Late in the afternoon on Budget Day, October 8, 2019, Ulster Bank announced that it had found a buyer for yet another portfolio of non-performing loans. There was speculation at the time that the timing, at a moment when business journalists were run off their feet, was an attempt to bury the news that over 3,000 home loans with €800 million in receivables, mostly owner-occupier mortgages, were about to be acquired by US vulture fund CarVal. 

Yet the sequence of events that has unfolded since that day shows that the American distressed debt investment firm was also scrutinising budget speeches and documents for any fiscal landmines along the complex journey the Irish loan book was about to embark on.

In recent risk disclosures to investors, the CarVal subsidiary now in control of the old Ulster Bank mortgages specifically referenced changes introduced by the Finance Act 2019 to Section 110 of the tax code regulating the type of corporate structure used for this deal. The deal went ahead on the basis that new tax obligations “should not apply” to the debt format used to fund it.

After a series of transactions involving special-purpose vehicles (SPVs) in Ireland, Luxembourg and the Cayman Islands, the portfolio known as Project Deenish and the thousands of Irish homes underpinning it have become the collateral in a €357 million issuance of mortgage-backed securities to international investors through the Irish Stock Exchange.

This the story of how it happened, as told through hundreds of pages of financial documents filed on both sides of the Atlantic and tracked down by The Currency


The starting point of this investigation is Dennett Property Finance DAC, one of the countless letterbox companies maintained by the corporate secretarial firm Intertrust in Dublin – not the first iteration of Dennett Property Finance, registered on October 7, 2019 and since dissolved, but rather its sister of the same name incorporated the following January.

For an unreported reason, CarVal decided not to use its first Dennett subsidiary, instead acquiring the Irish loan book on October 7, 2019 through CVI CVF IV Cayman Finance Corporation, a vehicle used to run the firm’s $3 billion Credit Value Fund IV out of the Cayman Islands. 

This company, along with five other entities channelling capital from various CarVal-managed funds in the Caribbean jurisdiction, then formed a subsidiary called Deele Investment Holdings SARL in Luxembourg four days later (Irish rivers and islands have provided running themes to code-name Ulster Bank’s bad loan sales to vulture funds). This Luxembourg intermediary in turn acquired the first iteration of Dennett Property Finance incorporated in Ireland in January 2020 and struck it off the companies’ register, “never having traded”. 

Instead, CarVal formed a new Irish SPV in January 2020 and gave it the name Dennett Property Finance as soon as it became available from its moribund sister company. By then, budget day announcements had also translated into the Finance Act 2019 and any uncertainty about Section 110 rules had been lifted.

By maintaining a subsidiary with this name continuously since October 7, 2019, CarVal can now report that Dennett “is deemed to have been a party to the Original Mortgage Sale Deed from the date thereof”. This could one day be useful in the courts, where borrowers have challenged the validity of some loan transfers to vulture funds’ subsidiaries in recent years. Dennett has been involved in litigation with at least one borrower to date.

Filings now describe Luxembourg-based Deele as the “holding company” of Dennett, although the Irish subsidiary’s ownership is formally routed through a nominee structure maintained by Intertrust. Deele is also the conduit through which CarVal funding flows to Dennett in the form of profit-participating debt. The ownership and funding structure of the SPV will be important to determine its tax status under Section 110 rules as it files accounts for full-year activity from 2021 onwards.

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This second iteration of Dennett has just filed annual accounts for the very first time. First of all, they reveal the scale of the discount obtained by CarVal when it bought the Deenish loan book. The purchase price paid by Dennett in three tranches in 2020 was €286 million. The SPV then acquired “the remaining and final closure of loans relating to the deal” for €56.2 million in April 2021.

The total price paid was therefore €342.2 million, which would represent a discount of over 57 per cent on the €800 million in receivables Ulster Bank said it was disposing of. When the deal finally closed six months later, CarVal reported being in possession of loans with a lower total current balance of €665 million. The discount obtained against this amount would be under 49 per cent.

In either case, this was one of the highest prices CarVal has paid for distressed Irish debt – as previously reported, it obtained discounts ranging from 55 per cent on PTSB’s Project Connacht to 83 per cent on its joint deal with Goldman Sachs for IBRC’s Project Stone.

