The bank gave loans in the US at breakneck speed. But its $12.5bn in US loans remains the strongest part of its portfolio, writes SIMON CARSWELL, Finance Correspondent, in Boston

NO OTHER part of Anglo Irish Bank’s business grew as fast during the boom years as the bank’s loans in North America. Photographs of properties in Boston, New York and Chicago, the purchase of which was financed by Anglo, adorn the pages of its annual reports – from the exclusive Apthorp apartment building on the Upper West Side in New York to a landmark office building on Milk Street in Boston’s financial district and the Palmer House Hilton Hotel in Chicago.

In 2007, before the credit crunch turned into a full-blown financial crisis, the bank offered the growth of the US business as an illustration of how it was diversifying its business and spreading its risks outside of Irish property.

Anglo’s overall lending surged during the years from 2005 to 2007, which marked the peak of the property boom, but the US loan book was grown at break-neck speed, with most of the US loans provided over just two years.

While overall loans increased more than fivefold from €13.3 billion in 2002 to €73.8 billion in 2007, Anglo’s US loans surged elevenfold over the same period, from €836 million to €9.3 billion. However, even by September 2005, Anglo’s US loan book was still just €2.5 billion. Loans of about €7 billion were provided over just 24 months, or roughly €60 million a week – all underwritten and approved by a team of just 100 people spread across three offices in New York, Boston and Chicago, the last office opened by the bank in the US in 2006.

The US business was set up in 1999 by David Drumm who, five years later, was the surprise successor to Sean FitzPatrick as chief executive of the bank. Drumm’s ascent to the top job at Anglo guaranteed that the bank’s US business grew further under his stewardship, given his belief that the bank could prosper by exporting to the US Anglo’s banking model, which was focused on strong and close relationships with borrowers.

Between his arrival in America in 1999 and 2005, Anglo dipped its toe in the US market, getting to know it better. In the next two years, it dived in aggressively, financing deals in the commercial property market on the east coast.

The bank funded big-ticket transactions, relying largely on young lenders sent from Dublin to oversee growth in the business.

It tried to avoid lending to Irish property developers and investors dabbling in the market but did finance some of them – to the tune of $2-$3 billion (€1.47-€2.2 billion). As the loan book grew, Anglo’s deals became bigger and more aggressive to maintain the bank’s strong earnings growth.

Anglo’s US loans were much bigger than in other parts of the business, so the loan book comprises hundreds rather than thousands of transactions.

“They may have been too enthusiastic on marginal loans,” said Ben Thypin, an analyst at Real Capital Analytics in New York. “Instead of finding excuses not to give a loan, it seems they found excuses to give a loan. They were viewed as money willing to take returns from riskier projects.”

US loans amounted to less than 5 per cent of the bank’s loans in 2005. Within three years this had risen to almost 13 per cent.

“They did deals that a lot of other banks shook their heads at,” said a senior US banker at a blue-chip New York-based bank. “They were so aggressive and they wanted to be recognised as players, as a big bank, but they weren’t. They were a small regional, foreign lender.”

Anglo’s expansion coincided with a frenzy in the US commercial property market, with large German lenders such as Commerzbank and Hypo Real Estate competing with blue-chip insurance companies and the aggressive commercial mortgage-backed securities (CMBS) players. These were large investors and private equity houses that sought big returns on highly leveraged transactions when credit was cheap and easy.

“Anglo’s appetite for business was so heated that it was well-known in New York circles and among brokers that one way to get a deal done was to send it over to Anglo,” said another banker at a rival lender in Manhattan.

“I don’t think they had the experience in the US of people who had been through several downturns, and they overlooked some very sound underwriting in their quest for earnings.”

Marc Holliday, chief executive of property firm SL Green, the largest owner of office space in Manhattan, said Anglo financed a handful of its property transactions with loans totalling $250 million and that the bank was no different to other lenders, he said.

“I don’t think they were taking on any more risk than other lenders – their loans outside New York tended to be in the better markets with the better borrowers,” he said.

