In May, when The Blackstone Group paid €1.1 billion to Ireland’s National Asset Management Agency (NAMA) for a portfolio of loans with a par value of €1.8 billion there was little sign of things to come. Trumpeting the deal, NAMA’s chief executive Brendan McDonagh said it provided further evidence of the current and strong investor appetite for real estate assets in Ireland. It was further validation that Ireland was a place to do business in.
However, it is now an example of how those pursuing European real estate debt deals via government-backed asset management agencies can find themselves in unwanted legal rows.
When Blackstone bought the loans via subsidiary Carbon Finance, it did so knowing it was dealing with a high profile borrower – in this case, an Irish property entrepreneur called Michael O’Flynn who is a ‘hero’ of Cork that even built Ireland’s tallest skyscraper called the Elysian tower in his home city.
But right from the start things did not go according to plan it seems. In the face of €1.8 billion of debt, one might have expected the firm and O’Flynn to reach an agreement in which the borrower would accept a write down and also a management fee and perhaps some other financial incentive for managing the assets. Instead, O’Flynn claims the company never intended to do anything other than try to gain control of the assets by enforcing on personal loans.
Blackstone claims it found the O’Flynn companies difficult to obtain important information from such as company accounts or about the way the business was run – something denied by the borrower.
At some point, O’Flynn offered to buy the Irish portion of the assets for €244 million but this was rejected by the US firm.
Blackstone turned for advice to Dublin-based law firm, Arthur Cox. Six weeks after the original deal, the firm demanded the repayment of personal loans which allowed Blackstone to crystallize a default by the O’Flynn Group companies and to appoint receivers. The company also petitioned for an examiner to be appointed as Blackstone argued it could not get information from the O’Flynn companies, the group was being uncooperative, and it was cash-flow insolvent. However, O’Flynn fought the appointment of an examiner, and last month the Irish High Court ruled in his favor, rejecting Blackstone’s arguments. In a 74-page judgment – some of it unflattering for Blackstone – the judge set aside the appointment of receivers pending a hearing on October 7 at which point Blackstone will argue that the demand on the personal loans was valid.
The case has already attracted massive media attention in Ireland and is being seen as a tussle involving a local ‘hero’ who refuses to be pushed around by large, American private equity firm.
In the aftermath of winning his appeal, O’Flynn told the Pat Kenny radio show that Blackstone’s actions had been “frightening” and alleged the firm’s proposed strategy for the O’Flynn loans before and after the sales process were completely different. He said he was given just two and a half hours to repay personal loans of €16.5 million, failure of which allowed the firm to engineer a default across the whole structure of the company.
“There is no doubt about it: Blackstone before the event and Blackstone after the event were two different Blackstones,” he stated. He added: “The world is interested in this because a lot of people are going to be in a similar situation as us. The last thing they wanted was the money. They wanted the consequence of me not paying the money.” Personal loans of €25 million have since been repaid.
O’Flynn was the first of the big borrowers to emerge from the NAMA process, and in an interview with the Sunday Independent newspaper, he said: “I can tell you for certain I have been contacted by a number of the borrowers [whose loans are still in NAMA] that this is a game changer in relation to people’s attitude, and why wouldn’t it be, given how events have unfolded for us, and given that it is clear how despite having spent four years navigating out of NAMA, the purchasers [Blackstone] had different plans [for us] once we exited.”
In a statement following the High Court’s decision, Blackstone said: “Carbon notes the ruling of the High Court in Dublin today on the O’Flynn Group. Carbon continues to believe that all steps taken in the current proceedings were necessary and appropriate in the circumstances and is pleased to note Michael O’Flynn’s decision to make an immediate repayment of his personal loans which it looks forward to receiving. Carbon will continue to safeguard its position as a significant creditor of the O’Flynn Group and to do everything to protect the assets of the Group and its creditors.”
The lesson which Blackstone and others will not be new to is that buying straight forward assets is one thing, but getting involved in the courts when dealing with borrowers is a lot harder.