To fund the acquisition, CarVal advanced a profit-participating loan to Luxembourg-based Deele, which in turn funnelled intercompany debt to Dennett in February, April and July 2020 as it received mortgage tranches from Ulster Bank. This took the form of €69.3 million in fixed-rate loan notes and €7.7 million in profit-participating notes, totalling €77 million. That was the extent of capital from CarVal-managed funds invested in the deal. Assuming a similar funding mix was used for the acquisition of the final tranche in April 2021, which has yet to be reported in detail, the US vulture fund’s total exposure to the Deenish loan book never exceeded €100 million.

This is because the deal was heavily leveraged, with Dennett reporting €214.5 million in drawdowns from a senior loan in February, April and July 2020. A charge registered by the Irish SPV on February 21, 2020 against its mortgage book and other assets identified Deutsche Bank as the “initial senior lender” providing this leverage finance. Again assuming the continuation of similar funding arrangements until the acquisition closed in April 2021, the German lender bankrolled the deal for up to €250 million in total.

By the time it closed its annual accounts on November 30, 2020, Dennett had collected €14.7 million from borrowers. The mortgages had also incurred €14.2 million in fresh interest, so their value on its balance sheet remained virtually unchanged. 

The Irish SPV used the cash from collections to repay €10.3 million of the Deutsche Bank loan and declared a €5.5 million profit-participating interest in favour of CarVal, but this was not paid out and instead added as a liability on the profit-participating notes owed to its Luxembourg intermediary Deele. 

Dennett also spent €5.6 million in set-up costs and fees and ended its first year in the red by €1.3 million – a purely paper-based loss considering it had rolled up gross profits into interests owed to its CarVal parents.

Section 110 lives on for Irish property deals

As a loss-making company, Dennett paid just €550 in corporation tax in 2020. It claims eligibility to Section 110 of the tax code, which allows Irish SPVs to remit gains to their investors in a tax-transparent way in the form of profit-participating debt interest. 

Changes to Section 110 at the end of 2016 excluded gains derived from Irish property from this tax exemption, but Dennett appears to have ticked the boxes required to work around this. Exceptions exist, such as payment of the interest to another European company meeting certain criteria – in this case, Dennett’s immediate lender is Deele in Luxembourg.

In any case, as of last October, Dennett no longer owns the old Ulster Bank mortgages (see below). The SPV that acquired them, Rathlin Residential 2021-1 DAC, reports that it is eligible to Section 110 despite handling Irish property-backed assets because it pays profit-participating interest to another Irish company (in this case Dennett). “Those payments should not cease to be deductible for the Issuer on the basis that the Class Z2 Notes will be held by the Seller, which is an Irish resident company,” Rathlin disclosed to its investors.

By lengthening the chain across multiple subsidiaries in Ireland and Luxembourg, CarVal appears to have found a legal way of maintaining the advantages of Section 110 while sweating debt assets secured on Irish property. 

This is not the first time a vulture fund has cracked this nut since the 2016 reform – in 2019, a subsidiary of Goldman Sachs similarly managed to flip a distressed Irish mortgage book quickly and generate a €153 million tax-free gain under Section 110 rules.

The structure based on Dennett could have remained in place, as it has for dozens of other Irish SPVs in control of distressed loan books acquired by vulture funds here and elsewhere in Europe, with collections used first to repay leverage debt and then to channel profit-participating interest to US-managed hedge funds.

CarVal and Deutsche Bank, however, had other plans. It soon became clear that the Irish economy was doing well and Ulster Bank’s old borrowers were repaying fast despite the pandemic. Meanwhile, global investors were starved of opportunities to park their money at a profit. It was time for the US vulture fund and the German bank to go to the market and free up their cash for the next deal.


On October 28, 2021, Dennett reported the sale of its entire mortgage portfolio. Documents released by CarVal subsidiaries and by stock exchange authorities in Ireland and in the US reveal that the Deenish loan book moved on that day to another CarVal-controlled Irish SPV, Rathlin Residential 2021-1 DAC. Rathlin immediately raised hundreds of millions of euros from the bond market through mortgage-backed floating-rate notes, which are now listed on the Euronext Dublin exchange. 

A report prepared by Deloitte to check the integrity of the 3,384 mortgages underpinning the notes and released to US investors through the Securities and Exchange Commission confirms the loan book’s name as Deenish.

