Stories
In October 2007, developers Donal Caulfield and Leo Meenagh put the first phase of their luxury Streamstown Wood development in Malahide, Co Dublin on the market. Half of the 44 planned Edwardian-style residences were built, modelled on Shrewsbury Road houses and standing around a two-acre park complete with its own bandstand and putting green. Louise Kennedy was on hand to design the homes’ interior. The six-bedroom version boasted a private gym.
The Irish Times reported on the champagne launch for the estate, noting that “a big talking point was the lavish brochure – a large photo-album-style affair, weighing in at 7.5lbs. The leather croc-calf album from Aspinal of London cost €750 a pop to produce”. Each house was guided between €5 and 6 million.
Within months, the financial crisis had killed all hope of selling them. By 2009, property website MyHome.ie reported their asking price to have dropped by two thirds. Land registry records show that no part of the development was sold until 2010.
In 2013, Ulster Bank appointed an examiner to Glenlake Properties, Caulfield and Meenagh’s vehicle for Streamstown Wood. The bank later sold the associated debt to Cairn Homes. By 2018, the building company had full control of the property and applied for planning permission to increase the number of houses to be built on the undeveloped half of the site from 22 to 32. Shortly after obtaining this last year, Cairn flipped the asset.
The site’s new owner is Streamview Connect Trading DAC, part of a group of joint ventures between US vulture fund Cerberus and Dublin-based investment firm Avestus Capital Partners. Avestus is the new name adopted by Quinlan Private after it parted ways with its founder Derek Quinlan. Avestus is no stranger to investment in distressed property assets, having been linked to the sale of the controversial Project Nantes portfolio from Nama. Its residential development brand Richmond Homes is now advertising the future development of Streamstown Lane, the new name for Streamstown Wood’s phase two.
Promontoria ACP DAC, a joint holding company formed by Cerberus and Avestus in 2018 and Streamview’s parent, is among a series of Irish subsidiaries of the New York-based firm to file annual accounts in recent days, shining some fresh light on the activities of one of the most active vulture funds in Ireland.
Promontoria ACP reported a €2 million book value for its 100 per cent stake in Streamview companies, and lent €3.2 million to Streamview Connect Trading as this ultimate subsidiary acquired the Malahide property. This was funded by a €3.1 million loan funnelled from Cerberus’s own investor funds through a Dutch intermediary holding, and €80,000 lent by Glencraig Ltd, a subsidiary of Avestus Capital Partners.
Avestus did not reply to queries from The Currency on its tie-up with Cerberus.
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Streamstown’s journey from Ulster Bank-backed development to Cerberus-led joint venture signals a new departure for the US fund in Ireland. The firm had, until now, purchased debt portfolios offloaded by Nama and the banks in transactions worth billions rather than millions. Its partnership with Avestus may signal an appetite to adopt a less vulture, more venture approach to some deals in Irish property – at least in last year’s pre-Covid-19 environment.
Its use of Ireland as a base for special-purpose vehicles aggressively targeting distressed debt overseas, however, is not abating, as we will see below. Recent filings also reveal that a series of its subsidiaries owning Irish debt, inlcuding former Ulster Bank loans, have now received Central Bank authorisation to service their own debt in Ireland.
There are more signs that the hound of hell – Cerberus in Greek mythology – is putting down deeper roots in this country. Take annual accounts just filed by Promontoria Redwood DAC, the special-purpose vehicle (SPV) established in 2018 to partner with Everyday Finance and acquire AIB’s investment property loans portfolio Project Redwood. The debt was worth €1.1 billion on the balance sheet of AIB, which sold it to Everyday for a net €800 million. Promontoria Redwood then became the beneficial owner of the loans at a full reported cost of €915 million.
As usual in this type of deal, Cerberus leveraged cheap finance from European banks, borrowing over half a billion at 2.75 per cent, and funded the remainder. Part of this came from a €100 million, 8.5 per cent loan channeled through a Dutch parent – another classic. What is more unusual is that the Dutch intermediary holding also stumped up another €100 million as a capital contribution to its Promontoria Redwood, and is now reaping profits as dividends.
All of Cerberus’s similar deals had previously involved profit-participating debt, which allowed Dutch parents to part-fund Irish SPVs through loans where interest payments consisted of whatever profit was left in the company. Profit was essentially disguised as interest payments, offset against income taxable in Ireland and siphoned off to the Netherlands. As previously reported, it is likely that such profits also paid very little Dutch tax.
