Monday 28 May 2018

The Cardinal rules: property, debt, deals, Celtic and Wilbur Ross

Paul Corry has never met Wilbur Ross - but he's managing his bet on the Irish property market. The wealth manager spoke to Gavin McLoughlin

Paul Corry: 'Are we busier than we were six months ago? Certainly the pipeline is particularly strong at the moment. Of a €300m fund, we're probably two years ahead of schedule in terms of the drawdown trajectory that we would have predicted'
Paul Corry: 'Are we busier than we were six months ago? Certainly the pipeline is particularly strong at the moment. Of a €300m fund, we're probably two years ahead of schedule in terms of the drawdown trajectory that we would have predicted'

Wilbur Ross has done pretty well out of Ireland. The US billionaire nearly tripled his money after taking a big bet that Bank of Ireland would eventually recover.

That deal was brokered in part by Cardinal Capital, an investment company set up by Irishmen Nigel McDermott and Nick Corcoran.

McDermott was a founding director of International Investment & Underwriting (IIU), synonymous with Dermot Desmond, where Corcoran worked for two years before leaving for Zurich Capital Management.

Ross is now long gone from Bank of Ireland but he retains a presence with Cardinal in this country via the WLR Cardinal mezzanine fund - a €300m cash pile in which Ross and the Chinese Investment Corporation are investors.

The fund is focused on the Irish property sector and is managed by Paul Corry, a massive Glasgow Celtic fan who used to work in the wealth management division of Anglo Irish Bank.

It provides mezzanine (mezz) finance to property players and is active across a wide range of deals: site acquisition, construction funding, investment and refinancing.

This stuff isn't for the faint-hearted. Mezz finance typically sits between senior debt and equity, so if things go wrong, the likes of Cardinal won't be at the top of the creditors' queue.

Their offering is priced accordingly, of course, and it seems there has been a big appetite to tap into the fund. Corry won't reveal who Cardinal has worked with but reports have indicated that Johnny Ronan and ex-Leinster rugby player Paul Hennebry have been among its clients.

Corry (50) says that one year into a four-year project, they're two years ahead of schedule in terms of drawdowns from the fund - and they expect it to be fully committed by the end of this calendar year.

"Are we busier than we were six months ago? Certainly the pipeline is particularly strong at the moment. Of a €300m fund, we're probably two years ahead of schedule in terms of the drawdown trajectory that we would have predicted.

"What's happened over recent years is that following the collapse of the markets back in 2007-2008, banks have retrenched and it has allowed us to bridge the gap between what senior lenders are now willing to do and what investors can absolutely contribute to a transaction."

Corry is a career banker. It runs in the family. He started a commerce degree, but with Bank of Ireland recruiting, he left college to take up a job, working across retail banking, business banking and private banking before moving to Anglo, the IBRC and then Cardinal.

With Nama's sale of Projects Ruby and Emerald due to be completed shortly, Cardinal expects the phones to start getting busier.

It will look to capture some of the debtors whose loans are contained in those portfolios and provide them with an exit route from their new lending relationship.

The typical deal involves Cardinal writing a cheque for the exit price agreed between the borrower and the new loan owner, with the borrower then asked to bring in a senior lender (like a bank) within a number of months to cover a portion of the costs, while Cardinal retains a slice of the debt at mezzanine pricing.

"Usually, what the new funder will want is for the borrower to present a business plan around what they propose to do with the situation they find themselves in," Corry says.

"It'll all be different. Some of them will be completely distressed, with very little ability to do anything. They may have been beaten up by their current owners over time.

"And of the 30 or so that will come out of Ruby and Emerald, there will be some strong characters in there - so there'll be good borrowers who just happened to end up in Nama, who will be in a position to act professionally and maybe look at exiting whoever their new funder will be.

"There are still a number of borrowers who have relationships in the equity funds and with Nama and we've worked with some of those people to refinance them. And then with Ruby and Emerald there's just under €5bn of par debt in those transactions. The good borrowers will want to come out, they'll want to control their own destiny.

"So while they obviously have a relationship, being funded by Nama for a number of years now, they'll want to manage their way out of whoever acquires the loans over the coming weeks.

"What borrowers should be doing is preparing a business plan that will maybe identify some of the assets within their portfolio that they'll want to hold on to, and some maybe where they'll want to work consensually with their new funder to exit over an agreed time. And that's something that we've obviously been doing and are doing.

"What we're able to do is we're able to go in, and once the borrower has agreed an exit price with their new loan owner - typical funds such as Deutsche, Apollo, Nama type lenders - and the borrower is looking to exit and get a new lending relationship, then we can actually provide them with the flexibility to get out..

