Cerberus Capital Management: Purchase of Distressed Assets

Roger Mullin Excerpts

Wednesday 22nd February 2017 Westminster Hall

[Sammy Wilson (East Antrim) (DUP)]

It is a joy to serve under your chairmanship, Mr Owen. May I first of all apologise for the earlier interruption as a result of my phone going off? I congratulate the hon. Member for East Lothian (George Kerevan) on securing this debate. The issue of how Cerberus has dealt with the distressed loan books that it has purchased and the impact that has had on individual businesses is of great importance in Northern Ireland.

I say at the outset that I do not want to deal with the issues raised by the hon. Gentleman at the end of his speech about the sale of the NAMA assets to Cerberus, other than to say this: there was an acknowledgment at that time in Northern Ireland that NAMA had taken £4.7 billion of loans in Northern Ireland under its auspices for a number of years and had been in charge of those loans, but that there were flaws in how it was dealing with the loans. It was felt that there were very good reasons for getting away from a Government-controlled agency, which had difficulties making decisions because of the political connotations and political constraints, and that it was better that those loans were moved from NAMA to another body.

Indeed, there was support for that in Northern Ireland. It was seen as a way of freeing up the market. Having taken the loans on and written them down, and with the Irish taxpayer having been responsible for the costs of the write-down of many of them, it was a difficult decision for NAMA to make and for the Irish Government to allow. They tried to get the market moving again, and allow those people who had borrowed money and defaulted on loans some liberty—they wanted to get equity or money back into the market, and allow people to develop assets and perhaps make money from them. It was therefore felt that moving the assets to a separate body would be better. That is the background to the sale of the assets, for which Cerberus was eventually the successful bidder.

At that stage Cerberus made a number of promises, which it conveyed to the Northern Ireland Executive. First and significantly, it said that it would adopt a long-term strategy and was not involved simply to make money quickly by moving in, closing down the businesses, selling off their assets and leaving. Many of the businesses were viable in their own right but had moved into the property market during the property boom and found that their core business was affected by the loans they had taken on for property. Cerberus made it clear that it would adopt a long-term strategy and look for assets that could grow in capital terms over a longer period and that had an income stream. It indicated that it would be prepared to make money available because it had funds not only to purchase the assets, but to lend to owners of the assets when it was felt that there was potential to enable them to develop and grow, and pay back the loans.

Secondly, Cerberus made it clear that there would be no fixed period and that it was not looking at a time horizon. Again, that provided assurance for many businesses.

Thirdly, Cerberus said that it would use local staff, and that it would employ people who understood the market and the businesses. Significantly, I remember dealing with one case that perhaps shows how Cerberus were much more aggressive. An individual faced a staff member that Cerberus had employed from the bank that he had previously banked with and which held his loan. That same person was demanding far harsher terms from him when working for Cerberus than they had offered as a bank employee when the loan rested with that bank. That shows what happened, despite the promises that were made. By the way, the banks were not easy on their customers, and yet the same employee, when operating for a different firm, was much more aggressive and hard-headed.

Fourthly and very importantly, Cerberus indicated that—I do not know whether this is true of the loan books that were purchased from other banks—it does not pay and build into the value of any loans that it purchases the value of personal guarantees. Cerberus made a virtue of that, saying that, as no value was attached to the personal guarantees, it would be easy to exempt people from personal guarantees. Very often, the personal guarantees prevented businesses from being able to borrow, and to try and develop an asset, because they always had the value of the personal guarantee hanging over them.

Fifthly, Cerberus said there would be a presumption in favour of the incumbent—in other words, where possible, it would try to work with the people who held the loans. That made good sense. They knew the assets and were probably already involved in the business, so they would be easier to work with.

Lastly, Cerberus indicated that it would find ways of trying to liquidate the companies through equity finance and loans, and in other cases by writing down debts.

As I am sure Members have found time and again, Cerberus claimed that it wanted to work with individuals and to have a consensual approach with the people who held the loans. That has not been the experience, although in some cases, businesses will testify that it worked. I can think of large businesses in Northern Ireland that were able to do deals, but by and large, the approach has been aggressive—aggressive to the point of incompetence, in fact, as one financial adviser put it to me. Sometimes there was a deal to be done, but when those working on behalf of Cerberus saw a chink of light and that a business was able to pay, they went even further and pushed harder until they pushed them to the brink. In one case when they were on the brink of a deal, some of the assets that were part of the deal were sold, which brought the deal down. There was aggression to the point of incompetence. It might be argued that what happened was good for Cerberus. In some cases it might not have been, but importantly, it was often not good for the businesses. Viable businesses were put to the wall. In some cases, when they did survive, individuals and business owners were driven almost to distraction and had health issues.