Changes to Irish legislation governing so-called Section 110 companies at the end of 2016 ended the tax deductibility of profit-participating debt used to fund Irish property. The funding structure for the Project Redwood transaction may be the first tangible sign that it is having any lasting effect.
Project Redwood has so far proved a successful investment for Cerberus. From an initial valuation of €915 million, the portfolio generated €200 million in debt collections for each of 2018 and 2019. Promontoria Redwood also adjusted its fair value upwards by a total of €122 million over those two years. It was left with a handsome book value of €636 million at the end of last year in addition to the €400 million collected so far.
As a result, the SPV reported a pre-tax profit of €25 million in 2018 and €46 million last year, generating respective tax charges of €6.3 million and €11.5 million. Its cash flow statement shows that it made an actual tax payment of €20 million last year. These are the largest figures reported in Ireland by a Cerberus subsidiary, instead of the paltry bottom line and associated tax usually reported after the application of profit-participating debt offsets.
Redwood’s isolated case does not necessarily mean wholesale change across the Promontoria maze of vulture SPVs. Other AIB portfolios, such as Projects Pine in 2017 and Beech last year, were indeed partly funded by profit-participating loans after the 2016 rule change – though it remains to be seen whether Cerberus will ultimately try to extract profits under the form of interest in these cases.
Promontoria Beech has filed its first set of accounts since being established to purchase the €3 billion face-value residential and commercial property loan book from the State-owned bank in March 2019. The filing reveals that the Cerberus SPV acquired the beneficial interest of the portfolio through Everyday Finance for €919 million, and has since collected €242 million from debtors and increased its valuation by €30 million. Promontoria Beech borrowed €553 million at 3.15 per cent from Morgan Stanley to fund the deal and another €200 million from its Dutch parent, split between an 8.5 per cent fixed-interest loan and profit-participating debt.
These three examples also show that Cerberus’s Dutch holding companies continue to draw funds from Irish SPVs above the bottom line under the form of asset management fees. This cost Pine nearly €2 million, Beech €6 million and Redwood €10 million last year alone.
€600 million haircut on Ulster Bank’s Scariff portfolio
Ulster Bank has been the other major supplier of Irish pillar bank debt to Cerberus since the financial crisis and new filings by three SPVs provide an update on this business.
Promontoria Scariff DAC’s fist ever set of accounts shows that it paid €840 million in August 2018 for a block of residential and commercial mortgages, revealing a €600 million haircut for Ulster Bank on the portfolio’s €1.4 billion book value. Funding for the deal came from half a billion borrowed from Morgan Stanley and BAWAG at 3.25 per cent, while Cerberus’s own investment came through the SPV’s Dutch parent under the form of two loans: a €67 million at a fixed 8.5 per cent rate, and €108 million under a profit-participating loan which had already generated an additional liability of over €22 million by the end of 2019.
This results from strong performance from the Scariff portfolio for Cerberus. Last year, it sold off a bundle of loans worth €100 million at a €6.3 million profit. It also collected €242 million from debtors and re-valued the remaining debt upwards by €93 million. These transactions value the loan book so far at €1.175 billion, erasing half of the discount conceded by Ulster Bank.
Although Promontoria Scariff repatriates gains to its Dutch parent under the form of interest, leaving a pre-tax profit of just under half a million euro, the 2016 tax reform appears to have an effect on its Revenue bill. It reported a tax charge of €12.6 million for its first 16 months in existence and, while this was deferred on paper in its profit and loss account, an actual €12.4 million tax payment is reported in its cash flow statement.
Another unit, Promontoria Aran Ltd, has been in business since 2014 when it paid €1.3 billion for a book of Ulster Bank mortgages across the UK and Ireland. It borrowed €780 million from Deutsche Bank at benchmark rates +2.75 per cent, €287 million from its Dutch parent at 10 per cent and €72 million for the same Dutch holding company as a profit-participating loan. Its accounts for 2016 show that the end of tax deductibility for profit-participating interest created a new tax charge of €4 million that year. By then, the initial €72 million loan had grown into a massive €491 million liability waiting to be repatriated out of Ireland tax-free.
