McKillen wins fight for control of €800m IBRC loans but battle with Barclay brothers continues

Good week for Irish tycoon as he ensures control of his IBRC debts in latest twist in saga

Belfast developer Paddy McKillen

Belfast developer Paddy McKillen


Millions have been spent; thousands upon thousands of hours of lawyers’ time have been clocked up, and, yet, the confrontation between Paddy McKillen and the billionaire Barclay brothers is the war, seemingly, without end.

McKillen has had a good week. The €800 million worth of debt held by the Irish Bank Resolution Corporation – €260 million of which is personal to him and €500 million linked to his companies – is now charged to a McKillen ally, the US-based Colony Capital.

Hours after his success in ensuring control of his IBRC debts did not go elsewhere, David and Frederick Barclay, who own the Daily Telegraph , the Ritz Hotel and much more, dismissed the significance of the day’s events. Debts once charged to the IBRC are now charged to Colony, said a statement on their behalf, no more.

“Colony or Mr McKillen will presumably decide who will represent their interest on the board of Maybourne (a subsidiary of the Coroin holding company) for which they have one of the six board seats,” it went on.

Ten years ago, Derek Quinlan put together a consortium, including McKillen, to buy four of London’s leading hotels – Claridges, The Connaught, The Berkeley and the Savoy. The last one was quickly sold.

Today, McKillen, who led the redevelopment of the Connaught, owns a 36.2 per cent shareholding of Coroin Limited; the Barclays own 28.36 per cent. Quinlan owns the rest, though his shares are now mortgaged to the Barclays.

McKillen had a far better day than the Barclays accept. His success in buying his IBRC loans in the KPMG-run blind auction was far from guaranteed – his success still led yesterday to quiet declarations of respect in London financial circles yesterday.

Events have vindicated McKillen’s challenge to the National Asset Management Agency’s bid to bring more than €2 billion worth of his loans under its control – which he fended off in the Supreme Court in February 2011. If he had lost, he would not have been able to buy his debt from Nama.

The refinancing efforts went right up to the wire, a jubilant McKillen told The Irish Times . He and his advisers had been locked in a series of talks with different billionaires and investment funds about how to structure a buyout of his debt.

At times it looked like it would fail. “Our enemies had written us off. They were cock-sure they had beaten us right up until last night. But we had the ability to move within days and complete this deal,” he said, speaking by mobile telephone from Hong Kong.

It was complicated. McKillen had personal debt of about €260 million secured on his hotels shareholdings. He then had joint-venture borrowings with businessman Tony Leonard and others, taking the total owed to IBRC, the former Anglo Irish Bank, to €800 million.

The personal debt was bought at par – ie, face value – though the London-based CoStar News reported that McKillen and Colony Capital bought the rest with a 20 per cent weighted discount, “the shallowest of the discounts” offered by bidders.

McKillen’s prime assets are his shares in the London hotels, the Jervis Street shopping centre in Dublin and the Frenchgate shopping centre in Doncaster, South Yorkshire, which has enjoyed improved fortunes of late.

The debt on Jervis Street has been retired and refinanced by a €140 million five-year loan, implying a sub 50 per cent loan-to-value senior loan, with M&G Investments – the second time in the last two years when M&G has lent into to the Irish property market following a €45 million November 2012 deal.

McKillen always had one way of ensuring that the Barclays never got control of his personal debt – by paying full price for it. Under the IBRC’s “borrowers’ convention”, a borrower always has the right to redeem debt if full value is paid.

The Barclays, The Irish Times understands, had wanted to buy McKillen’s personal and corporate debt – titled Project Pebble by KPMG liquidators, Kieran Wallace and Eamonn Richardson, who are responsible for IBRC’s orderly wind-up.

Tenacious negotiator
However, Richard Faber, a Barclays executive and a former son-in-law of Sir Frederick Barclay, had sought “back bids” from investors willing to take all but the hotel lending off their hands, it is understood.

The complication for anyone buying that debt is that it is tied to assets spread across the world – in California, Boston, Japan, Eastern Europe, Vietnam, Argentina, France – along with Ireland and the UK.

McKillen’s success is good news, too, for KPMG and IBRC since his debts would have stayed on the IBRC’s books for months, if not years, if the Barclays had been the highest bidder – awaiting the result of McKillen’s Dublin High Court action against the Barclays.

For months, McKillen, a tenacious negotiator, had been locked in talks with numerous potential backers. He criss-crossed the world meeting them as he knew everything was on the line.

Lone Star, Deutsche Bank and Davidson Kempner were also circling. In the second last week of February, McKillen was on the verge of striking a deal with Blackstone to form a joint-venture to buy out his debts. At the last minute, however, he teamed up instead with the Santa Monica, California-based Colony Capital, a private real estate investment firm with $20 billion of assets under management led by Tom Barrack.

“There was no shortage of interest from supporters, including some of the biggest funds in the world, but in the end we went with Tom Barrack who is an amazing man,” McKillen told The Irish Times .

Colony, McKillen said, knew the hotels “intimately”. They co-owned three of them – Claridges, the Connaught and the Berkeley – before selling them on in 2004 to a group investors led by financier Derek Quinlan, but which also included McKillen.

The past few months had not been an easy experience, he said. “We’ve been customers of Anglo Irish Bank for 30 odd years. To be thrown to the wolves in the way we were at the 11th hour was very wrong.”

Winning control
He had struck a deal with IBRC’s previous management to repay his debts over three years, and he felt he should have been allowed time to complete this deal, rather than being forced to scramble.

McKillen said he felt his treatment by the State was “bizarre” and that he had felt forced to continually fight it in the courts in order to protect his business interests. “My loans were good and I was always going to repay them,” he said.

