Wednesday 25 April 2018

How AIB sleepwalked into crisis on Kallakis's London loans

Shane Hickey in London

IT was September 2008 and the Ballsbridge headquarters of Allied Irish Banks was in a state of turmoil.

The entire financial world had been thrown into flux with the news that Lehman Brothers had just filed for bankruptcy, and AIB board members were in the midst of lengthy contacts with the Government over what would eventually become the bank guarantee scheme.

After years of boom, the property market was in freefall -- as was the AIB share price -- and many were already calling this the worst economic crisis of the past century.

But behind the worry and the panic lay another major problem for the bank.

Concerns over one of the bank's biggest customers -- a forthright, confident and astute businessman -- had arisen after guarantees on £740m (€715m) of property loans on high-end sites in the UK had come under question.

The guarantees -- that rents on the properties would be secure for years to come, thereby raising the value of the sites and acting as a powerful reason for the bank to lend -- had apparently never been heard of by the Hong Kong property giant which AIB thought had issued them.

The allegations could not have come at a worse time for the bank, and within three months the property portfolio of 14 remaining loans had been sold to an Irish firm.

Achilleas Kallakis, the apparent Greek shipping tycoon who headed the purchase of the buildings, along with his business partner Alexander Williams, now both deny 23 fraud charges relating to the AIB transactions and another from Bank of Scotland.

Six years earlier, the economic situation could scarcely have been more different.

The property market in London was booming and AIB was eager for a very big slice of the action.

However, in a market where some 400 other lenders were also eager for business, it was a competitive field.

AIB bolstered its property team, and staff were tasked with increasing the size of the bank's loan book.

For Mike Cooke, a relationship manager in the London property division, they were heady days -- the bank was operating at the top of the market in terms of both size and the quality of the properties which they were lending money to buy.

The bank was soon introduced via a broker to Achilleas Kallakis, an assertive individual who appeared to come from substantial family money as a result of a shipping business and who had all the trappings -- "nice offices, nice house, nice car" said Mr Cooke -- of a high net worth individual.

Bonuses

Following the first meeting, the relationship between Mr Kallakis and the bank flourished. He wanted financing for property -- mostly commercial -- purchases and apparently had a guarantee to back him up.

The guarantee from Hong Kong property giant Sun Hung Kai Properties (SHKP) meant the rental income on the property would be secured for years.

The scene was set for what appeared to be a very positive and lasting relationship between AIB and the Kallakis business.

Fast forward to 2007, and things were going well for the property team at AIB.

Bonuses were being handed out -- up to two thirds of salary in one instance -- as they reached their targets.

Mr Kallakis, who had grown to be one of the bank's biggest clients, was very generous with hospitality for his business associates.

Mr Cooke went to Monte Carlo and stayed aboard Mr Kallakis's yacht while on the way to a property conference in Cannes. There was a birthday party in St Petersburg. At the end of a deal in 2007, three members of the bank went to Mauritius as part of a thank-you trip organised by Mr Kallakis.

As AIB's loan exposure crept to its upper limit, the bank decided by 2008 that it wanted to reduce that exposure by passing on some of the debt to another bank.

Impostor

One of the banks AIB entered into discussions with -- after being introduced by Mr Kallakis himself -- was the German outfit Helaba. This was the beginning of the end for relations between Mr Kallakis and AIB.

Up to this time, AIB had never spoken to SHKP about the guarantees. However, this changed as the crisis wore on and AIB wanted face-to-face time with a representative of the property giant.

Mr Kallakis subsequently set up a meeting in London with a man called Jonathan Lee, said to work in the treasury department of the company, but who did not have any business cards with him at the time. He is now alleged to be an impostor.

In May, the German bank raised concerns about a previous conviction Mr Kallakis had. In 1995, at the same courthouse where the current trial is taking place, both he and Mr Williams pleaded guilty to the joint offence of conspiracy to commit fraud. This was in relation to the sale of bogus honorary titles to unsuspecting Americans, among others.

The pair later changed their names from Kollakis to Kallakis and Lewis to Williams.

There was immediate concern in AIB. Without the guarantees, the loans -- which now extended to £740m -- made no commercial sense to the bank.

AIB confronted Mr Kallakis and ordered the repayment of £114m (€141m) of reverse premiums as well as £200m (€247m) to cover the loss of value of the properties. Mr Kallakis maintained the guarantees were genuine.

In October, AIB reported a fraud, and by the end of November the bank served a notice of default and demanded repayment before they called in the guarantees which the prosecution says were "worthless".

Ownership of the remaining properties transferred to the bank which then passed them on to Green Property, an Irish firm, for £650m (€804m) on a 100pc non-interest loan. There was an agreement that should Green ever sell any of the properties, AIB would get 30pc of the profits.

The trial of Mr Kallakis and Mr Williams -- who deny all of the charges against them -- has given a unique insight into the lending practices of Ireland's biggest bank at the height of the boom.

By the end of the good years, transactions in London and Dublin made up the vast majority of AIB's loan book. The Kallakis loans -- at the centre of the London loan book -- included some of the most prominent commercial properties in the British capital, such as the Home Office building in Croydon.

The prosecution has claimed the Kallakis money was used to fund his lifestyle, with the books of the management company being in complete disarray and funds -- withdrawn from whatever account was in the black -- were used to buy a yacht, a villa and a helicopter, among other luxuries.

The trial is expected to last for several weeks more.

Indo Business

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