BANKS BACK LENDING - BUT TO WHO?

We have been reading with interest over the last number of months that the various Irish Banks including Bank of Ireland, AIB, Permanent TSB and the U.K. Bank are keen to start lending again. Our Market soundings would suggest that this is proving more difficult than would first appear. We understand that most of the Banks are off loading their impaired property assets to repair their balance sheets so that they can improve their Capital position thereby offering new borrowers new facilities.

If and when this happens it will obviously be excellent news for not only the Irish but also the U.K. Economy. However one matter seems to have been overlooked. As the Banks off load their property book to the American Vulture Funds the problem really hasn't gone away. The overused term moving the deck chairs on the Titanic means that the borrowers remain in situ except they have a  new lending master. This new master does not have the patience, willingness nor desire to work with borrowers for the medium to long term. They are here for short term solutions and a big quick returns, it is a ‘smash and grab’ business model. So if the remaining borrowers are still caught up in the property debacle even though their loans may have been bought by American Vulture funds will the Banks lend to these people. The short answer is no. So who is left to borrow money from the Banks, yes SME's in a small way, Entrepreneurs if there are any left and people who have potentially re-invented themselves. Do we not hear the PR machine from the Banks crying out that there is no demand from SME’s for their loans?

How large is this market? This will not get the economy moving again and will not allow the Banks to release further capital nor will it improve the liquidity for businesses throughout the Island of Ireland. So what is the solution, surely the current Banks that are off loading their property book must take a more pragmatic approach to lending and relax their overall lending criteria to borrowers who have decent proposals but due to high levels of due diligence now required by the Banks who are still risk averse cannot borrow the funds. As I look around Belfast this morning on a bright and beautiful November morning I can see two cranes currently in operation at the new university planned for York Street.

Nothing else in the construction property market is happening in Northern Ireland. Will we catch up with Dublin not in the immediate short term as there is a huge lack of finance available for the industry to move forward.

Perhaps the only good thing to come out of these loan sales is the 7 years of stagnation we have had is now coming to an end but the question is how we will encumbered borrowers deal with their new masters and the huge overhang of debt that still has to be addressed.

We will keep a watching brief on the treatment of borrowers by the Vulture funds and by the Banks as the next 3 months will prove critical for borrowers and the economy alike.

 

JAMES GIBBONS LLB

WHAT DOES THE FUTURE REALLY HOLD FOR NI?

Last month I ran the Dublin marathon in just under four hours.  It was a great day with the people of Dublin coming out in force to support over 15,000 runners through the 26.2 miles.  The feel good factor after doing something like a marathon is always great.  However on this occasion the euphoria was short lived as I drove back to Belfast listening to the radio local politicians were sniping at each other over the austerity program and the incoming cuts to our budget with the added occasional descent into a rant with name-calling.

For me it’s all theatre as despite all of the bickering and fighting Stormont approved a budget for next year, all be it, not one we should celebrate too quickly. 

In the last few months I have listened to some elements of the media, politicians and economists tell how the economy is improving.  Apparently more people are working; the private sector is picking up and the property market is moving again! It is going that well that Stormont is preparing asset sales of their crown jewels to pay for the £100m so called Wonga loan note that Westminster has lent to us.

In short and from a statistical point of view, yes the economy in Northern Ireland has certainly picked up.  However I would suggest that the man on the street is not feeling this and furthermore won’t be feeling the benefits of an upturn anytime soon. 

Recently I have seen evidence of the huge household debt overhang facing many people and with the insolvency cases hitting record numbers this year it is forecast that this trend will continue.  It is accepted that Northern Ireland has a greater problem dealing with debt than the rest of the UK, with 27% of the population over indebted, compared to the UK average of 18%, that’s according to the Money Advice Service.

However there is another problem facing the economy that has gone largely unnoticed which is causing me concern and it has the potential to put the Northern Ireland economy back into a nosedive. 

By 2014’s year end, billions of pounds worth of property loans will have been sold by NAMA and Ulster Bank which relate to our small to medium sized business community.  These loans have been and will be bought by American Vulture Funds for the most part.  These Funds will now own the loans and will be responsible for the out-workings of these loans. 

The challenge for the SMEs through no fault of their own is how they remain in control of their assets and their business.  If we look at what happened in Cork of late whereby an American Vulture fund tried to take control of a very lucrative family business by calling in a personal guarantee at very short notice – this is alarming!

In the last few weeks our practice has been contacted by dozens of companies from all over Northern Ireland. Their bank has advised, Ulster bank in most cases, that their loans are being sold.  The businesses have no say in the matter and the bottom line is they will soon have to deal with a new bank or to be more accurate private equity companies that want their money back.

Having worked in this space for the past eighteen months I advise that for the SMEs in this position it will prove extremely tricky to keep everything on track.  The private equity companies which are buying these loans aim to get 15/20 % internal rate of return on their monies per annum, and this type of business model is not conducive to supporting a local business which maybe working to a longer term business plan.

It would appear that one exit strategy for the SME is to find a finance partner or a bank that will support them.  The challenge in Northern Ireland is that our banks are not open for business for the most part and those that are, their terms are such that they cannot or will not assist.

SMEs that find themselves in one of these loan trades need to be proactive in terms of putting together their own proposals and ultimately trying to stay in control of their businesses. It’s certainly not for the faint hearted however a solution is possible.

For me the austerity program is now starting to unravel and with its lifespan due to run to 2020 it is very hard to be optimistic. Maybe I need to run more marathons to have any chance of experiencing euphoria in the near future as any sense of optimism or business optimism in Northern Ireland is someway off giving the current sorry state of affairs.

Conor Devine MRICS