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Property grab gets Green light
07 February 2010 By Richard Curran
One bank’s misfortune may be another man’s gain. But if there are several banks with heavily devalued properties on their books, there maybe plenty of opportunities for the right investors.
This appears to be the case in relation to Green Property’s two opportunistic deals with Irish banks worth close to €1.8 billion.
It emerged last week that negotiations between Green Property and Anglo Irish Bank over the purchase of a €1billion portfolio of nine properties were coming to fruition.
The sale of the properties to Green by Anglo Irish Bank will be funded by Anglo, with a newspaper report saying the loan would carry a 0 per cent interest rate.
This follows the recent disclosure of details surrounding Green’s purchase of €800 million worth of British properties from AIB at the end of 2008. In both cases, it appeared that Green was getting a very good deal from the banks on loans to buy properties from those banks.
Industry sources have questioned the motivation of the banks in both cases. There are questions about whether financing the purchase of the properties ultimately helped the banks to avoid booking a major loss on the properties. Both cases are different but share some common threads, insofar as the details of the transactions are known.
In the boom days of 2005 and 2006, AIB in Britain began lending to Greek businessman Achilleas Kallakis, who bought prestige office blocks and apartment buildings in London. In all, AIB lent companies connected to Kallakis, whose real name is Kollokis, €800 million.
After getting in very deep with Kallakis, AIB discovered that he was providing bogus information about his ability to repay. It turned out that he also had a 1995 conviction for selling bogus British titles to Australians and Americans. The bank repossessed the buildings and called in the British Senior Fraud Office.
In the meantime, property values had fallen and AIB faced losing a lot of money on the properties. It found a buyer in Green Property, which borrowed money from AIB to buy the properties at an undisclosed price. However, AIB only booked a €64 million loss on the sale of €800 million worth of properties to Green.
From the outside, it appears that the bank sold the properties to Green at a price above market value to reduce its financial loss. Green appeared to be taking a risk, but if the rent flow covered the interest bill on the loan - and possibly a bit more - and the loans were only secured on the properties, then Green couldn’t really lose.
This raises questions about whether the bank was lending at an above market price to postpone a major loss.
From the bank’s perspective, the situation is quite different.
It was in a hole and needed to find a way out. Green was a blue chip company willing to take on the properties. ‘‘The bank took a view. These were good properties generating a good revenue," said one source close to the bank.
AIB felt that it was restructuring the loan with a client that was on a much better financial footing. It took the view that the properties might appreciate in value over a long period and, in the meantime, it was going to get a solid interest revenue on the loan. ‘‘If the bank went and sold the properties in the market, it would not have got a good pr ice for them," the source said.
The real downside was that AIB was still taking a risk by lending on the back of those properties. If it sold them off and took its medicine, the situation would be dealt with and there would no longer be any risk. However, AIB can point out that it is expected to take a hit of €5.3 billion on loan provisions in its next results, so adding another €100million or €200 million to that would hardly matter much. This was about taking a view on the best chance of getting back the most money over a long period of time.
The Green/AIB deal has one thing in common with the Green/Anglo deal - namely, that the bank was set to take a bath on the properties. In AIB’s case, the bank had been stung by a trickster. In Anglo’s case, it was just bad judgment and bad timing.
Anglo Irish Bank’s property fund planned to raise enough money from investors to acquire all of the properties in the nine-property portfolio being sold to Green. During the heady days of the boom, Anglo Irish Bank would bankroll developers to build projects.
Then it would use its wealth management division to find private clients to buy those properties. The bank would collect loan interest and fees along the way.
However, some deals were left too late in the cycle to manage to sell off completely to private clients. In some instances, the bank was left holding the equity, as well as the loans, on certain properties.
Anglo is in the process of finalising a deal with Green Property, through which it will buy part or all of a portfolio of nine properties from the bank.
The Irish Times reported last week that Anglo would finance the deal with a 0 per cent loan.
The reality is that the deal is highly complex, but one which reflects the strength of Green Property and the weakness of the bank’s position.
Fine Gael deputy leader Richard Bruton asked questions about the transaction, and indicated that he would welcome full competition for the assets. In reality, anyone who wants to try and buy them is free to knock on Anglo’s door.
Banking sources have said that these kinds of deals are happening around the world.
There are examples of them in the US, and one banker said he knew of Scandinavian banks approaching financially well backed property investors to take assets off the bank’s hands, with the bank lending them the money.
In fact, when Nama gets up and running, it is likely to move quickly to sell off properties.
Someone will have to lend the money to the buyers. It may be the original bank that lent money on the property, or it may even be Nama itself.
The AIB deal was concluded in late 2008, before the appointment of the public interest directors. However, sources close to AIB have indicated that the Financial Regulator was fully informed of all aspects of the deal and did not have any issues with it.
In the case of Anglo Irish Bank, one can only presume that it has the blessing of the board and the Department of Finance, given that it has gone this far. ‘‘There is nothing illegal or illegitimate about these kinds of deals. They just arise because of the mess that the banks find themselves in. They will do anything to try and avoid realising losses, and are prepared to take further risks to avoid that," one banker said.
Another banker said there were ways for the bank to justify lending on a deal that was above the current market value for properties, because they would take into account long term economic value and other factors. ‘‘The key issue is what value the purchaser places on the assets when they come on to its balance sheet," he said. In the case of Green Property, it is not possible to say.
The parent company of the Green Property group, Green Property Investment Fund 1 Plc, is in fact a variable capital investment fund. This means it does not have to file annual returns and accounts. The last set of publicly available figures showed that, in the year to March 2006, it made a pre-tax profit of €133 million - having received a dividend of €122 million from a subsidiary. The group behind the Blanchardstown Shopping Centre also had assets of over €2 billion at the time.
Run by Stephen Vernon and a team that includes former estate agent Pat Gunne, Green Property’s shareholder breakdown is not disclosed in the Companies Office. Vernon’s shareholding is held through a company called Verdi Holdings, which is registered in Barbados.
Industry sources expect further deals like the Green Property transactions to take place in the Irish market. The logic, from the bank’s point of view, may be questioned, but ultimately, it has problems that need to be fixed. It may simply be a case of taking further pain now or buying time to see what happens.
‘‘We will see more of these deals going on. They help turn something into a performing loan and the bank will view them as simply a restructuring of an existing loan, but with someone who has a better chance of making the repayments," one Irish banker said.
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