When Dublin property investor Patrick McKillen bought a 21-story Boston office tower for $170 million in 2006, his lender, Anglo Irish Bank Corp., helped find an anchor tenant: itself.
Now McKillen, Anglo Irish and its U.S. headquarters at 265 Franklin St. are entangled in a lawsuit that may determine how the bank, seized by the Irish government last year, handles more than $14 billion of debt backed by U.S. property. The bank’s loans are tied to buildings including a Rodeo Drive shopping mall in Beverly Hills, California, and the century-old Apthorp apartment building on New York’s Upper West Side.
“Anglo Irish ramped up its U.S. lending and has a book of loans that would be very appealing to real estate opportunity funds,” said Ben Thypin, an analyst at Real Capital Analytics Inc. in New York. “Big real estate players have tried to pursue purchasing Anglo’s assets but have been tripped up by uncertainty around who is actually in control: the bank or NAMA.”
McKillen’s suit against Ireland’s National Asset Management Agency -- itself a tenant of his in Dublin -- adds to the financial chaos surrounding the bailout of the nation’s banks. The government said last week that it will take control of Allied Irish Banks Plc, the second-biggest lender, and inject extra cash into Anglo Irish, pushing the cost of the rescue to as much as 50 billion euros ($69 billion). A hearing on whether the case may proceed is set for tomorrow in Dublin’s Commercial Court, a division of the High Court.
Banks ‘Lent Recklessly’
“The Irish people are entitled to be angry with the bankers, who lent recklessly over a considerable period of time in the earlier part of this decade,” Finance Minister Brian Lenihan told reporters in Dublin on Sept. 30.
NAMA was established as Ireland’s “bad bank” in April 2009 to buy 81 billion euros of property loans from five Irish lenders, and so far the banks have sold loans at an average discount of 52 percent. NAMA can take a developer’s entire portfolio of loans from the banks, rather than just the non-performing ones.
The 55-year-old McKillen, whose business partners have included Irish rock singer Bono, contends that NAMA has no right to seize any of the 2 billion euros of loans linked to him, according to his spokeswoman, Breda Keena. He says the loans, some of which are in the U.S., shouldn’t be transferred to NAMA because they are still performing, according to Keena.
Moving them to the agency could harm him as a borrower because the loans could be sold at a discount to a creditor less interested in preserving a property than retrieving the cash, according to Mike Soden, who in 2004 stepped down as chief executive officer at Bank of Ireland Plc, the country’s largest lender by market value. It could also harm his reputation by associating him with toxic borrowers, said Hugh Byrne, a Dublin-based lawyer and co-author of a book on NAMA, “The National Asset Management Agency Act 2009: Annotations And Commentary” (Bloomsbury Professional).
McKillen is suing NAMA over plans to take over 80 million euros of loans he has with Bank of Ireland. Banks aren’t named as defendants. He is “reserving his rights” to use the case to prevent seizures of loans linked to lenders including Anglo Irish and Irish Nationwide Building Society, the Irish Times reported July 15.
“Paddy contends that NAMA has no right to take his loans at all,” Keena said in an e-mail.
He has the support of Joseph Stiglitz, 67, the Nobel Prize- winning professor of economics at Columbia University and former chief economist at the World Bank. Stiglitz, who has filed an affidavit related to the case with the Irish courts, has criticized Ireland’s decision to set up NAMA and last year said on Irish television that it would be “criminal” for NAMA to overpay for soured loans.
If McKillen succeeds in keeping his loans out of NAMA, others may follow suit, said Karl Whelan, a former economist at the Federal Reserve in Washington who is now a professor of economics at University College Dublin.
“Developers who have a mixed bag of good loans and bad loans may challenge having these sent over to the agency on an individual basis,” Whelan said in an interview. “This would really change the dynamics of NAMA.”
Private equity firms including Blackstone Group LP and Colony Capital LLC have discussed buying Anglo Irish’s U.S. loans, according to two people with direct knowledge of the talks.