"They agree the exit number, we can write the cheque for them, assuming that they can bring the required amount of equity to the transaction, and it gives them breathing space so that they can partially refinance us then in an agreed number of months post that transaction.

"What it does is it gives their lender certainty of delivery, once they know that we're involved in the transaction, and it also gives the borrower certainty that they can actually go and control their own assets, and execute their own business plan then when they bring their senior lender on board.

"It's enough flexibility so where a borrower can't actually get enough leverage from their senior bank or the traditional lender, we provide the missing piece of the jigsaw. And that's typically 20pc. Think of it as if your ideal structure of a deal is 60pc senior lending, 20pc mezz, 20pc equity. But no two deals are the same so what we tend to do is tailor every deal that we do to the requirements of the borrower.

"So they can come in and as long as it's a sensible business plan and we're happy with it, and in particular we're dealing with an A-list of borrowers. The guys that we're dealing with are professional investors, they're professional developers and have strong track records, so we're backing them and we're buying into their business plans."

Market expectation is that Ruby and Emerald, which contain almost €4.7bn of par debt, will be sold off for around ten cents in the euro. The market is getting increasingly competitive and from what Corry hears on the ground, aggressive. People are now happier to settle for a smaller return than would have been the case this time last year, he says.

"From talking to the guys in the various funds it would appear that given the competition that's come into that market, that they would be happier now with returns of 15pc, whereas a year or 18 months ago they were probably working off a business case of about 20pc.

"So they seem to have become more aggressive in their pursuit of the portfolios that come to market," he says.

How aggressive then is Cardinal? As a mezz provider, an additional level of risk is part and parcel of the game. Given that Ireland is now experiencing an economic recovery, is Corry now willing to push the boat out a little bit further? He's cautious in both his answer and his outlook.

"If you look back at where the banks loaned in the past, if we go back eight, 10, 12 years, they were lending too much money at too little margin for the risk that they were actually taking. So if they were charging 2pc and leveraging up to 80pc or 85pc, that was one of the issues.

"That has obviously been addressed since then with Basel (rules on the amount of capital banks have to hold) being introduced and also the banks' credit committees now being tighter and providing a more restrictive practice in terms of what they can actually lend.

"So we're prepared, with the right borrower and the right lender, to take on additional risk but we'll price the risk appropriately, so that it'll reflect the strength of the deal, the cash flow and ultimately our comfort in getting our money back at the end of the facility.

"In a recovering market, where, on the occupational side, rents are rising, you have a situation where the general business environment is obviously improving, shopping centres are leasing up better than they had been two or three years ago, leases are longer, because tenants now want to take a longer punt on a particular location.

"They feel more comfortable, more confident that they can actually generate returns from a location. That will obviously help the sentiment. But then you look at what happened with Debenhams. There's always risk around the corner. So with even an anchor tenant, such as Debenhams, going into examinership, we obviously have to look closely at any deal that we analyse. We'll assess each deal on its own merits,

"What we would look at doing when we're partnering with a typical senior debt lender, is that the blended rate is generally very attractive.

"The risk will be priced on criteria, such as an income-producing asset, well let, versus a site that's not producing any income."

Corry has never met Wilbur Ross but says the American has "a very keen interest in the fund's management".

"He's a help to us on occasions, he has a different view on certain matters," Corry adds. "He likes Ireland, he just likes the Irish story, as evidenced by his very successful investment in Bank of Ireland.

"He's a regular attender to Ireland. I've never met the man, but he seems to be a guy who just likes the whole Irish story still."

Corry refused to be drawn on what would happen once the current fund is exhausted, saying only that Cardinal intends "to continue to grow with the Irish real-estate market opportunities".

However, this newspaper understands that a second fund is in the pipeline. Watch this space.

I used to have a season ticket for Celtic

My hobbies are...

Top of the list is cycling. I’ll be doing the Wicklow 200 in a few weeks. I used to play a lot of rugby. I was involved in Greystones Rugby Club for a number of years, played down there and trained kids. I’m a big football fan too, I used to have a season ticket for Glasgow Celtic. And also golf.

My music taste is...

I’m a big U2 fan. I saw them in the 3Arena there just before Christmas. I like 1980s music — Echo & The Bunnymen, New Order and so on.

The book I’m reading at the moment is...

Fear and Loathing in La Liga. It’s about the rivalry between Barcelona and Real Madrid in La Liga, it’s written by Sid Lowe.

The best bit of career advice I’ve received is...

Probably “People don’t work for you, they work with you.” My father told me that many years ago. He said that if you remember that, you shouldn’t create trouble along the way. We’ve a very strong team inside Cardinal — it’s a great place to work. It’s a business that the principals are very keen to grow.

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