Loan system is paying off for Cerberus

As its portfolio expands, so does the amount of attention Cerberus is getting

While it is not known yet whether US company Cerberus intends using the Republic as a base from which to manage the £13 billion (€18.5 billion) worth of assets it bought this month from the British government, the private equity fund already uses Ireland as a hub for a large part of its European business.

Cerberus Capital Management is a New York-based company that manages more than €22 billion. It takes money from its clients, mostly pension funds, life assurers, banks and other financial institutions, and invests it in businesses, property and other assets with the aim of making a profit.

One area in which it specialises is “distressed assets”.This is a corporate euphemism for loans secured against properties whose value has fallen far below the debt’s original value. Cerberus buys these loans at heavy discounts, giving it the right to seek their repayment or take ownership of the properties themselves if the borrower fails to pay up or agree a settlement.

Cerberus has been mopping up distressed assets in Ireland, Britain and western Europe for the past two years, bringing it some unwanted attention in the process. Its purchase of State agency Nama's Project Eagle loans in the North for £1.24 billion (€1.6 billion) in April 2014 is the focus of several investigations, following claims that Belfast businessmen and politicians were to benefit from the deal. The company denies any wrongdoing.


It made the news more recently when it bought another Nama portfolio, Project Arrow, made up of loans totalling €6.25 billion, for €800 million. And this month, a UK agency sold Cerberus £13 billion (€18.5 billion) of debt that was once held by Northern Rock, the British bank that became one of the first casualties of the financial crisis when it collapsed in 2007. This sale sparked speculation that the company would transfer ownership of those loans to the Republic, from where it already manages distressed assets it has bought here, in Britain and in Europe.

Thirteen companies

At the moment, Cerberus is using 13 companies for this purpose. These entities all have the word "Promontoria" in their names and were registered between 2013 and this year. They have either Cerberus's chief operating officer, Mark Neporent, or its head of distressed real estate, Lee Millstein, on their boards. All are subsidiaries of other group companies, based in Baarn in the Netherlands, which also use the Promontoria tag.

The Dutch companies loan money to their Irish subsidiaries at high interest rates, ensuring that most of the cash generated here flows back to the Netherlands in the form of repayments. The result is that while the Republic-registered companies are handling billions of euro, they pay only minimal amounts of tax as the interest eats up any potential profits.

Accounts and other filings show that Cerberus uses the same structure across all its Irish Promontoria subsidiaries. The companies hold assets bought in this country or elsewhere in Europe, mostly in Britain but also in Germany and Scandinavia.

Figures provided by six of the companies – the others are not yet due to report – show that they generated income of about €350 million last year and paid interest of €245 million. Operating costs and other charges, such as writing down the value of some assets, ate up most of the rest. The six Cerberus companies combined paid about €15,500 in tax last year.

Each company receives three loans, one from a global bank, generally Japanese finance institution Nomura or Credit Suisse. These are classed as "senior debt"; in other words, they take precedence over other liabilities. The lenders charge interest at normal commercial rates, which are tied to wholesale money market charges.

The Irish companies then receive two loans from their Netherlands parents. Interest on one is charged at double figures, 10 per cent or more; the other is subject to a variable rate and is described as a "profit-participating loan". For example, accounts recently filed by Promontoria Avon, which bought a series of British property loans from Bank of Scotland in 2014, owed £150 million (€215 million) to Credit Suisse on December 31st last. This was the senior loan and the interest rate was 3.75 per cent.

Two debts

Promontoria Avon owed two debts to its parent, Netherlands-based Promontoria Holding 109 BV: a £52 million loan, with an interest rate of 10 per cent, and a £31.3 million profit-participating loan. The amount borrowed under the second facility was £12.5 million, but the interest came to £18.8 million, leaving it with a total liability of £31 million.

Promontoria Avon’s figures show that it generated an income of £38 million. Interest came to £25 million, most of which went to the Dutch holding company. That and its other costs left it with a profit of £7,789. It paid £1,947 to the Republic’s exchequer. Its assets stood at almost £160 million at the end of the year. The company’s accounts are in sterling as the assets are in Britain.

It is not known what Cerberus pays to the Netherlands revenue. That country exempts companies from corporation tax on payments received from overseas subsidiaries and branches, provided they meet a number of conditions.

The Netherlands has a reputation as a tax haven that stretches back to the 1970s. U2 houses interests there and it is also the meat in the double-Irish Dutch sandwich, the structure that allows companies such as Google to avoid tax by channelling payments through companies in both jurisdictions. Tax advisers point out that these practices are legitimate and that they are facilitated by tax treaties, as well as by EU and domestic laws here and in the Netherlands. Ultimately, though, they say that when countries begin implementing measures under the Organisation for Economic Co-operation and Development's initiative to combat cross-border tax avoidance, it will become harder to to set up structures such as these in the first place.

Eagle accounts

Accounts filed by Promontoria Eagle, the company that Cerberus used to buy Project Eagle, state that it collected £73.2 million over the eight months following its agreement with Nama in April last year. The unpaid balances due on the debts it acquired were £4.35 billion.

The accounts show that the company borrowed £438.5 million in two loans at high variable rates from its parent, Netherlands-based Promontoria Holdings 83, and £730 million from Nomura International to buy the Project Eagle portfolio. It paid £62 million in interest.

Promontoria Eagle paid £1,947 in corporation tax in 2014. Its business generated income of £111 million and ended the year with £7,788 profit. It owed a total of £1.16 billion to its parent and Nomura.

In a similar vein, Promontoria Thames paid a total of €5,320 in corporation tax in 2013 and 2014. In those years, it turned over €122 million in interest repayments on property loans bought from Lloyds TSB and Bank of Scotland in May 2013.

The figures show that over 2013 and 2014, Promontoria Thames repaid most of a £40.4 million loan from its Netherlands parent, Promontoria Holdings 60, on which interest was charged at 18 per cent.

It repaid £4 million on a second loan from the Dutch company of £36 million, on which £17.5 million was due in interest. It also cleared a £99 million advance from Nomura. Its total interest bill for the two years was €110 million.

Of the other companies that published accounts, Promontoria Hampton 1 and 2 used a similar structure. Hampton 1 paid no tax in 2013 and wrote off losses from that year against its 2014 liability.

It paid a total of €2,500 to the exchequer for the two years, during which time it collected €96.5 million in repayments on loans against German and Scandinavian properties. Hampton 2 also paid just €2,500 to the State.

Cerberus says that its investments in Ireland have created a wide variety of jobs and that development and construction are beginning again as debts are resolved or refinanced and the “cycle of investment and employment that was stalled for so long has been restarted”.

Barry O'Halloran

Barry O'Halloran

Barry O’Halloran covers energy, construction, insolvency, and gaming and betting, among other areas