Cerberus Capital Management: Purchase of Distressed Assets

George Kerevan Excerpts

Wednesday 22nd February 2017 Westminster Hall

[George Kerevan (East Lothian) (SNP)]

It is a pleasure to speak under your chairmanship again, Mr Owen. This is a very complex issue. I shall try to cover it as briefly—

[Albert Owen (in the Chair)]

Order. The hon. Gentleman needs to move the motion.

[George Kerevan]

Indeed. I shall move the motion that we are to consider—actually, I do not have the official piece of paper with me; forgive me, Mr Owen.

As I said, this is a very complex issue. I want to be as fair as possible to everyone, including Cerberus itself. I will take interventions, but I ask hon. Members to delay introducing any individual cases until I have developed, as rapidly as possible, the—

[Albert Owen (in the Chair)]

Order. Will the hon. Gentleman take his seat? I want to start doing this properly; we have already had two debates in which the Member did not move the motion. If the hon. Gentleman just reads from the Order Paper, his motion will be in order.

[George Kerevan]

I beg to move,

That this House has considered the purchase of distressed assets by Cerberus Capital Management.

Cerberus Capital Management is an American private equity firm that specialises in distressed investing—purchasing so-called distressed or non-performing loans. Few people in the UK have heard of Cerberus, but it is the biggest purchaser of distressed assets in the world. Since 2010, Cerberus has acquired more than 1.2 million distressed or non-performing loans, worth more than $80 billion. Simply put, Cerberus is the world’s largest debt collector.

Let me begin by saying that so-called distressed loans are often anything but. Since the banking crisis of 2008, we have seen a sorry catalogue of thousands of instances in which banks have forced legitimate borrowers into distress or even insolvency through no fault of their own. The so-called distress that we are discussing is largely manufactured. That has come about for a variety of reasons: interest rate swap mis-selling, the infamous Royal Bank of Scotland global restructuring group’s dash for cash, and outright criminal fraud such as occurred at HBOS Reading.

Even where such egregious or criminal behaviour has not taken place, there are too many instances of banks deciding that they no longer wish to support small and medium-sized enterprise customers in sectors that the lender now considers non-core to its shrinking loan book. As a result, thousands of legitimate customers find themselves being sold on to firms such as Cerberus without their knowledge or against their wishes. Because loans to SMEs are unregulated, those customers have little or no redress. My intention today is to put on record the plight of those badly served bank customers and to expose the exploitative and often inadequate business model used by Cerberus—a model that is also bad for the British taxpayer.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Gentleman for bringing this matter to Westminster Hall for consideration. In the light of what he has said, does he agree that although the mortgages and loans are currently owned by entities licensed by the Financial Conduct Authority, they, like any UK mortgage, could be sold in the future to an entity that is not regulated, meaning that customers would need to seek redress under the Consumer Rights Act 2015? Does he agree that the Government must consider additional protection for people whose lives have been turned upside down since the collapse of the Northern Rock bank?

[George Kerevan]

I agree, and the hon. Gentleman gets to the heart of the issue that we want to bring before Treasury Ministers, which is that even when loans were initially regulated, they can be sold on to unregulated parties, such as Cerberus, at which point there are no guarantees about the behaviour of those companies and how customers will be treated.

[Corri Wilson (Ayr, Carrick and Cumnock) (SNP)]

Will my hon. Friend give way?

[George Kerevan]

If my hon. Friend will forgive me, I will not, because I need to develop my case a little so that the Minister knows where I am going.

Cerberus has taken advantage of the situation. It is now the biggest purchaser of distressed real estate debt in Europe. It has acquired loans from such banks as Santander, RBS, Clydesdale, Yorkshire, Lloyds and banks in Italy and Scandinavia. It purchased £13.3 billion-worth of Northern Rock mortgages in 2015. Cerberus has also—we may come to this, and I will treat it in a very gentle fashion—purchased the Northern Ireland loan book of the National Asset Management Agency, which was set up by the Irish Government to dispose of property loans inherited from failed banks. We know that that is subject to serious fraud inquiry, and I will be very careful not to step into those legal areas.

The key question is how Cerberus makes its money. It claims to make a return for its investors in the range of 17% to 20% per annum, which is a staggering amount. The key way it makes its money is through tax avoidance. That is perfectly legal, but hardly the business model that the Treasury should be encouraging.

Cerberus manages distressed debt bought in the UK and Europe through a multiplicity of shell companies based largely in the Irish Republic. Those entities usually have the word “Promontoria” in their titles. They are, in turn, subsidiaries of other Cerberus Group companies registered in the Netherlands. Essentially, the Dutch companies lend money to their Irish subsidiaries at high interest rates to effect the asset purchases. That ensures that most of the cash generated from the purchased loans, or from liquidating distressed assets, flows back to the Netherlands in the form of transfer payments. According to an investigation by The Irish Times, six key Cerberus Promontoria holding companies in Ireland collectively paid a miserly €15,500 in tax in 2015.

