Cerberus Capital Management: Purchase of Distressed Assets

Part of the debate – in Westminster Hall at 4:57 pm on 22nd February 2017.

Alert me about debates like this

Photo of Sammy Wilson Sammy Wilson Shadow DUP Spokesperson (Treasury), Shadow DUP Spokesperson (Work and Pensions), Shadow DUP Spokesperson (Education) 4:57 pm, 22nd February 2017

It is a joy to serve under your chairmanship, Mr Owen. May I first of all apologise for the earlier interruption as a result of my phone going off? I congratulate George Kerevan on securing this debate. The issue of how Cerberus has dealt with the distressed-loan books that it has purchased and the impact that has had on individual businesses is of great importance in Northern Ireland.

I say at the outset that I do not want to deal with the issues raised by the hon. Gentleman at the end of his speech about the sale of the NAMA assets to Cerberus, other than to say this: there was an acknowledgment at that time in Northern Ireland that NAMA had taken £4.7 billion of loans in Northern Ireland under its auspices for a number of years and had been in charge of those loans, but that there were flaws in how it was dealing with the loans. It was felt that there were very good reasons for getting away from a Government-controlled agency, which had difficulties making decisions because of the political connotations and political constraints, and that it was better that those loans were moved from NAMA to another body.

Indeed, there was support for that in Northern Ireland. It was seen as a way of freeing up the market. Having taken the loans on and written them down, and with the Irish taxpayer having been responsible for the costs of the write-down of many of them, it was a difficult decision for NAMA to make and for the Irish Government to allow. They tried to get the market moving again, and allow those people who had borrowed money and defaulted on loans some liberty—they wanted to get equity or money back into the market, and allow people to develop assets and perhaps make money from them. It was therefore felt that moving the assets to a separate body would be better. That is the background to the sale of the assets, for which Cerberus was eventually the successful bidder.

At that stage Cerberus made a number of promises, which it conveyed to the Northern Ireland Executive. First and significantly, it said that it would adopt a long-term strategy and was not involved simply to make money quickly by moving in, closing down the businesses, selling off their assets and leaving. Many of the businesses were viable in their own right but had moved into the property market during the property boom and found that their core business was affected by the loans they had taken on for property. Cerberus made it clear that it would adopt a long-term strategy and look for assets that could grow in capital terms over a longer period and that had an income stream. It indicated that it would be prepared to make money available because it had funds not only to purchase the assets, but to lend to owners of the assets when it was felt that there was potential to enable them to develop and grow, and pay back the loans.

Secondly, Cerberus made it clear that there would be no fixed period and that it was not looking at a time horizon. Again, that provided assurance for many businesses.

Thirdly, Cerberus said that it would use local staff, and that it would employ people who understood the market and the businesses. Significantly, I remember dealing with one case that perhaps shows how Cerberus were much more aggressive. An individual faced a staff member that Cerberus had employed from the bank that he had previously banked with and which held his loan. That same person was demanding far harsher terms from him when working for Cerberus than they had offered as a bank employee when the loan rested with that bank. That shows what happened, despite the promises that were made. By the way, the banks were not easy on their customers, and yet the same employee, when operating for a different firm, was much more aggressive and hard-headed.

Fourthly and very importantly, Cerberus indicated that—I do not know whether this is true of the loan books that were purchased from other banks—it does not pay and build into the value of any loans that it purchases the value of personal guarantees. Cerberus made a virtue of that, saying that, as no value was attached to the personal guarantees, it would be easy to exempt people from personal guarantees. Very often, the personal guarantees prevented businesses from being able to borrow, and to try and develop an asset, because they always had the value of the personal guarantee hanging over them.

Fifthly, Cerberus said there would be a presumption in favour of the incumbent—in other words, where possible, it would try to work with the people who held the loans. That made good sense. They knew the assets and were probably already involved in the business, so they would be easier to work with.

Lastly, Cerberus indicated that it would find ways of trying to liquidate the companies through equity finance and loans, and in other cases by writing down debts.

As I am sure Members have found time and again, Cerberus claimed that it wanted to work with individuals and to have a consensual approach with the people who held the loans. That has not been the experience, although in some cases, businesses will testify that it worked. I can think of large businesses in Northern Ireland that were able to do deals, but by and large, the approach has been aggressive—aggressive to the point of incompetence, in fact, as one financial adviser put it to me. Sometimes there was a deal to be done, but when those working on behalf of Cerberus saw a chink of light and that a business was able to pay, they went even further and pushed harder until they pushed them to the brink. In one case when they were on the brink of a deal, some of the assets that were part of the deal were sold, which brought the deal down. There was aggression to the point of incompetence. It might be argued that what happened was good for Cerberus. In some cases it might not have been, but importantly, it was often not good for the businesses. Viable businesses were put to the wall. In some cases, when they did survive, individuals and business owners were driven almost to distraction and had health issues.

Another difficulty was reaching an agreement—I think of what an individual I dealt with said. Cerberus would only speak to businesses when it wanted to speak to them, and businesses wanting to try to move on often found that they were hitting a blank wall—so much for the consensual approach. Even when that did happen, trying to get information about what a deal would look like was very difficult. Rather than trying to help businesses, the approach has almost been more about staring them out, and businesses have been adversely affected.

In most cases—financial advisers tell me this—despite the fact that no timescale was set, Cerberus is loth to do deals beyond two years. A two-year horizon is much too short for businesses when there have been large debts and a big fall in the assets, and when they have been relying on building up an income stream and looking for capital increases in the value of assets as the economy picks up. That has forced many businesses simply to say, “Look, we can’t continue. We will have to accept bankruptcy or constrain ourselves much more than we had anticipated.”

This is the important point: there is very little if any oversight of this area and no regulation, yet it has a huge impact on our economy. Businesses that employ people, pay tax to the Treasury and provide local services are put in jeopardy as a result of loans that can be easily transferred from one financial institution to these companies. There is little or no regulation and the people who originally took out the loans have no say. The terms of those loans can then be changed at the whim of the business that has taken over. I do not believe that that is good for the economy. Some strengthening of the regulations and oversight of the businesses is needed. There also needs to be protection for those who have taken out loans in the first place on certain terms, so they cannot have those loans changed.

Finally, the Treasury needs to look at a point that was well made by the hon. Member for East Lothian: as a result of transfer pricing, the local subsidiary is given loans at high rates of interest to purchase the assets, which keeps its profits down in the United Kingdom, thus avoiding taxes. I would be interested to hear the Minister’s response on the levels of corporation tax paid by businesses such as Cerberus.