Another difficulty was reaching an agreement—I think of what an individual I dealt with said. Cerberus would only speak to businesses when it wanted to speak to them, and businesses wanting to try to move on often found that they were hitting a blank wall—so much for the consensual approach. Even when that did happen, trying to get information about what a deal would look like was very difficult. Rather than trying to help businesses, the approach has almost been more about staring them out, and businesses have been adversely affected.

In most cases—financial advisers tell me this—despite the fact that no timescale was set, Cerberus is loth to do deals beyond two years. A two-year horizon is much too short for businesses when there have been large debts and a big fall in the assets, and when they have been relying on building up an income stream and looking for capital increases in the value of assets as the economy picks up. That has forced many businesses simply to say, “Look, we can’t continue. We will have to accept bankruptcy or constrain ourselves much more than we had anticipated.”

This is the important point: there is very little if any oversight of this area and no regulation, yet it has a huge impact on our economy. Businesses that employ people, pay tax to the Treasury and provide local services are put in jeopardy as a result of loans that can be easily transferred from one financial institution to these companies. There is little or no regulation and the people who originally took out the loans have no say. The terms of those loans can then be changed at the whim of the business that has taken over. I do not believe that that is good for the economy. Some strengthening of the regulations and oversight of the businesses is needed. There also needs to be protection for those who have taken out loans in the first place on certain terms, so they cannot have those loans changed.

Finally, the Treasury needs to look at a point that was well made by the hon. Member for East Lothian: as a result of transfer pricing, the local subsidiary is given loans at high rates of interest to purchase the assets, which keeps its profits down in the United Kingdom, thus avoiding taxes. I would be interested to hear the Minister’s response on the levels of corporation tax paid by businesses such as Cerberus.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

rose—

[Albert Owen (in the Chair)]

Order. While Mr Mullin takes his seat on the Front Bench, let me say that the debate will finish at 5.44 pm, so Members have plenty of time, but they should leave at least 10 minutes for the Minister to respond to the debate and two minutes for Mr Kerevan to wind up.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

It is a pleasure to serve under your chairmanship once again, Mr Owen. Thank you for inviting me to take my seat on the Front Bench.

We all owe a great debt to my hon. Friend the Member for East Lothian (George Kerevan) for securing this debate, especially the companies that have been driven to the wall or destroyed by the actions of Cerberus. I know that some of those companies are represented in the Public Gallery today; I hope they find that we have done justice to their cause. My hon. Friend certainly has.

[Patrick Grady (Glasgow North) (SNP)]

I have a constituent who was affected by the behaviour of the Royal Bank of Scotland’s global restructuring group. Does my hon. Friend agree that there is a huge lack of trust in such major institutions, particularly RBS, which is largely owned by the public purse? It falls to the Government to get a grip on the situation and take the necessary actions that my hon. Friend the Member for East Lothian (George Kerevan) outlined, so that public confidence can be restored and some of the businesses affected can have some hope of restitution.

[Roger Mullin]

I agree wholeheartedly. Indeed, in a debate on a related issue last week, I raised the fact that many people and small businesses will find it extraordinary that banks such as RBS have no duty of care towards the customers they deal directly with. Given all the tales of misery caused either by the banks directly or by Cerberus, surely we need to ensure that there is proper regulation and a proper duty of care towards those who suffer at the hands of such institutions.

[Sammy Wilson]

The hon. Gentleman makes a point about banks’ duty of care and their improper behaviour. The coalition Government commissioned a review into that matter, but it has never been published. One wonders why its contents have not been made open for debate so that we can see the banks’ practices.

--- Later in debate ---

[Roger Mullin]

I agree entirely. Perhaps the Minister will give a more detailed response to that point than I can, because it dumbfounds me that such secrecy has surrounded so much of this.

Yesterday I spoke on the Criminal Finances Bill, so I feel particularly at ease speaking about this matter a day later. As we have heard from a number of Members, much of what has happened has involved what ordinary members of the public would call criminal activity. Indeed, some legal actions are under way; obviously I cannot speak about them in detail, but the fact that they are being pursued speaks for itself. I am not sure what the correct term is, but if there were ever an example of a company that operates to standards that are the very reverse—[Interruption.]

[Albert Owen (in the Chair)]

Order. The Minister and his Parliamentary Private Secretary may pass notes to each other but not speak. There should be only one speaker at a time.