The tax avoidance scheme means that Cerberus can offset the risk of purchasing so-called distressed loans. With the bulk of the financial risk removed, the true surplus profit for Cerberus comes from squeezing the distressed assets. That explains why Cerberus has been prepared to outbid rival US equity firms to acquire swathes of European distressed debt. My question to the Minister, and my key point, is this: has the Treasury made any calculation of the tax loss to the UK of the purchase by Cerberus of British so-called distressed assets, mortgages and properties? In particular, what corporation tax has Cerberus paid on the loan book purchased from United Kingdom Financial Investments Ltd in 2015—the Northern Rock portfolio?

[Corri Wilson]

Does my hon. Friend agree that trying to get answers from Cerberus Capital Management on this issue is like drawing blood from a stone? Attempts to communicate with it, by both myself and my constituents who have been impacted, have proven entirely fruitless, and calls for a meeting have fallen on deaf ears.

[George Kerevan]

My hon. Friend reveals something that many other Members, and people in other jurisdictions, have discovered: the company is unwilling to engage publically and is known to be highly secretive in its operations.

I want to continue on the issue of how Cerberus makes its cash. Cerberus is not a bank. Its business is not to make loans and earn interest. It is an investment fund that seeks a capital return, and that means it has to extract more value from the loan book than it paid to acquire it. Cerberus appoints local agents to review the loan books that it purchases, and it either squeezes more revenue by increasing lending rates or puts the client into liquidation in order to realise the value of the property.

Of course, it is theoretically open for SME clients to pay off their loan by refinancing with another lender. The problem is that Cerberus and its agents have no interest in letting that happen unless they can extract facility fees, which make such a transfer prohibitively expensive in most cases. Such fees often represent a significant percentage of the overall size of the original loan. For instance, the support group working with clients caught in the mis-selling of interest rate swaps by the Clydesdale and Yorkshire banks—clients transferred to Cerberus without their consent—reports that in many cases Cerberus or its agents refuse to accept full repayment of the loans. Instead they insist on adding backdated default interest and break clause costs, which were the subject of the original mis-selling.

I will now turn briefly, if you will indulge me, Mr Owen, to events in Northern Ireland. Again, I refer to the sale by NAMA—the Northern Ireland toxic bank agency—of property loans in the north of Ireland. That is subject to criminal investigation, and I will not go there, but I want to give some of the timings and the background of what happened.

The original bidder for the NAMA assets in Northern Ireland was a company called PIMCO, which is a California-based global investment company. PIMCO withdrew from that sale when it became aware of a £15 million private fee arrangement involving PIMCO’s US lawyers, Brown Rudnick, and two Irish individuals close to NAMA. After PIMCO withdrew, Cerberus had an unsolicited approach by agents acting on behalf of NAMA itself on 6 February 2014. Barely a week later, on 14 February 2014, Cerberus asked to be, and was, admitted to the bidding process for the NAMA loan book. Cerberus submitted a bid of £1.24 billion on 1 April 2014, a scant six weeks after entering the bidding process. The Cerberus bid was accepted on 3 April. Altogether, that is a breathtaking pace for a purchase of that magnitude—from entering into discussions on 6 February to the winning bid on 3 April.

We should note that at that point Cerberus had no investment history in Ireland, north or south. So why did the company feel confident enough to make such a large purchase—£1.24 billion of distressed loans in the north of Ireland? The answer is that Cerberus hired the firm of lawyers that had been employed by PIMCO, Brown Rudnick, which had previously been involved in the abortive sale. It did so on 24 March 2014, a mere week before Cerberus submitted its winning bid. Cerberus admitted to the Public Accounts Committee of the Irish Parliament that it paid Brown Rudnick £15 million for that one week’s work. Why was Cerberus willing to pay so much? As it admitted to the Irish Parliament, it was to gain detailed knowledge of the debts it was buying. However, NAMA had specifically banned prospective buyers from engaging directly with debtors or key stakeholders. Irish Deputies have accused Cerberus of paying Brown Rudnick so much—£15 million for one week’s work—precisely to obtain knowledge of debtors that it would not have been able to acquire through the formal bid process. Cerberus denies that—I put that on the record—but I leave it to others to assess why the company paid Brown Rudnick so much money for such a short amount of work.

That brings me to my next line of questioning to the Minister. Will he agree to conduct an inquiry into the NAMA sale of its assets in Northern Ireland once the legal proceedings have run their course? That way the issue can be aired, and if there was wrongdoing it can be found out, but if there was not everyone can be cleared. I make no allegations of illegality against Cerberus, but I do criticise its business methods and its growing stranglehold over so-called distressed assets in the UK and Europe. Its business model is bad for small companies and bad for the UK economy. In that context, I have a final question for the Minister: is there any substance to the persistent rumours that Cerberus has approached the Treasury with a view to buying debt from Her Majesty’s Revenue and Customs?

