Creditors fear passing of time when vast amounts at stake

This year will see less forbearance with borrowers that are in default , writes COLM KEENA, Public Affairs Correspondent

‘WHEN THERE’S blood in the water the first shark to the carcass gets the best bite,” is how one financial expert put it when asked what was to be gained from moving against developers such as Bernard McNamara.

“I’m not running anywhere,” McNamara said on Wednesday after Davy investors secured a €62.5 million judgment against him he has said he cannot pay. “I’ll stand here and face whatever music there is.”

The investors are understood to have secured a copy of the judgment order at close of business on Wednesday.

The question now is, what will they do with it?

McNamara has a wide range of assets, many of them owned in partnership with others such as Jerry O’Reilly and David Courtney. Most of his assets are owned by companies which have bank charges registered against them and many also hold personal guarantees. McNamara says he has overall debts of approximately €1.5 billion and is broke.

One adviser to people such as McNamara sees the investors’ options as: seeking to have McNamara declared a bankrupt; seeking to have their judgment registered against his assets, and seeking to have the sheriff collect their debt.

Such moves would involve a cost and might not raise much. A number of sources spoken to were of the view that the move by the Davy investors was of little value to them, apart from placing their claim in an early position in the queue.

On the other hand it has damaged McNamara, whom many see as being the person best able to maximise the value of the various assets he has.

“Other creditors will now be nervous,” the adviser said. “They will consider ending negotiations and going the legal route. This will stir them to do something.”

The National Asset Management Agency (Nama) is a complicating factor. Irish banks with co-operating clients who are in default may decide to wait until the loans can be sold to the agency.

“From a banker’s point of view it will cost you, but you have a definite exit,” said the adviser. “Irish banks are not proceeding against borrowers, only where they are being given the two fingers.”

However many developers, including McNamara, have debts to a number of banks, including ones such as Bank of Scotland (Ireland) and Ulster Bank, which are not expected to sell loans to Nama.

Such banks might have more of an incentive to move in and the Irish banks may be nervous that they might lose out if they are second or third in line down in the Four Courts.

An insolvency expert says the key issue is control. Persons or institutions owed money have to assess the extent to which the person who owes the money is still in control and the quality of his assets.

“You can lose control if other creditors move first.”

Even if a loan is on its way to Nama, creditors gain greater control if they make a move. If a receiver is sent in, whoever sends the receiver in may be more likely to get something out of the debtor’s assets.

“Decisions have to be made on a case-by-case basis,” he says.

A banking academic says that leaving the developer in charge can be a rational move, as over time he may be best placed to maximise the value of the property assets that are at the core of the crisis.

The whole point of the Nama exercise is that by dealing with the crash over an extended period of time, the losses that have to be faced can be minimised.

On the other hand, having a client who has given personal guarantees to other banks can make a bank with a mortgage with that person, or one of his companies, nervous.

The academic also sees a political aspect to the situation. Given that the State may end up as a majority owner, if not outright owner of some banks, “a rational banking careerist might think he is better off putting the boot in”.

Such a position might look better “before the Public Accounts Committee” than letting the interest bill mount in a situation that may remain in difficulty for some time.

The adviser says the legal options that are available for people who want their money back are “all tedious”, yet he believes 2010 will see “more action” than was seen last year.

There will be less forbearance with borrowers that are in default, because the debts will be growing, there is always uncertainty and it is only when a lender goes down the legal route “that you get the full picture”.

Creditors naturally fear that as time passes, the people and companies that owe them money might be “doing things”, such as divesting themselves of assets, he says. As time passes, the impulse to act grows.