When Cerberus acquired a massive €1.3 billion bundle of distressed debt from Ulster Bank in December 2014, the international vulture fund mirrored the same structures and strategies that it had utilised on other portfolios snapped up in the aftermath of the financial collapse.

First, it incorporated a new special purpose vehicle, in this case Promontoria Aran, to hold the assets, before hiring a servicing agent, Link, to effectively manage the loans. It then loaded the new SPV up with debt – some funnelled from a Cerberus company in the Netherlands, topped up with cheap debt from an external lender (Deutsche Bank).

It was designed to be tax efficient (too tax efficient for the government’s liking, it would later transpire), and operationally effective.

The numbers involved were significant and involved a whopping 76 per cent down from Ulster Bank. The portfolio contained 1,300 borrower groups, and over 6,200 loans with around 5,400 properties.

But with the finance and the structure in place, it quickly set about negotiating with its newly acquired borrowers on how best to work through the various parcels of the massive debt jigsaw.

And in the years that followed, the strategy worked. Before the government cracked down on Section 110 tax shelters in 2016, it was able to route money to the Netherlands almost entirely tax-free. When that tactic ended, it found other ways to minimise its tax exposure through management fees and write-offs.

The pandemic, however, has changed the dynamic for Cerberus – or at least for Promontoria Aran. From negotiating with borrowers over payment reschedules, it spent the early part of this year renegotiating with its own lender Deutsche Bank, which holds a charge over the entire portfolio.  

Promontoria Aran was due to repay the last tranche of its Deutsche Bank loan on August 12 this year. However, the company has confirmed that its debt collections in the first quarter of the year were “below plan”, with sources pointing to the impact of Covid on the ability of many retail property borrowers to repay debts.

“The various interest bills are not insignificant.”

As such, the Cerberus subsidiary began negotiating with its own lender about extending the loan. The negotiations are now complete, and the maturity date for the remaining debt to Deutsche Bank has been extended until August 2022. “The Directors are confident that this revised maturity date should be met,” according to a company statement.

The fact that a subsidiary of one of the world’s largest and cash-generative vulture funds has received a debt extension is illustrative of the wider issues that have been exposed by the pandemic, with many business owners increasingly worried about the ability to catch up on debt arrears.

Based on its own numbers, Promontoria Aran will have little trouble repaying its remaining external debt. But, the case, and the numbers involved, point to a brewing issue for less secure borrowers.

So just how much money is involved, and why did Cerberus need to cut new terms?

*****

When Cerberus incorporated Promontoria Aran in December 2014, 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 – a structure previously used as a tax shield.

It then began chipping off the Deutsche loan as it generated income from borrower repayments. By the time the Deutsche loan was refinanced in 2018, Promontoria Aran owed €170 million to Deutsche. As part of the refinance, the interest rate increased to 3.25 per cent.

It since paid more of the debt, including €87 million last year. The outstanding balance at the end of 2020 was around €53 million. This is in addition to the €109 million it owes group companies through other loans.   

The various interest bills are not insignificant. Between 2019 and 2020, it paid Deutsche €10 million in interest repayments, while it paid group companies a further €14 million over the same 24-month period.

The subsidiary is nearing end game – it expects to resolve “the majority of debtor connections” over the next year with the remaining being resolved by January 2024, according to new financial accounts for 2020.

Those accounts also reveal that debt collections fell from €108 million in 2019 to €91 million in 2020. Assets have fallen from €362 million to €236 million, although this is largely due to the repayment of debts from borrowers as the unit begins the wind-down phase.

Promontoria Aran’s filing reveals the performance of one of Cerberus’s SPV in Ireland during the pandemic. As the image below shows, there are many more to come.

Click to download the full corporate map of Cerberus’s Irish presence.

Further reading

Cerberus uncovered: How the hound of hell uses Dutch co-ops to guard Irish profits against tax

Cerberus is a potential buyer for Ulster Bank’s loan book in the Republic. This is how it built its Irish empire

Deutsche Bank has quietly built a €700m Irish property empire. Now it’s going to court do defend it

REO raid: How Dublin became the repossession capital of Spain