However, one former Anglo lender in the US said credit checks could have been stronger. The weekly credit committee sat on Tuesdays but was “more a committee of peers” than one providing deep credit checks.

“Ultimately, there was credit approval that came from Dublin but it was just a rubber stamp,” he said. “Anglo was a deal shop – they were deal junkies.”

A rival New York banker operating in the same sector as Anglo recalled how surprised he was at how young Anglo’s team was and how the bank had not hired senior lenders with experience and local knowledge. “Trying to do that business without local experience does not work,” said the banker.

Despite funding deals at the peak of the market, Anglo’s $12.5 billion loan book remains the best part of the nationalised bank’s operations, given that the property values have not fallen as heavily in the US as they have in Ireland and Britain, where the bank has loans of €42 billion and €21 billion respectively before transfers to the National Asset Management Agency (Nama).

The only US loans moving to the Nama from Anglo are those due from Irish developers and property investors. The most high-profile is Paddy McKillen, whose loan transfers are on hold as he is bringing his legal action against Nama to the Supreme Court.

Last August – prior to the Government’s wind-down plan for the bank – Anglo estimated that 36 per cent of its €8.4 billion non-Nama loans in US were bad compared with 45 per cent in Britain and 61 per cent in Ireland.

Most of the US loans had been earmarked for the proposed good bank that the new Anglo team wanted but was shot down.

Property values have dropped between 20 per cent and 25 per cent in New York and Boston, two of the best-performing areas in the US, from a peak in 2007, though prices have dropped by at least 50 per cent in some suburban areas around Boston where Anglo also made a large number of loans.

About one-quarter of the loans are in New York, 30 per cent in Boston and New England, and 30 per cent in Chicago and Washington DC – the best-performing market ahead of New York and Boston. The remainder were provided across the country where Anglo lent to borrowers with which it had existing business.

The bank financed deals as far away from its US offices as Georgia, North Carolina, South Carolina, Arizona and Florida.

The loans are split into five areas – retail, office, hotels, residential and other sectors, including biotech, car parks and land. The bank maintains that it exited the higher-risk “condo conversion” – where apartment blocks are renovated for the market – by the peak of the market in 2007.

Since the closure of the Chicago office last year, some 60 per cent of the US loans are managed from the bank’s Boston office (in a building owned by McKillen) and 40 per cent from New York.

While the bank financed riskier deals at the peak of the market, banking and property sources acknowledge that Anglo has backed some trophy property acquisitions, which should perform better than other assets.

So far, Anglo has the support of the Minister for Finance, who has stood by the bank’s management approach of sitting and waiting to secure better value in the US.

But the Government’s position on the US loan book may change as pressure mounts from the European Commission, the International Monetary Fund and the European Central Bank to reduce Anglo’s growing funding pressures by selling off a large number of loans. The US book could be sold the quickest given the performance of that market relative to the bank’s other lending areas.

The bank’s position on its US loans is that the most it would get for the book is 70 cent in the dollar, although it is more likely to be about 50 cent in the dollar.

Anglo believes the properties it has backed could be worth far more if it rides out the next two years and waits for higher levels of refinancing and liquidity to return. The bank estimates that the market could recover to the 2007 peak between 2013 and 2015.

“It would be just torching value to sell now, said a source close to Anglo. “It is a capital write-off that does not need to be taken. The bank has very few golden eggs that are worth holding on to.”

Matters are complicated as most buyers in the market are vulture investors seeking double-digit returns but they will only act on distressed assets at heavy discounts to face value of the loans or their underlying properties.

The nature of the bank’s lending to special purpose vehicles set up for specific deals means that the legal process around foreclosures is protracted and complex.

Others in the property market are not so sure about the merits of waiting if there are gains to be made before about $1.4 trillion worth of CMBS-funded deals starts to fall due for refinancing from the second half of next year.

