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McKillen €2.1bn loans 'a risk' to system, court told

THE pre-NAMA status quo of developers renewing and refinancing bank debt rather than paying their loans is not sustainable, the High Court has been told.

An expert engaged by the Government, which is staving off a legal challenge to the toxic loans agency by developer Paddy McKillen, said the Belfast-born investor appeared to take no account of the fact that the status quo prior to 2007 and NAMA -- when "comfortable relationships" existed with the banks -- was unsustainable.

Following the collapse of the bubble, property has become a "tainted asset" and borrowing on the basis of property has become subject to more stringent tests, said Prof Dermot McAleese of Trinity College Dublin in court filings for NAMA.

Yesterday, a specially convened three-judge Divisional Court was told by Attorney General Paul Gallagher that Bank of Ireland gave Mr McKillen a relatively low credit rating. He received a rating of nine out of 13 -- where 13 is the worst.

Mr Gallagher was speaking during the continuing hearing of Mr McKillen's action aimed at preventing transfer of his Bank of Ireland loans to NAMA.

Mr Gallagher said experts for Mr McKillen, including Nobel-prize winning economist Dr Joseph Stiglitz, had argued he was a "good" borrower with all his loans "performing" when an analysis by NAMA of the state of his borrowings showed several loans had expired while others were in breach of loan covenants.


It was also "amazing" that Mr McKillen's experts failed to recognise the reality of the Irish financial crisis, including that several of the banks that had lent Mr McKillen money would be insolvent without state aid, Mr Gallagher said.

Dr Stiglitz had argued Mr McKillen should be allowed to maintain "normal" banking relationships, but this was to completely ignore the reality, including that Anglo Irish Bank -- with which Mr McKillen had loans of €900m -- was being maintained in an "assets recovery" capacity.

Dr Stiglitz and other experts for Mr McKillen also failed to recognise that Mr McKillen's €2.1bn loan exposure to the five participating institutions in NAMA represented a "systemic risk" to the Irish financial system requiring their acquisition by NAMA, said Mr Gallagher.

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The NAMA Act required a "clean break" from loans such as those of Mr McKillen's, and the acquisition of those loans was entirely consistent with the purpose of the Act, he said. This was not about individual borrowers but the macro removal of troublesome assets from the banks' balance sheets. There was no legal requirement for NAMA to address Mr McKillen's individual situation or other "relevant considerations" before making its decision.

He rejected as "absolutely wrong" arguments by Dr Stiglitz that NAMA will underpay for bank loans acquired, saying that Dr Stiglitz appeared to be working on a mistaken impression as to the powers of NAMA.

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