Distressed Asset Investment In Ireland
The volume of assets being sold has risen significantly, the property supplements are filled with properties for sale together with the sale of businesses, their trade and goodwill and ‘voluntary’ sales of assets by borrowers beginning to occur at the direction/co-operation of lenders.
Added into this, there has been the sale of certain books of loans by some financial institutions, the most significant of which being loans sold by NAMA worth collectively €22 billion. All of which has created a growing momentum of deal activity within a section of investors, ranging from domestic and overseas institutional investors, private equity firms, high net worth individuals and sovereign wealth funds.
The previous sale by NAMA of an €800 million loan portfolio known as Prospect Aspen being a prime example of the scale of transactions taking place coupled with the commencement by IBRC’s Joint Special Liquidators of the sales process for Project Evergreen (Irish originated corporate loan book), Project Rock (UK commercial real estate loans), Project Sand (Irish residential mortgage loan book) and Project Stone (Irish originated commercial real estate loan book) in August. Assets not sold by the special liquidators at or above the internal independent valuations are to be transferred to the National Asset Management Agency.
However, investors should note that the process is far from a ‘gold rush’ with growing competition for the available supply of prime assets and with complex legal, due diligence, tax and reputational/brand issues arising together with sales/bidding processes which can involve a certain amount of complexity and strict time limits associated with auction and tender sales. It must also be observed that Lenders have also had their share of ‘tyre kickers’ intent on sourcing prime assets at bargain prices without having carried out appropriate research.
But what type of deal activity is occurring and what are the issues that arise?
In dealing with distressed assets, investors need to be concerned about a greater range of issues than might arise in a regular transaction. More than ever the mantra of ‘caveat emptor’ applies.
1. Asset Sales:
(a) Dealing with Receivers
A mortgage commonly provides that the receiver is the agent of the borrower and the receiver sells the property on foot of the powers contained in the mortgage over the property. No different to purchasing an asset from an ordinary vendor, efforts need to be made to ascertain that correct title to the asset is held by the receiver to sell the asset in question.
Is the receiver properly appointed and vested with power to sell the asset? The recent case concerning Foley’s Bar should be noted, where the receiver appointment by Bank of Scotland Plc was overturned due to the deed appointing the receiver not having been executed in accordance with its Memorandum & Articles of Association.
What warranties and assurances are being provided by the receiver in relation to issues such as planning permission or where a commercial property has been developed, what is its VAT history? Typically, a receiver will hold very limited information on such issues and will not be prepared to offer any warranties as a result. This places a greater burden on an investor / purchaser and onerous/restrictive contracts issued by receivers have been the subject of recent correspondence from the Law Society to the Banks.
Particularly, incomplete properties or imperfect titles can often be encountered, requiring detailed further investigations with properties frequently being offered for sale at auction or by tender creating a narrow window to identify, quantify and resolve problem issues. Investors need to be cognisant of properties being sold ‘warts and all’. Such issues can present financing issues with banks being cautious in terms of the security value of an asset and any implications any defects may have on the value of the security or realisability of the security.
(b) Voluntary Sales by Borrowers
Increasing numbers of properties are being placed on the market ‘voluntarily’ by borrowers. Issues can arise where a property is being ‘short sold’ i.e. below the value of the underlying loan, whether the Bank will furnish a full release of its charge. For obvious reasons this is something which a vendor will be anxious not to disclose for fear that it may prejudice the sale negotiations. However it can lead to delays whilst a lending institution decides whether to consent to a sale and this process can often cause frustrations on a purchasers side. In reality, lenders are often hesitant to confirm consent until the bidding process has concluded and the final terms agreed. Once a sale has been agreed each lender will have their own procedures to be complied with, by which it authorises a sale and deals with any shortfall remaining on the loan.
In addition, purchasers would be well advised to conduct full searches against the vendor and property at pre-contract stage to alert themselves to any judgments or judgment mortgages which may be registered against the vendor or property.
2. Sale of Business as going concerns
Once again, limited warranties will be an issue for purchasers and also issues such as monetary and time period caps, to warranty claims and indemnities. Investors will further be concerned as regards the prospect of recovering from a receiver or distressed borrower in the event of a warranty claim.
‘Pre pack’ transactions are becoming more common with Clerys and the Thomas Crosbie Holdings Limited being two recent reported examples. Issues arising in such transactions can include questions of prejudice to creditors due to limited marketing of the assets/businesses or the perceived lack of transparency in such transactions. Recently a challenge was brought by a creditor 1 to the Thomas Crosby Holdings Limited receivership alleging amongst other matters, breach of contract, procurement of a breach of contract, intentional interference with business and economic relations and conspiracy. Whilst the substantive case remains pending before the Courts, the Court at a recent preliminary hearing ordered that the creditor provide security for costs to a number of the defendants. The amount of money to be provided as security for costs was not determined but is likely to amount to a substantial sum (the legal costs of all defendants combined were estimated to be in the region of €3.2 million Euro). The magnitude of such orders is likely to concern already hard pressed creditors who may wish to challenge such processes.
3. Acquisition of Loan Portfolios / Distressed Debt
With the commencement of the IBRC liquidation sale process, many investors and borrowers may be eying up bids for the loan portfolios or indeed the loans of certain borrowers which will be made available for sale on a standalone basis.
The sales process which must be concluded by 31st December 2013 involves a notification and submission process (which is already underway) to borrowers and the disclosure of information pertinent to the loans to qualified bidders subject to confidentiality provisions. The Special Liquidators are in the process of determining the requirements in order to be eligible as a ‘qualified bidder’ and how the loans will be sold.
Any purchaser would require to undertake detailed due diligence on the underlying loan book and loan documentation together with comprehensive tax advice to consider the most suitable vehicle to acquire the loan book and address issues such as double taxation treaties and withholding tax on interest payments arising on the loans.
There are a number of investment strategies available for the acquisition of loan portfolios under the Irish Corporate and tax regime:
(i) Acquisition by Special Purpose Companies under Section 110 of the Taxes Consolidation Act 1997;
(ii) Acquisition by Regulated Fund Structures, whether they be UCITS / non UCITS or Qualifying Investor Fund (QIF); or
(iii) Acquisition by Irish Incorporated Company.
Specific tax advice should be taken at the outset to establish the correct corporate structure to suit the particular investment based on the requirements of each structure.
For example a Section 110 SPC must hold qualifying assets (which includes shares, bonds or other securities; invoices, all types of receivables, obligations enduring debt including loans and deposits) to a minimum market value of €10 million;
QIF’s are suited to transactions where underlying land comprising the security for the loan portfolio is to be acquired, as a Section 110 SPC cannot hold land directly;
REITs could be a suitable vehicle where rental/investment property is intended to be acquired.
Further transaction opportunities are likely for investors and purchasers as the market develops into late 2013 / early 2014 as the supply grows due to factors such as the Central Bank targets set for the Banks for resolution of loan arrears, the advancement of the IBRC liquidation and sales process, and the recent enactment in July of the Land and Conveyancing Law Reform Act 2013, as a solution to the Start Mortgages issues surrounding the granting of summary orders for possession, will lead to an increase in enforcement activity by lenders.
McKeever Solicitors can provided added value advice on all aspects of investment in/sale of distressed assets and businesses by receivers, banks and purchasers/investors.
1 Webprint Concepts Limited v Thomas Crosbie Printers Limited, Thomas Crosbie Holdings Limited, Bontury Limited (trading as Landmark Media Investments), Allied Irish Banks plc, Kieran Wallace, Irish Times Limited, Thomas Patrick Crosbie and Alan Crosbie (2013) No 2662P/ (2013) No. 37 COM