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Blood on the Streets - Dose of Reality Required in Ireland

In December 2010, the CEO of Blackstone told an audience that they were ‘waiting to see how beaten up people’s psyches get and where they are willing to sell assets’ and that ‘you want to wait until there’s really blood in the streets’. He was talking about Ireland and you the Irish people. Blackstone have already amassed a €2bn portfolio of Irish assets and last week appointed receivers on the single largest borrower in that portfolio, Michael Flynn, so quite clearly that time has come.

Many saw the American funds as white knights riding in to save the day. Unfortunately, this was extremely naïve; an artery has been severed and the blood is pumping. They’re not called vulture funds without reason. A vulture spends time circling their prey, waiting until they’re near death and then swoops on an easy target, tearing every part of flesh, muscle and sinew until nothing remains, leaving a rotting carcass in their wake. Vulture Funds are no different. They’ve existed for decades and are a necessary evil and an important part in any economy’s recovery from recession, depression, austerity and over lending. But they are aggressive, efficient and profit orientated.

Whilst they buy loans at huge discounts, their first target is to receive back the par value of the loans, making huge profits. Ask yourself the question, were you lending the money, would you target a different outcome? The honest answer is no. It is a very simple spreadsheet exercise, the vulture fund will look to recoup all of their money as quickly as possible, lock in their anticipated profit and then deal with the rest of the portfolio. If the remainder of the portfolio doesn’t look great, they’ll either pass it to an asset manager to recoup the money through a repayment schedule much like a bank or having already made their money, sell it on to another debt purchaser.

Many of you will have seen the movie Wall Street. The prevailing mantra of the movie was ‘Greed is good’. Let’s rephrase that, Greed is the norm. Steve Schwarzman, the CEO of Blackstone earns $211m a year, the best part of $4m a week. He earns this huge sum of money not by being nice, but by repeatedly and consistently delivering on his targets. If it was me in Upstate New York, cold, impassioned and trying to justify a huge salary, I’d have no problem putting anyone’s lights out.

Michael Flynn and others before him will take to the courts to try to ascertain details over how their loans were sold. Unfortunately it is largely irrelevant. Most of these funds, when looking to arrive at the price to bid on the loan book, will do one of two things. They will either value the twenty best performing assets in the loan book or fifty of the worst performing assets. If you are in the former, you’re in trouble. You are already ear marked as the easiest way for the fund to recoup their initial outlay. This is just common sense. In the absence of you not being able to buy-out your loan, the likelihood is that they will engineer default, break up your businesses and sell to the highest bidder, normally your closest competitor. Is it nice? No. Is it ethical? Borderline. Is it good business? Definitely.

Did NAMA sell Michael Flynn and others down the river? Absolutely! They understand the process and know that many of these loans that are currently being sold will be sold time and time again until they eventually change hands for decimal points of their original par value.

So what can the borrower do? Quite simply, you have to gain back control as quickly as possible. The only way to do this is to re-acquire your loans from these funds as efficiently and quickly as you can. There is a window of opportunity - absolutely. Many loans will have moved to a fund under the same terms that were agreed at the previous lender. This won’t last forever. Very soon, your new lender will be looking for principal and interest repayments on your loan, which of course they are entitled to do but clearly wasn’t possible before and no more is it now. Failure to do so will place you in the uncooperative, non performing pigeon hole that Michael Flynn finds himself in and any chance that you had will be lost.

There are investors and funds who specialise in this type of process. They understand the valuation process that the funds have gone through and are equally aware of the buy-out price that the fund is looking for. If you find yourself in the situation that your loans have been acquired by one of these ‘white knights’, you need to act soon. Michael Flynn and others thought everything was going well - it wasn’t.

Mr Schwarzman spoke initially about the psyche of the Irish people; that’s no longer relevant. Borrowers need to wake up and smell the coffee, they need to understand the process. It doesn’t matter if it’s Cerebus, Lone Star, Carval or Blackstone; they are all fairly similar.