[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]

The hon. Gentleman raises a fair point. I will answer it shortly, if he bears with me.

Not only were customers’ mortgage terms and conditions unchanged by the sale, but they continued to be served by the same mortgage company with the same skilled and dedicated staff. In the contract with Cerberus, UKAR went further to ensure that specific additional protections were in place, including a one-year lock-in period that limited any increase in interest rates to changes in the base rate. All the mortgages are still protected by Financial Conduct Authority regulation. Owing to comprehensive planning and preparation, it was a well-executed sale, achieving good value for money and a good outcome for customers.

Various Members have expressed their views concerning purchases of assets by Cerberus. Unsurprisingly, I will not comment specifically on sales made by other parties to a private bidder. However, in the context of our sale, I will turn to some of the specific points raised by Members, including the hon. Members for East Antrim (Sammy Wilson), for East Lothian and for Bootle (Peter Dowd). They made thoughtful and helpful contributions.

One point that was raised was the tax domicile of Cerberus. UKAR’s sale was structured as a UK sale, and the taxes resulting directly from the sale are paid in the UK. However, we do not consider a bidder’s tax jurisdiction as part of the selection process for three reasons: first, to do so would greatly reduce the number of bidders able to participate, which would risk losing the competitive tension that is essential for maximising value; secondly, companies can and do change their tax arrangements, so there would be no guarantee that a UK-domiciled company would continue to be so in the future; and thirdly, to discriminate against a company based on its tax jurisdiction would risk our being exposed to legal challenge.

The hon. Member for Bootle mentioned the Public Accounts Committee. I note that its conclusions were that the transaction was executed successfully and that there were many positives from the sale. The Treasury response to the recommendations was clearly set out in a report, “The sale of former Northern Rock assets”. He also mentioned the NAO’s criticisms and touched on the important area of lessons to be learned. As the NAO report notes, UKAR and UKFI carried out a complex transaction “professionally” and “within a tight timeframe”. As the NAO suggested, we have increased transparency around the objectives of Her Majesty’s Treasury, UKFI and UKAR and ensured that strategic documents are drawn together in one place. UKAR has now published its framework document.

We heard about Project Eagle and the sale of Northern Irish loans by the National Asset Management Agency in Ireland. Specifically on that issue, Cerberus provided UKAR with suitable assurances consistent with the detailed submission it made to the Northern Ireland Committee for Finance and Personnel, which conducted an inquiry into the sale. That provided sufficient comfort. When we selected Cerberus as a preferred bidder, it was on the shortlist for another portfolio in Ireland. More generally, as UKAR would for any bidder, it carried out thorough due diligence of Cerberus as part of the selection process.

The hon. Member for East Antrim expressed various concerns about the treatment of businesses by Cerberus. I listened to those concerns carefully. When it came to the UKAR sale, customer treatment was a key consideration. Our sale did not contain any commercial loans. The NAO report states that the FCA protections for the borrowers whose mortgages were sold remain in place, and that the FCA continues to be satisfied.

We are aware that Cerberus is a buyer of assets across the UK and further afield. It is subject to the UK regulatory regime here and other regulatory regimes in other jurisdictions in which it operates. I am proud to say that the UK Government have ensured that we have a strong system of regulation here in the UK.

We have heard today about other asset purchases by Cerberus. It is an active buyer of assets across the UK and further afield. As I have said, it is not for me to comment on sales made by other parties to a commercial bidder, but we assess all bids thoroughly through our extensive due diligence carried out on any bidder for any assets. We particularly assess value for money and, importantly, continued fair treatment for customers. The assets in the recent £13 billion sale were not distressed assets. Having been originated a number of years ago, they were considered well seasoned assets, and Cerberus paid above book value for them. In any case, ensuring the continued fair treatment of existing customers is a key consideration in all sales, as I have said.

In short, the sale of £13 billion of former Northern Rock assets to Cerberus was a successful step on the way to returning assets to the private sector. It meant £5.5 billion coming back into the national purse, as well as the transfer of nearly £8 billion of liabilities from the public balance sheet to Cerberus. The sale was managed effectively, and it attracted good competition and secured a good price.

[Roger Mullin]

Minister, you have been talking for some considerable time. Am I being unfair in saying that the gist of your argument is that you do not consider that Cerberus has acted in any way unfairly—

[Albert Owen (in the Chair)]

Order. I know that the hon. Gentleman was referring to the Minister, not to me, but the Minister must respond now.