On Christmas Eve, 2018, the management of Spanish bank Unicaja signed off on one final deal before heading off on their holidays. The financial institution, based in Málaga on the Costa del Sol, was scrambling to offload non-performing loans accumulated during the financial crisis. 

On that day, it sold Project Omega, a portfolio of problematic mortgages, to the US investment firm Cerberus. The loans had a face value of €230 million, but the special purpose vehicle (SPV) used by the vulture fund for this acquisition agreed to pay just €87 million.

This company, Promontoria Omega DAC, is Irish. New financial data for the firm reveals the growing role of Ireland as centre for international investors to manage distressed debt and repossessions in Mediterranean countries.

After the last crash, hedge funds and institutional investors flocked into Ireland, acquiring vast amounts of distressed debt and assets from Ireland’s bruised banks. Now, they are turning Ireland into the repossession capital of the Mediterranean.

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Promontoria Omega DAC and its parent Promontoria Omega Holdings DAC form one of around 40 similar structures established in Ireland to date by Cerberus, initially to build its multi-billion portfolio of Irish non-performing loans. It follows a familiar ownership pattern, with intermediary holding companies in the Netherlands topped off by a Dutch co-operative, which is exempt from withholding tax on dividends distributed overseas.

Promontoria Omega DAC’s accounts take us right to the beginning. “On 24 December 2018, the Company acquired assets from Unicaja Banco SA. The assets were a portfolio of non-performing mortgages, secured and non-secured loans located in Spain,” a note details. 

The Irish company, however, only made an initial cash payment of €16.3 million. The Spanish bank effectively funded most of the transaction itself, extending vendor credit to the SPV until 2023. “The deferred purchase price is €66,803,560 and is treated as a financing arrangement,” it reported.

Aside from this, Promontoria Omega DAC has been funding the purchase of the Spanish loans and other expenses through debt raised from its Dutch parent. Unlike previous Cerberus vulture deals, in which the Irish SPV leveraged acquisitions by borrowing directly from international banks, the funding for Project Omega can be seen to trickle up the balance sheet of its Dutch parents without further details.

The structure of intercompany debt raised by Promontoria Omega DAC shows that it initially drew down €10.7 million on two interest-bearing loans at interest rates of 4 and 9 per cent maturing in February 2024. This presumably matches external leverage funding raised by Cerberus from a bank. 

The Irish SPV also borrowed €3.3 million from its parent under a variable interest loan, consistent with the model used in the past by Cerberus to carry its own investors’ stake in distressed debt purchases. “As the Variable Interest Loan is a profit participating loan, interest paid on this loan is not at a fixed rate but is determined in relation to accumulated net profits in the financial period,” Promontoria Omega DAC reported. 

The company has until 2029 to repay any of this profit-participating loan. By the end of 2019, the funds liable to flow back to Cerberus in this form had grown four-fold to €12.5 million. The Irish SPV, which has no employees, pays management fees to another Dutch parent – worth €912,065 in 2019. This left Promontoria Omega DAC with a taxable profit of just over €900,000, resulting in a €225,320 income tax charge in Ireland.

The company’s income flows primarily from €9.4 million in collections on the Spanish loans. Some €4.1 million of this is from “interim collections received on the portfolio before the deal closed”. 

At this point, the notes to the account of Promontoria Omega DAC introduce its Spanish sister company Promontoria Omega SLU, which gives the deals another dimension.

Enforcement procedures

Promontoria Omega SLU is owned by the same Dutch holding entity, Promontoria Holding 254 BV. “Under the terms of the sale agreement, Omega SLU has agreed to purchase any underlying properties securing the loans which have been obtained by the Seller through enforcement procedures,” notes to the accounts explain. “Omega SLU has also purchased a number of underlying properties securing the loans purchased by the Company throughout the financial period.” 

The properties “obtained by the Seller” were those already repossessed by Unicaja before it flogged the loan book, which for some reason the Spanish bank could not or did not want to sell itself. Promontoria Omega SLU acquired them upfront for €2.6 million. 

During the year following the deal, further similar transactions amounted to another €2.7 million. This means that the Irish SPV repossessed and sold to its Spanish sister company properties worth more than Unicaja had foreclosed during the decade since the start of the financial crisis.

It is then up to Promontoria Omega SLU to sell them locally on the open Spanish market, generating further profit to route to Cerberus through the Dutch holding structure.

It is worth noting that since the deal closed, Promontoria Omega DAC has not reported any collections outside those related to properties changing hands. Project Omega was what bankers call a “real estate-owned” (REO) portfolio – there is no hope of recovering the debt other than through repossessions. 

The number of properties involved was not disclosed, but it was high enough to justify a €2.8 million legal fee to register Promontoria Omega DAC’s new ownership of the mortgages with the Spanish authorities. Cerberus, through its Irish subsidiary, has decided to foreclose its way through this list at great speed, judging by the 2023 and 2024 term deadlines on the finance it has raised for this deal.

37,500 foreclosed properties from Santander

While Omega is the first vulture fund debt purchase in the Mediterranean for which this level of detail is available about the central role of an Irish SPV, it is by no means the only one. Irish legislation allows this type of vehicle to transfer income to its overseas parents under the form of tax-free intercompany debt interest. This is no longer allowed when dealing with underlying properties in Ireland but it remains a popular way of channelling profits from overseas deals for many firms.

Cerberus itself has at least three other similar Irish-Spanish pairs of companies established to work through real estate-owned loan books. Promontoria Manzana is in charge of a massive portfolio of 35,700 foreclosed residential properties sold by Santander in September 2018 for €1.5 billion, which the Spanish bank reported at the time represented 55 per cent of its gross book value. Santander retains a 20 per cent stake in this joint venture, with 80 per cent for Cerberus. It has yet to file accounts in Ireland.

Promontoria Lezama, which acquired a mortgage portfolio for €135.6 million from Spain’s Kutxabank in September 2018, is also flanked by a sister Spanish company of the same name. 

In July 2019, Cerberus went back to Unicaja, paying €71 million for another portfolio of mortgages. Again, the Irish SPV which now owns the loans, Promotoria Aloe DAC, has a property dealing counterpart established in Spain. 

As previously reported, Cerberus has five more Irish subsidiaries holding debt assets in Spain and Portugal, though they could not be directly linked to local property trading units.

Other US vulture funds have also used Ireland to scour southern Europe’s distressed debt markets. CarVal apparently competed with Cerberus for Santander’s Project Manzana, registering a company of the same name in Ireland weeks before the deal in July 2018 which has yet to report any activity. 

That same month, it was more successful with Banco Sabadell, partnering with Deutsche Bank to acquire the Spanish bank’s Project Makulu – a mortgage portfolio with a face value of €2.3 billion. Three of CarVal’s Irish SPVs, Pera Assets DAC, Pera Funding DAC, and Sandi Assets DAC, have since filed debt documents confirming they had raised finance from Deutsche for an REO transaction. They have yet to file detailed accounts.

CarVal has also used Irish SPVs to purchase distressed debt elsewhere in Spain as well as Greece… and as far as China.

Further reading

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