The Belfast-born property investor said that after winning control of his loans with the backing of Colony, he now felt the pressure was on his adversaries – the Barclay brothers, and on Quinlan, who is backing their bid to win control of Maybourne.

“The gamble has backfired,” McKillen, a usually private man who has had to adopt a higher profile during this controversy, said. “They thought they could just close me down, but I am still here and stronger than ever.”

Colony’s Barrack, a former official during Ronald Reagan’s administration in Washington, has promised him he would help him take control of the hotels, he said, adding that this would allow him to finally redevelop them.

However, the conditions of the deal are unknown. McKillen has either ceded control of the shares to Colony, or he has agreed interest payments on the monies needed to free them from IBRC.

Maybourne is currently valued at €1.3 billion – an enterprise value which is considerably higher than the one mooted during the 2012 legal action – but McKillen reasonably argues that they could be worth hundreds of millions more if properly developed and expanded.

McKillen said he was disappointed that Quinlan and other stakeholders in the hotel group had not backed him in this vision and instead had sold out to the Barclay brothers.

“I feel I’ve been let down very badly,” he said. “A lot can certainly change in 24 hours.

“Friday a week ago, the Barclays thought they could buy my loans and defeat me. They were going to put my wife and family and kids out of our home. They didn’t care. They were totally ruthless,” McKillen says.

Properties sold
Now, the Barclays are the ones under pressure, he claims. “They are supporting Derek Quinlan and his lifestyle. They are keeping him solvent. That is not sustainable.”

Back from the brink, he firmly believes that he can win the war.

However, Quinlan is not facing an immediate cliff. Since 2009, he has reduced his debts by €3 billion. The list of properties sold includes the Asprey building on Old Bond Street, which repaid £73 million to AIB and Bank of Scotland (Ireland).

The Knightsbridge Estate was sold for £580 million. All senior debt was repaid, along with a £20 million payment to Nama to cut Quinlan’s personal borrowings.

The DKNY building on Old Bond Street in London has also gone under the hammer.

Meanwhile, Quinlan, who appears to divide his time between London and Abu Dhabi, has sold 40 Charles Street in Mayfair to the president of Gabon, Ali Ben Bongo, for £25 million, with all of the funds going from that sale to the Bank of Ireland.

If Wednesday was a good day for McKillen in Ireland, it was less promising for him in the High Court in London, where Master Bowles ruled that Quinlan’s claim – that McKillen is the one who should be forced to surrender his shares in Coroin – must be heard in London.

Illustrating the way in which this battle has twisted and turned over the past years, McKillen previously tried and failed to get a court order to the effect that Quinlan should be the one force to sell his shares – an action which, if it had happened, would have given the Belfast man control.

“The judgment today was a mere jurisdiction point concerning Derek Quinlan’s and the Barclay Brothers’ claim that the liquidation of IBRC was an event of default, which is untrue as it was completely outside the control of the borrower,” said a McKillen spokesman.

The case would not be heard for a year, he said – though court sources in London predicted an autumn start for the legal action. Either way, it will not be on the scale of the 2012 battle that has left McKillen with nearly €25 million in legal costs.

“Further, given that McKillen’s debts are no longer in IBRC, the point is no longer relevant. It is not a matter we are concerned about at all,” the spokesman went on – though this view of the case’s importance is not shared by Master Bowles, it appears.

In his ruling, he declared: “Put simply, if the claimants are right in their contention and if the directors of Coroin make the necessary determination, then Mr McKillen can be compulsorily bought out of his shareholding and of any opportunity to control Coroin.”

If the three parties stay at the table, questions will inevitably be raised about the hotels’ future. “The offer is on the table to buy out the Barclays’ stake and it is only a matter of time until pre-emption is triggered on Derek Quinlan’s shares and McKillen is the majority shareholder,” a spokesman for McKillen says.

Personal relations between McKillen and the Barclays are such, however, that the chances of a deal between the two sides seem slender, and they will have been worsened by McKillen’s latest volley of accusation against the brothers.

Equally, they will have been irritated by his decision to travel to Sark, where he met locals who have complained that the secretive billionaire brothers – who own a castle on the smallest of the Channel Islands – have sought to run the place as a feudal domain.

The House of Commons justice committee agrees that problems exist, noting that “the process of change” on Sark is “unfortunately made more difficult because of the intense disputes between the largest investor on the island, the Barclay brothers, and the island’s elected representatives”.

“As a matter of general principle, we note that, in a very small jurisdiction, there must always be the possibility that individuals wielding very significant economic, legal and political power may skew the operation of democratic government there,” the MPs noted.

Money is not sentimental, but in this battle personal feuds have left deep marks. Unless something emerges to change the dynamic, it seems the hotels will continue to be fought over in the courts – on ever narrower points of law – for years.

McKillen wants control. Currently, the Barclays hold it, on the back of the deal they did with Quinlan whereby they control his shares, but do not own them – a position the High Court in London found did not breach pre-emption rights.

For now, neither side is interested in compromise. McKillen stated: “I am especially keen to bolster my ongoing efforts to take rightful control of Coroin and finish the development job to which I committed so many years ago.”

He says he has Colony’s support, but backing in the world of business comes at a price. Quinlan could hit choppy waters, perhaps. The Barclays could lose interest, but they show no signs of doing so.

The difference between McKillen’s reaction, where he talked about having fended off the Barclays’ bid to turn him out of house and home, was sharply different from the measured tones struck by Barrack.

“The key to discovering great mispricing opportunities is not found in assets but rather is found in great partners. Paddy McKillen is an esteemed real estate professional, a first-class partner, and above all a superb human being,” he said.

Later, Barrack, who controls more than $50 billion worth of assets around the world, had words of approval for “the iconic and well-respected, world- class investors such as the Barclay Brothers”.

Within such diplomatic language may lie the route to progress.

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