“Anglo is poised to make some great recoveries, said David Schechtman, a senior director at real estate brokerage business Eastern Consolidated in New York. “The time is right to sell – there has been an absolute paucity of product for the last two years and there is a hell of a lot coming on the market next year and the year after. There is a six-to-eight-month window now to sell.”

The US book attracts huge interest from investors looking for bargains on distressed assets on the east coast. One source with knowledge of the level of interest said Anglo could set up a dedicated phone line to deal with approaches from these parties.

“My advice to Anglo Irish is to wait no longer unless you want to compete. It is a simple case of supply and demand,” said Schechtman. “If you are selling cars, wouldn’t it be good to sell when there are only three or four cars on the market?”

APTHORP, NEW YORK

A TROPHY property on the Upper West Side of Manhattan, the Apthorp was built by William Waldorf Astor in 1908 and comprises 163 apartments. It is one of only four apartment blocks in Manhattan with a private courtyard.

Anglo funded the $426 million (¤313 million) purchase of the building by developer Maurice Mann and the Africa Israel Group in 2007 at the peak of the market in “a condo-conversion” project. Contracts have been agreed on 35 of the apartments.

The bank is owed $325 million after the debt was restructured in July. The apartments are worth $1,100 a sq ft atmost, below the estimated $1,600 a sq ft at which the owners first aimed to make returns.

RECTOR SQUARE, NEW YORK

ONE OF Anglo’s most troubled projects, Rector Square in Battery Park City, Lower Manhattan – next to the World Trade Centre site – was another condo conversion that ran into problems.

Developer Yair Levy defaulted on Anglo’s $165 million loan last year, leading to foreclosure.

More than 75 per cent of the Rector Square apartments are empty, and in a bid to take control of the development, Anglo paid $82.7 million this week at auction for the building’s 232 unsold units out of a total of 304 apartments.

The bank is likely to sell those properties privately to a developer or manager to recoup its loans.

222 EAST 31st STREET, NEW YORK

ANGLO MADE a substantial profit on the sale of this building which houses the bank’s New York office. The first property bought by the bank in Manhattan, it was purchased in 2004 for $210 million (¤154 million).

The bank sold the building for $320 million in 2007, providing the buyer with a $130 million loan.

THE SPIRE PROJECT, CHICAGO

THE BRAINCHILD of Irish developer Garrett Kelleher, the Spire was to be one of North America’s iconic skyscrapers, the tallest residential building in the world. But the project was launched just as the property and credit markets collapsed. Last month, Anglo filed a lawsuit to take possession of the 2.2-acre site, which has been vacant for two years. The bank claimed the developer had defaulted on loans of $77 million (¤56.5 million).

RALPH LAUREN STORE, MADISON AVENUE, NEW YORK

ONE OF Anglo’s prime Manhattan property deals, the flagship Polo- Ralph Lauren store was bought for $78.8 million in 2005.

The building is owned by Sloane Capital, the property investment vehicle owned by Limerick developer Aidan Brooks and racing and bloodstock tycoons John Magnier and JP McManus. It is one of Anglo’s bestperforming assets in Manhattan, with strong cash flow coming in on the clothing store.

ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS

ANGLO STARTED foreclosure proceedings on this lab, retail and office complex in Cambridge, Massachusetts, next to the prestigious MIT campus, earlier this month. The property covers 650,000 square feet and 11 buildings and is almost 90 per cent occupied.

Anglo has a loan of $171 million on the property, which the owners claim is worth over $200 million. The bank maintains the borrower is in breach of the loan-to-value agreement and a foreclosure sale is scheduled for December 16th.

The owner, Beal and Rockwood Capital, is trying to stop the sale, claiming it has never defaulted on the loan and that the bank is seeking to collect on the loan before it falls due because Anglo has lost billions of euro. It argues the bank has “fabricated a technical default”.

Anglo’s move involves “unfair business practices of a foreign bank perpetrated as part of a complex scheme to coerce cash out of successful American properties”, Beal and Rockwood Capital claims in its lawsuit.