It has recently been reported in the press that two so called “vulture funds” are looking to acquire non-performing loans from two UK banks.
The US firm Cerberus has been in discussions to buy loans from the Co-Op Bank. A move which one politician described as spelling “devastation for customers”. While another US based fund, Elliott Management, is looking to acquire loans from the popular start-up and SME lender Funding Circle via its UK subsidiary Azzuro Associates.
The upshot of these transfers, if they take place, could be that the borrowers, and those guaranteeing the borrower’s obligations (be it group companies or the company directors personally), may find that their debt is now being managed and pursued by an entity much less likely to allow forbearance than their original bank and whose primary objective is immediate cash collection as opposed to any ongoing customer relationship.
These are typically US based hedge funds. The most well-known one in the sector being Cerberus Capital Management. Named after the three headed dog which guards hell in Greek mythology it is an American private equity firm, specializing in distressed investing. It has a wide investment portfolio including a stake in Deutsche Bank. Cerberus has been very active in the UK and Ireland in recent years.
Other funds include Loan Star and Elliott Management mentioned above. Elliott Management is probably best known for pursuing sovereign debt and for taking financial stakes in the football team AC Milan and the booksellers Waterstones amongst others.
Both the Co-Op Bank and Funding Circle acquisitions are interesting as these are lenders who are often lauded for their values of fair play and customer service. There might be an element of pride at play here in that the banks themselves do not want to be seen as pursuing the customers directly in a challenging financial climate especially in circumstances where the directors of the borrower companies may have personally guaranteed these debts with their own assets, and in many cases their own homes.
Typically, these funds look to pick up non-performing loan books from banks at low prices and then seek to recover from the borrower more than they paid for them. Most of our experience has been dealing with facilities transferred from the Allied Irish Bank and the Clydesdale Bank to subsidiaries of Cerberus.
These funds exclusively operate through subsidiaries who are often incorporated in Luxemburg, the Republic of Ireland or in offshore jurisdictions.
We believe that these loan books are effectively bought as a “job lot”. Very rarely is it disclosed at what price the fund acquired the debt for.
A suite of transfer documents is used to transfer the debt from the original bank to the vulture fund. This usually includes a sale and purchase agreement together with an assignation and novation agreement. Many of the legal challenges which can be made against the fund’s enforcement of the transferred debt stem from these documents and any deficiencies in them. Accordingly, the acquiring funds will try to avoid disclosing them if possible or if they are disclosed, provide them in a heavily redacted form.
From the borrower’s perspective they usually receive some notification from their original bank prior to the transfer.
This is generally followed up by a letter from the vulture fund’s agents seeking payment of the outstanding loan. Often the borrower will be invited to a meeting with the fund or its agents to discuss repayment proposals.
The funds engage a number of organisations to case manage the acquired loan books. These agents in turn instruct solicitors on the fund’s behalf when formal enforcement action is required.
The typical approach is an aggressive one. Borrowers, in our experience, are put under significant time pressure and told that enforcement action will follow if acceptable proposals are not made in good time.
Very often cash will be demanded and even in cases where the outstanding debt is in the millions, the agents might still demand token payments of a few thousand pounds while negotiations are ongoing. Cash collection is key from their perspective.
As a result, directors often turn to expensive bridging finance just to get the funds off their back while they put in place more long-term banking arrangements with new lenders.
The agents in our experience are often quick to shut the door and to stop engaging in negotiations, especially if they think they are being messed around by a borrower.
While the fund may have bought the debt for pennies in the pound, if in the agent’s assessment a full recovery can be made from the assets of the borrower or from the assets of its guarantors, they will generally accept nothing less than the full amount outstanding. Assuming that the fund will always accept a significant reduction in the debt outstanding because they bought it for a cut-down price is a mistake a lot of borrowers and their financial advisors make. This results in low ball offers which lead to a swift end to negotiations and often the commencement of enforcement proceedings.
Taking appropriate legal or financial advice at an early stage, and before the transfer if at all possible, is key given the speed that some funds move towards enforcement.
A number of legal strategies can be deployed to stop or at least slow down the enforcement measures taken by the funds.
In our experience a joined-up approach works best whereby legal proceedings are used to slow down the fund’s enforcement processes while at the same time refinancing proposals or a reduction of the debt is negotiated with the assistance of financial advisors, brokers or insolvency practitioners.
If you have an outstanding debt that is being transferred from your existing lender to a vulture fund, get in touch with our Dispute Resolution team to find out what options you have to manage the process and what can be done to protect yourself before enforcement proceedings get underway.