Sunday 19 January 2020

Nama and US buyers differ on O'Flynn loans

Richard Curran

Richard Curran

Michael O'Flynn's challenge to the appointment of an examiner and receivers to his €1bn property empire has given some important insights into the way Nama goes about its business.

The state agency sold O'Flynn's €1.8bn in loans to US investment fund Blackstone earlier this year. At the time it was seen as a bit of a coup for O'Flynn, who many expected to announce a new partnership with the American group and push on from there.

It all turned out differently as we learned in the High Court last week. O'Flynn was hit with a demand to repay €16m of his €23m in personal loans. Secured on assets within the group, this triggered a default and Blackstone went to court to appoint an examiner and receivers.

Regardless of whether O'Flynn wins his battle to have the examinership set aside, he plans to take legal action against Blackstone. If Justice Mary Irvine rules in O'Flynn's favour next week, there will be a full hearing into the case.

This would see O'Flynn, Blackstone executives and probably Nama executives also give evidence in court.

Blackstone argued last week that the group was balance sheet insolvent, which means its liabilities exceed its assets and that O'Flynn failed to meet the personal loan repayment, which was "on demand" - meaning it could be called in at any time.

O'Flynn argued that he wasn't given a reasonable amount of time to pay it, once the repayment demand was met.

Nama didn't move against O'Flynn but agreed to work with him as long as there were no more defaults.

Some might argue, that if Blackstone wins the case and is allowed to proceed and take control of the group, why Nama did not do something similar. After all, this is the same group of businesses, the same balance sheet, the same set of financial circumstances that Nama faced, yet it was happy to stick with O'Flynn and work through the difficulties.

The agency did decide to sell on the loans and is believed to have received around €1.1bn for them, a price similar to what it paid to buy the loans from the Irish banks. This implies just a one-third discount which is not bad compared to many other developers.

It would be very interesting to hear what Nama's take on all of this was. If the agency had confidence that O'Flynn could eventually pay back everything, why did it sell the loans? If it believed O'Flynn was in trouble and would default, then why didn't it move on him and take possession of the assets?

The answer may lie in the huge difference in approach taken by Nama compared to Blackstone. The state agency has moved against one third of the big developers by appointing receivers, where it felt they were not co-operating or hopelessly insolvent.

The O'Flynn loans were among the largest in the Nama portfolio, but they appear to have been in better shape than many others. O'Flynn has buildings in Germany and the UK which are completed and bringing in solid rent. The O'Flynn portfolio also has land banks and other assets in Ireland which have yet to be developed. The rent roll is believed to be around €75m per year.

O'Flynn appears to have co-operated with the agency, come up with a business plan and stuck to it. The agency reached an agreement with O'Flynn on where the rent roll should go and which loans should be paid down first.

In a sense, it kept a close eye on the business but still left O'Flynn in control as long as he operated within certain parameters. Nama obviously felt it would get back more money in the long run by operating this way.

O'Flynn did what many developers have not done. He played it straight. He had no personal guarantees yet stuck around to try and pay back his debts. If his loans had been in IBRC with the liquidator, he could have put together his own consortium to buy them back at a discount. Under Nama he couldn't.

Nama may not have shut him down, but they didn't go easy on him either. The agency didn't grant him a repayment term on his personal loans, which left him exposed to new creditors when the loans were sold.

As confidence in the Irish property market rises, the agency is selling off more and more assets. It obviously felt it could get a better price by selling now rather than wait for the O'Flynn business plan to come to fruition.

Bear in mind that O'Flynn will need to borrow more money from somewhere, in order to build and develop some of his sites. This means more debt and therefore more risk for Nama.

Nama could have taken the view that it was going to shut down every single major Irish property developer and sell off their assets to the highest bidder. It clearly hasn't done that, because such a move would wipe out the entire indigenous property development sector.

There would be nobody left of any scale here. We would see the total transfer of property asset ownership and management to international buyers. Some might argue, that is exactly what should happen. The scale of the losses to taxpayers derived from property developer borrowings is enormous.

But this kind of approach might not make the best financial or economic sense in the long run.

The difference in approach between the state agency and the buyer of the O'Flynn loans shows how unscientific the whole process of asset resolution can be.

Blackstone clearly does not need to take national or economic considerations into account. It is looking at the best way to make the best return on its investment. So too is Nama, yet they have approached the O'Flynn loans very differently.

Blackstone has spent €1.1bn buying these assets and clearly believes it can get back more money without O'Flynn in charge.

Regardless of the outcome of any court action between Blackstone and O'Flynn, this saga highlights the issues around selling off developer loans. It doesn't matter who owns Irish developer loans in Germany or Britain or Spain. But buyers should put forward an investment plan for what they will do with Irish assets. Otherwise, they could choose to do nothing after buying up strategically important sites.

Blackstone may not even want the Irish assets of the business at all, and received an offer from O'Flynn to buy them, which it turned down.

There has been much debate about the importance of Irish developers to working through the difficulties of their own loan portfolios. Some argue, they know the properties best and are best placed to earn a salary and bring the projects to completion.

Others argue that property management and development is exactly that. You can sell assets to the highest bidder or hire professional managers to come in and run them.

The O'Flynn case shows just how subjective this whole business can be. Nama or Blackstone or any other bank for that matter, is in a very strong position to take a view on what happens to a business built up over decades.

O'Flynn was probably delighted to get out of Nama. He may not have realised that he was going out of the frying pan and into the fire. No matter what way the court case goes, O'Flynn played a straight bat with Nama but is paying a hefty price anway.

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