer Downing, Solicitor and Head of Property with CDS Law & Tax. “These are people who took out two loans, one on their family home and one on an investment property, and because they got into difficulties they required a restructuring agreement with their banks. Another cohort of clients that we see affected by this issue are farmers, who perhaps invested in additional lands with the view to development, but that didn’t come to fruition.
“Of course the last group of clients we are working with are those who have buried their heads in the sand to a certain extent and not made any effort to engage with their banks,” adds Keating. “And that can be terribly destructive… that approach generally arises out of emotional stress, anxiety and a lack of knowledge as to what the available options might be.”
That emotional stress, of course, may stem from the proposed sale of a mortgage on a family home. To date this is not something that has been widespread, but that is changing – loan sales in 2019 included family homes, family farms and some family business debt, while the proposed sale by AIB of thousands of non-performing loans in early 2020 (codenamed ‘Project Birch’) includes thousands of distressed mortgages secured on family homes, a politically contentious step which the bank has avoided until now.
John Keating, Commercial and Banking Advisor with CDS Law & Tax.
“We are in the middle of a transition period,” explains Keating, added that new legislation requiring vulture funds to be regulated has been passed in the anticipation that the volume of their engagement with family home loans is set to increase.
But all of this begs the question – why now? More than 10 years after the crisis that shook the banking sector to its core, how are borrowers still in a position of uncertainty, and why are banks still selling off chunks of their loan books?
“It’s a question of interpretation,” explains Keating. “From the banks’ perspective a loan is either performing or non-performing. In the case of non-performing loans a bank must make a capital provision on its balance sheet, in other words put money aside in order to contemplate those bad loans being provided for. The fewer such provisions, the cleaner the balance sheet – so it’s in the banks’ interests to have as few such loans on their books as possible.
“Now in recent years, the definition of whether a loan is performing or non-performing has changed, as the entities that set the rules – the European Central Bank, the International Monetary Fund and so on and so forth – impose tighter definitions on what are judged as ‘performing’ or ‘non-performing’.”
MOVING THE GOALPOSTS
As Keating explains, recent years have seen the ECB take a view that any part of a loan which is on interest-only – in other words where capital is not being repaid as part of the overall offering – that loan is now defined as non-performing.
“A lot of Irish borrowers thought they had dealt with their debt issues by entering into settlements with their banks,” adds Downing. “And part of that settlement may have involved interest-only payments on a part of their overall debt.”
“But now,” Keating emphasises, “where capital is not being repaid as part of the overall offering – well then that loan is defined as non-performing, and the bank will want to offload it. Or where one element of the agreement was not met – for example an investment property not sold by a certain date because of tenancy issues – that is also considered a default and the loan becomes defined as non-performing.”
This results in a contagion effect – as one part of an individual’s borrowings is defined as non-performing, that definition also now extends to all borrowings right down to personal loans, overdrafts, car loans etc.
“The goalposts have moved,” summarizes Keating. “And that has caught a large number of Irish borrowers by surprise because in good faith they were working forward on the premise that their banking affairs had been resolved and they were on track to come out of the process.
“There is an entire generation of Irish business person that has been lost as they have sought to try and rectify their banking affairs.”
The question of why Irish banks continue to clean their balance sheets by selling off non-performing loans is clear. The question of how the so-called vulture funds who buy those loans will deal with borrowers is less clear, a root cause of uncertainty and anxiety for many who find themselves in this situation.
“A vulture fund is an unregulated entity, generally constituting a hedge fund that has multi-billion assets under management,” explains Keating. “For these guys, the acquisition of loan portfolios at a discount is just another asset class, and fund managers will manage those portfolios in order to achieve one outcome – return of profit. Now the great question is how are the funds going to deal with family homes? How are they going to deal with family farms?”
“Because they haven’t had to up to this point,” adds Downing.
Jennifer Downing, Solicitor and Head of Property with CDS Law & Tax
As Downing explains, potential solutions for borrowers may come in the form of sale-and-leaseback agreements (where, in the case of family homes, the borrower agrees to sell the home to fund but can avail of a lease agreement for the remainder of their life) or in the case of family farms, a succession planning-based solution that involves the next generation in a debt restructuring solution.
“But a key thing to recognise is that there is no universal protocol for applying these solutions and up to this point, the vulture funds have not been regulated,” warns Keating. “Meaning that resolution in many cases can be down to the preferences and practices of the individual fund managers. Some of them can act fairly, commercially and pragmatically and others… will not leave anything on the table.”
In circumstances like this, the best advantage for a borrower to have is a strong advocate in their corner who can help to negotiate on their behalf for the best possible result.
“What we try to do is strategically manage the communications process with these institutions in order to try to improve the probability of a better outcome,” explains Keating.
“We can’t change that you owe the money. We can’t change what might happen on that journey. But what we can try to do is manage it more efficiently on your behalf – from a tax perspective, from a legal perspective, from a banking perspective, from a solvency perspective…
“There are no guarantees, but the great advantage that CDS Law & Tax has is that we are uniquely positioned to act for borrowers, because under one roof we have a suite of skills here that allows us to create a blended solution.”
Key to the success of this approach, adds Keating, is removing the fear and emotional stress that can result from the situation.
“Our clients get to live their lives while we manage the relationship for them, and deliver what they really want – which is closure,” emphasises Downing.
“Many of the people that we have brought through this process, we are actually now in the happy place of acting for them in their normal course of business.
“And that’s really what we want.”
To discuss any of the above with CDS Law & Tax or to arrange a consultation please contact Jennifer Downing (Jennifer.email@example.com) or John Keating ( firstname.lastname@example.org) or call 021 235 5810.