--- Later in debate ---

[Roger Mullin]

If the messages that are being passed are going to answer some of my questions, I will not object too severely.

As I was saying, Cerberus is an example of a company that operates to standards that are the very reverse of a duty of care towards small businesses in our country. Surely we can expect the Government to be concerned about the effect on the good people who have suffered at its hands. In my constituency, a perfectly good trading company of many years’ standing was completely destroyed by the actions of Cerberus, in a similar way to another company mentioned earlier. It was willing to repay the loan, but the additional fees that it was stuck with and the way in which Cerberus operated drove it to bankruptcy. I will not name the company, because like other hon. Members I do not want to embarrass anyone who may be listening, but I am genuinely concerned about the health of the family who were treated in that way.

Let me comment on some points made by other hon. Members. My hon. Friend the Member for Ayr, Carrick and Cumnock (Corri Wilson) said in an intervention how difficult it has been to get a conversation between Cerberus and those affected by its actions. It seems that it is unwilling to speak except in the remarkable case that the hon. Member for East Antrim (Sammy Wilson) mentioned, when it sought to buy assets in Northern Ireland and was only too happy to make promises such as adopting a long-term strategy—that would be a novel thing for it to do.

[George Kerevan]

On the subject of secrecy and Cerberus, is my hon. Friend aware that Stephen Feinberg, Cerberus’s founder, is the leading candidate to undertake the review of the American secret service under Donald Trump?

[Roger Mullin]

Yes, I am aware of that. One can be fairly confident that that review of the secret service will itself be done in the greatest of secrecy.

I was also taken by some of Cerberus’s other promises that the hon. Member for East Antrim mentioned, such as making a presumption in favour of the incumbent and not squeezing value out of assets. It would appear that Cerberus has decided to act in a way that is precisely the reverse of its public promises.

I must pay yet more tribute to my hon. Friend the Member for East Lothian for the clear way in which he set out one or two facts that I hope the Minister will respond to, particularly the manufacturing of distress by the operation of such institutions and the movement from regulated to unregulated markets.

Cerberus proudly proclaims that it can make profits of 17% to 20% out of the tax avoidance schemes that it engages in, extracting value by moving between the UK, Ireland and the Netherlands. It is therefore not only small and medium-sized enterprises that are victims of the way in which Cerberus is operating, but the Treasury as well. I particularly look forward to the answer that the Minister must surely give to the question that my hon. Friend asked in his opening remarks: what has the loss been to the taxpayer in the UK from the actions of Cerberus? Everyone deserves to receive an answer to that this afternoon.

--- Later in debate ---

[Simon Kirby]

It is the long-standing policy of this Government to unwind the interventions made in the financial sector during the banking crisis of 2007-09 and return the assets acquired then to the private sector. That is a key part of restoring normality to the financial system, but in that we need to ensure value for money in getting back taxpayers’ money. We are making good progress in that. UK Asset Resolution, which is responsible for the assets of the former Northern Rock and Bradford & Bingley, has already reduced its balance sheet from £116 billion in 2010 to £37 billion last year. The sale of £13 billion of former Northern Rock mortgages to Cerberus Capital Management was another important step along the way.

As with any transaction of such complexity, the sale required careful analysis and meticulous planning. First and foremost, the Government had to consider whether the sale would meet one fundamental condition: good value for money for the British taxpayer. Secondly, however, the deal needed to ensure the continued fair treatment of existing customers. In this case, they held around 270,000 mortgages and unsecured loans. We are confident that as a result of the detailed preparation we conducted, those conditions were fully met.

It is perhaps worth providing a brief outline of the processes followed. The sale was initially announced at the 2015 Budget, following various expressions of interest and favourable market conditions. A full sales process was then launched that summer. It attracted a good level of competition, with multiple bidders involved, as the National Audit Office noted. At each stage of the process, experts in UKAR worked closely with UK Financial Investments and independent external advisers to assess against the four main criteria used in any public sale, namely: propriety, regularity, feasibility and value for money. Cerberus is an active buyer of assets across the UK and elsewhere, and UKAR carried out thorough due diligence before it was selected. Its bid represented a £280 million premium to the book value of the loans, and, importantly, it maintained the fair treatment of customers.

[George Kerevan]

I accept what the Minister is saying—it has been justified by the National Audit Office—but in the assessment of the bid from Cerberus, was any account taken of the likelihood that it would use tax avoidance measures to complete the sale?

--- Later in debate ---

[George Kerevan]

I thank all Members who have taken part in the debate, and I thank your good self, Mr Owen, for ensuring that the debate was in order.

I know that the Minister has tried to be helpful, within his brief, but the point still stands that Cerberus uses a tax model across all its purchases that is not beneficial to the Treasury. We will continue to press on this matter in the days to come.

Question put and agreed to.

Resolved,

That this House has considered the purchase of distressed assets by Cerberus Capital Management.