Meanwhile, the 305-page listing document prepared to market the notes to institutional investors through Euronext Dublin details the structure of the offering and contains unprecedented detail about the Deenish portfolio.

Over 3,000 homes all over Ireland

Among the wealth of data extracted for prospective noteholders from the Deenish portfolio when its acquisition closed in April 2021, Rathlin reported that it consisted of 3,384 secured loans with €657.9 million in receivables and a tiny group of 62 unsecured loans with a balance of €7 million. The difference with the €800 million face value announced by Ulster Bank when it agreed the disposal of Project Deenish is not detailed. 

Some 3,121 mortgages were for private dwelling houses and just 263 were secured on buy-to-lets. Their geographical distribution by county was broadly in line with that of the general population. The average amount due by each borrower was €248,652 over a remaining term of 15 and a half years. 

The majority were more than three months in arrears, including 15 per cent that were over six years behind their repayments. Just 33 had been rearranged into split mortgages under a personal insolvency arrangement.

Ulster Bank had originated the majority of the mortgages between 2005 and 2008, though some had also come through its acquisition of First Active in 2010. The Deenish portfolio consisted of loans identified after a one-year process initiated in October 2018 by Ulster Bank to restructure mortgages in arrears, or sell off those that remained non-performing.

The debt instruments issued by Rathlin last October had a face value of €357 million and three classes were available to investors, all with a final maturity date of 2075. The bulk of the notes, rated A2 by Moody’s and A(low) by DBRS Morningstar, are the most senior and pay a coupon of 2 per cent over the Euribor 1 month rate, plus a bonus of up to 1.5 per cent after September 2024 (which is also an optional early redemption date for noteholders). 

Smaller classes B and C rank lower and Rathlin pays their holders higher margins of 2.75 per cent and 4 per cent over Euribor 1 month respectively. 

After discounts to attract investors under the original issue price, the notes raised just under €350 million. Rathlin set aside €16.1 million to constitute a reserve fund and paid €4.4 million in interest cap fees as an insurance premium against any runaway increase in Euribor rates. This left €328.7 million, from which undisclosed issuance costs had to be paid.

The remaining amount was to be paid to Dennett for the acquisition of the Deenish mortgages, which was equivalent to the purchase price it had paid to Ulster Bank net of collections from borrowers in 2020. As the sun set on October 28 last, CarVal and Deutsche Bank had passed their entire capital expenditure on the Deenish portfolio onto bondholders.

These can be institutional investors anywhere in the world. For example, three funds managed by the US life insurance giant Prudential Financial have reported the purchase of over €82 million worth of Rathlin mortgage-backed securities between them.

CarVal SPVs have no employees and are maintained by Intertrust at the firm’s Dublin office.

After pocketing €4.3 million in interest in 2020 and any further payments due on the senior loan until October, when it was presumably repaid, Deutsche secured one last job out of the Deenish deal when it managed the issuance of the notes issuance alongside Morgan Stanley.

Meanwhile, CarVal entities remain entitled to any profits above and beyond the 2 to 4 per cent interest rate margin they were now paying to bondholders (the current coupons are lower because benchmark rates are negative, with the Euribor 1 month below -0.5 per cent for the past year).

While Dennett no longer owns the mortgages, the original Irish SPV received special Z class notes as part of the October issuance carrying the right to profit-participating interest sweeping any available funds remaining after other investors are paid. The structure initially built around Dennett via Luxembourg then remains available to funnel profits back to CarVal funds as interest payable on the initial profit-participating loan of just €7.7 million.

The prospects are good for the US vulture fund. As of last April, the Deenish mortgages had €657.9 million in receivables at a weighted average interest rate of 1.9 per cent, equivalent to €12.5 million in annual interest income. Against this, Rathlin was set to pay an annual coupon of just €5.7 million to its noteholders at current interest rates.

Yet this remains a risky business. The numbers above depend on borrowers repaying their entire mortgages, and the reason Ulster Bank sold them off in the first place was because they were not on track to do so. CarVal is, however, relatively well protected from a hike in interest rates by the combined coupon cap on the notes it has issued to investors and the fact that only 5.5 per cent of Deenish mortgages are on a fixed rate, with the vast majority on tracker or variable rates. 