Accounts filed by Promontoria Aran since then show that it has changed tack, slowly shifting profit out of that now taxable liability. By the end of 2019, only €145 million was due on the profit-participating loan. This liability fell by €68 million last year, even though Promontoria Aran made no repayment – the move resulted instead from a write-off as the SPV posted a loss. It used management fees instead to channel as much money as possible to the Netherlands, increasing annual payment for this service by €2.7 million to €15.8 million, even as the size of assets to be managed on its balance sheet was shrinking as a result of progress on collections from debtors.
Last month, the State commission established in 2017 to investigate the sale of the Eagle loan book pushed back its deadline for the eighth time, extending it until the end of this year.
Also filing in recent days, Promontoria Finn Ltd, which acquired another mortgage portfolio from Ulster Bank in 2015, is now in its final year of collections. This SPV, too, has been reducing its exposure to profit-participating debt now that its interest is regarded as taxable profit. At the end of last year, it had brought its liability under a profit-participating loan advanced by its Dutch parent back in line with the €25 million principal initially borrowed, leaving no taxable interest. It did not make any interest payments on that debt in the past two years, instead paying back fixed-rate debt and management fees to the Netherlands.
Promontoria Arrow Ltd, too, is nearing the end of its life, with most receivables on the loan book it acquired from Nama in 2015 due this year. By contrast to the Ulster Bank debt vehicles, Promontoria Arrow has continued to add interest liabilities to the profit-participating debt it owes to its Dutch parent, possibly indicating a larger exposure to UK property where this form of profit extraction remains tax-deductible in Ireland.
Other Cerberus units handling debt purchased from Nama have yet to file this year, including the SPV in charge of the controversial Eagle portfolio secured on Northern Ireland property. Last month, the State commission established in 2017 to investigate the sale of the Eagle loan book pushed back its deadline for the eighth time, extending it until the end of this year.
Irish SPVs target Mediterranean debt
The growing number of Irish-based Cerberus SPVs handling debt in other European countries also contributed to recent filings and several of them have just posted accounts for the first time.
Promontoria Aloe DAC, for example, is the new name of Promontoria Omni, an SPV apparently set up to handle Cerberus’s failed bid for the Irish ACC Loans portfolio, which Rabobank instead sold to CarVal last year. Cerberus quickly repurposed Omni with a more Mediterranean name and a new target: a portfolio of 5,400 mortgages offloaded by Unicaja, which the Spanish bank valued at €389 million. Promontoria Aloe reported clinching the deal for just €71 million.
Not only did the Dublin-registered vehicle secure a discount of over 80 per cent from Unicaja, it also got the Spanish lender to fund the deal. Promontoria Aloe paid just €14.4 million upfront and is due to pay a further €2.2 million this year, with the remaining €54.5 million not due until 2021 and 2023. This means Cerberus did not have to borrow from international banks for leverage and can instead pay the seller as it collects funds from debtors. It advanced its own funds through the usual Dutch holding companies channel as debt split between fixed-interest loans at 4 and 9 per cent, and a profit-participating loan.
As the collateral property is not in Ireland, interest on the profit-participating loan can be deducted from Promontoria Aloe’s profit. In its first year, the Irish SPV added €8.5 million to its liability under the loan from its Dutch parent, but posted just over €900,000 in pre-tax profit resulting in a charge of €229,107 in Irish tax only – and no cash payment to Revenue reported as yet.
A similar structure was replicated by Promontoria Lezama DAC, which agreed last December to pay €136 million for a mortgage portfolio offloaded by Spain’s Kutxabank – but paid only €37 million upfront. The remaining €99 million was due to be paid in three instalments this year. “The second closing was due to take place in March 2020 however it was delayed due to operational challenges imposed by the Covid-19 pandemic,” Promontoria Lezama reported. In addition to this funding by the seller itself, the Irish SPV is borrowing from Morgan Stanley and from its Dutch parent through the usual mix of fixed-rate and profit-participating loans.
Further filings illustrate the multiplication of Spanish deals by Cerberus through Irish vehicles. In November 2018, Promontoria Ares DAC acquired unsecured consumer and SME loans from unnamed Spanish banks for €50 million. Then in March 2019, Promontoria La Barrosa DAC paid €19 million for an unsecured portfolio valued at €100 million by seller Bankia. Cerberus initially funded these two relatively small deals itself, but then refinanced part of them through Citibank earlier this year.