‘Scratching the Surface’
Anglo Irish had 2.4 billion euros of U.S. loans “held for sale” to NAMA at the end of June, with the exception of 700 million euros that are “loans to U.S. customers which the bank expects to sell outside of the NAMA process,” the bank said in its latest financial statements. The entire U.S. loan portfolio was 10.7 billion euros at the end of June.
Dublin-based Anglo Irish, once Ireland’s biggest publicly traded lender to property developers, boosted U.S. lending sevenfold in four years to 9.3 billion euros at the end of 2008. That was about 13 percent of its total loans at the time, its financial reports show. It wasn’t the only bank to plunge into the U.S. real estate market during the boom years: Allied Irish was among lenders hit by Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, which defaulted in January.
“The Anglo management team was saying in 2006 and 2007 that the opportunities for earnings growth in the medium term would come from the U.S.,” said James Forbes, a senior equity strategist at Irish Life Investment Managers in Dublin. “They said that they were only scratching the surface with their operations in Boston, New York and Chicago.”
Miami, Detroit, L.A.
David Drumm, 43, who headed Anglo Irish’s U.S. lending business before becoming CEO in 2005, expanded the geographical reach of a lender that Real Capital Analytics said made just two real estate loans outside Massachusetts or New York between 2000 and 2004. In 2005, Anglo Irish loaned to properties in at least 14 U.S. cities, including Miami, Chicago, Detroit, Los Angeles and Washington, Real Capital said.
It backed at least $2.4 billion of Manhattan real estate deals between 2005 and 2009, helping finance the renovation of the Apthorp, a 12-story property built in 1906 with 163 apartments and a 117-car parking garage, as well as the purchase of a Ralph Lauren store on Madison Avenue and 72nd Street on the Upper East Side and a Holiday Inn on Lafayette Street in SoHo.
“Anglo honestly perceived the U.S. market to be a safer bet,” said Constantin Gurdgiev, who teaches finance at Trinity College in Dublin. “They ran out of the capacity, effectively, to grow aggressively in the Republic.”
Bono, The Edge
In McKillen, the bank had a client with U.S. ambitions of his own. The Belfast-born entrepreneur, who got his start in Dublin, had invested in everything from five-star London hotels to Dublin shopping centers and the Clarence Hotel on the River Liffey, where Bono and The Edge of U2 are co-owners, before making a foray to the U.S. in 2006.
That year, he bought three Boston properties with about $200 million of Anglo Irish loans through his flagship Clarendon Properties (Holdings), of which he owns 50 percent. The acquisitions included the Anglo Irish headquarters on Franklin Street, from where the bank financed U.S. loans.
At the end of June 2008, U.S. properties returned more than 16 million euros of rent to McKillen’s company, according to Irish corporate filings.
“He has no loans for land or development,” Keena said in an e-mail. “His strategy is to invest in prime property assets that produce income.”
Framed McKillen Mementos
The U.S. properties are “95 percent” rented, and the loans are “fully performing and fully compliant,” Keena said.
Not all Anglo Irish’s U.S. clients can make that claim. Anglo Irish has loans to 19 U.S. properties that Real Capital classifies as “distressed,” including the Channelside waterfront retail center in Tampa and Detroit’s Alden Park Towers.
The bank has marked almost 1.5 billion euros of U.S. loans as impaired since the end of March 2009, according to its financial statements. Another 1 billion euros is “past due but not impaired,” according to the statements.
At Anglo Irish’s U.S. headquarters on the 19th floor of the Boston tower, employees with Irish and American accents discussed weekend plans on the afternoon of Oct. 1. The office, overlooking the harbor and the city’s Irish South Boston neighborhood, is decorated with framed photographs of properties bought with the bank’s loans, such as the Rodeo Drive mall, an office tower on 41st Street in Manhattan and two of McKillen’s Boston properties, including the Franklin Street tower itself.
“Tough times,” said one employee, wearing jeans and a blue-and-white checked shirt, who said he’s worked at the bank for six years and gave only his first name, Ben. “We’re doing the best we can.”