How CarVal insulated itself from the tracker mortgage scandal

Two thirds of the Deenish mortgages CarVal acquired from Ulster Bank were on tracker rates and the vulture fund made sure it was protected from the scandal that saw the bank fined a record €37.8 million by the Central Bank last year for breaching the rights of those borrowers.

When it went to the bond market, Rathlin reassured investors: 

“Following the Tracker Mortgage Examination in relation to Ulster Bank Ireland DAC, any loans affected by such investigation were removed by the Original Seller from the pool of loans acquired by the Seller under the Original Mortgage Sale Deed. To the extent any additional affected loan arises, the Original Mortgage Sale Deed includes a right for the Seller to be indemnified by the Original Seller for certain losses incurred in relation to a Mortgage Loan to the extent that it falls subject to the Tracker Mortgage Examination.”

The exclusion of the loans affected by the tracker mortgage scandal may explain at least in part why it took until after the end of the Central Bank investigation into Ulster Bank in late March 2021 to close the deal, and why CarVal ended up acquiring just €657.9 million in receivables out of the €800 million expected six months earlier.

Political risk, meanwhile, features prominently in the disclosures made to potential investors in Rathlin’s notes. After describing the outcome of the 2020 general election, the company warned: 

“A new government may have different policies and priorities to the outgoing government and any change in such policy or priorities may have an adverse effect on the Issuer’s ability to make collections on the Mortgage Loans or commence enforcement proceedings, and accordingly its ability to make payments on the Notes. For example, a bill entitled “No Consent, No Sale Bill 2019” (the Bill) was introduced by Sinn Féin, an opposition party, in to the last session of the Irish Parliament.”

The document added that such legislation could affect Rathlin’s plans to move ownership of the mortgages between parties to the securitisation deal – for example, their right to reclaim the legal title of the mortgages in case the Irish company defaulted on its notes.

In fact, CarVal had no intention of informing homeowners that the beneficial interest of their loans was being moved around and securitised away last October: “Notice of the sale of the Mortgage Assets to the Issuer will not (except as stated herein) be given to any Borrower,” according to the terms of the notes issuance.

Between the lines, the firm assessed the potential for stricter regulation under a future coalition government, noting that Sinn Féin’s bill to submit mortgage transfers to the approval of borrowers was not opposed by Fianna Fáil. Rathlin told investors:

“If enacted, any further legislation could potentially impact the ability of the Issuer to make recoveries in respect of the Mortgage Loans and, accordingly, its ability to make payments under the Notes.”

Political risk extended to the possible repeat of the rent freeze and evictions ban imposed during recent Covid-19 lockdowns. Rathlin cautioned:

“The extension of such protections or the introduction of similar measures, could affect the enforcement of mortgages over residential properties including the Mortgage Loans and so could have an adverse impact on the ability of the Issuer to fully recover amounts due under the Mortgage Loans, which in turn may adversely affect its ability to make payments under the Notes.”

The document includes analysis of the Irish process involved in repossessions and the lengthy proceedings involving courts and sheriffs or personal insolvency arrangements, noting that enforcement on buy-to-let assets was likely to progress faster than on owner-occupied homes.

“In Europe, the US and elsewhere, there is increased political and regulatory scrutiny of the asset-backed securities industry.”

Rathlin notes issuance document

As for the move to transfer the capital weight of non-performing mortgages onto bond markets, the company told investors: 

“In Europe, the US and elsewhere, there is increased political and regulatory scrutiny of the asset-backed securities industry. This has resulted in multiple measures for increased regulation which are at various stages of implementation and which may have an adverse impact on the regulatory position of certain investors in securitisation exposures and/or on the incentives for certain investors to hold asset-backed securities, and may thereby affect the liquidity of such securities.”

This regulatory risk extends to uncertainty surrounding emerging EU rules on companies’ tax residency and so-called hybrid mismatches where a tax-deductible expense, such as intercompany debt interest, is different from one related company to the next.

So far, however, things have gone well for CarVal and the string of SPVs it established to digest Project Deenish. The cash flow projection it presented to investors shows it eventually hopes to collect €571 million from borrowers.

In addition, “cash flows have increased since migration,” the mortgages’ new owner Rathlin reported. “The actual collections since the Provisional Cut-off Date (between April 2021 and July 2021) exceed the projections of the Provisional Cut-off Date Business Plan; in total approximately €16 million was collected within the three months compared to the projected €10 million.”