The reach of Irish-based Cerberus SPVs extends into neighbouring Portugal, where Promontoria Indian DAC secured a portfolio of mortgages from Caixa Geral de Depósitos in January 2019 for €139 million. The loan book was reported by DebtWire to have a face value of €290 million. While Promontoria Indian followed the Cerberus playbook to leverage the deal with Morgan Stanley and channel tax-free interest income through the Netherlands, it added a new feature: the Irish SPV has a Portuguese subsidiary “set up to purchase some residential properties which are securing the assets”.
Shipping loans and Wall Street deals
The final stop on the European tour signposted by Cerberus’s latest Irish filings is in Germany, where the US vulture fund teamed up with another Wall St investment firm, JC Flowers, to take over insolvent HSH Nordbank in early 2018. The regional German lender had grown to become the world’s largest provider of shipping loans before being bailed out by German taxpayers following the financial crisis and finally disbanded – think of it as a sort of Baltic sea-faring Anglo.
Cerberus moved swathes of the bank’s loan book into Irish SPVs, which have only just filed accounts revealing the full extent of transactions conducted since the demise of HSH Nordbank.
Promontoria North Shipping DAC received the largest share of assets moved to Ireland, acquiring the German bank’s ship loans portfolio for €664 million in February 2018. By the end of that year, a new valuation had doubled the book value of the portfolio to €1.2 billion as international trade and associated shipping recovered.
In April 2019, Promontoria North Shipping carved out a tranche of loans valued at €736 million and moved it into an Irish subsidiary, Promontoria Maritime Holdings DAC, which it sold off last Christmas, generating an additional €9 million gain. The specialist shipping publication Trade Winds reported the deal to cover 60 ships. The buyers were private equity funds Fortress, based in New York, and Cross Ocean, which is managed out of Connecticut, London and Dublin. They have since renamed the subsidiary Nassau Maritime Holdings DAC and it remains registered in Ireland.
At the end of 2019, Cerberus’s Promontoria North Shipping was still working through its remaining share of the shipping loans, valued at €188 million. It had paid €9 million in management fees to its Dutch parents in two years and repaid all its fixed-rate debt. Meanwhile, of the €183 million initially advanced by Cerberus through Dutch holding structures under the form of a profit-participating loan, only €1 million outstanding principal remained due. Interest, however, had grown this total liability to €321 million, indicative of a potential €320 million tax-free gain for Cerberus.
Another vehicle, Promontoria North Real Estate DAC, acquired HSH Nordbank’s property loan book for €518 million. Last year, it reported selling on “one loan asset” for €544 million. Aside from €20 million in collections over the past two years, it has revalued the remaining loans on its books to just under €200 million, with receivables all due this year.
Promontoria North Corporate DAC, for its part, has been working through a portfolio of business loans initially valued at €145 million, with most receivables also due this year.
Together, these three Promontoria North have reported a combined €12 million pre-tax profit. While their accounts show associated tax charges, only Promontoria North Real Estate has made a cash payment to Revenue so far – for €2,500. They have also paid €14 million in management fees and €34 million in fixed-rate interest to Cerberus holding companies in the Netherlands.
More importantly, under profit-participating loans advanced by their Dutch parents, the three Irish SPVs have already reported repayments totalling over half a billion euro, far outweighing the €342 million they had drawn down under those facilities. Their profit-participating loans also showed a remaining €461 million combined liability, which will continue to be adjusted as the SPVs work through their loan books and make interim repayments to the Netherlands.
As Ulster Bank weighs up the future of its Irish business, the example of HSH Nordbank shows what happens when Cerberus acquires a lender’s entire loan book: performing loans are parcelled out and sold to other banks or institutional investors. Through Irish SPVs, the hedge fund then pursues non-performing loans aggressively and increases the value of those assets, channelling gains back to New York under the form of low-tax management fees and interest paid to Dutch holding companies and co-operatives.
One final example from another of Cerberus’s Irish vehicles shows how gains from a profitable German loan book are channelled through profit-participating debt. Promontoria Big Ben DAC, which has just filed for the first time after purchasing a shipping loan book from Norddeutsche Landesbank for $1.2 billion in February 2019, partly funded the deal with a $105 million profit-participating loan from its Dutch parent. By the end of that year, Promontoria Big Ben reported a fair value of $440 million for that liability, having incurred $13.4 million in interest during those 10 months alone – and paid the same amount in management fees. Its taxable profit in Ireland, meanwhile, was just €316,862.
