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Banks clamp down in bid to help make up margins
Sunday, August 31, 2008 By Gillian Nelis, Property Editor
Banks are attempting to make up for lost margins by loading fees and penalties onto distressed businesses, according to property investment consultancy Farrelly & Mitchell.

The firm, which last week announced that it had negotiated a €1 million reduction in debt principal for a consortium of Irish investors in a commercial property in Germany, has noticed a significant increase in demand for its debt restructuring services.

‘‘Banks are trying to impose all sorts of arrangement fees and penalties, as well as increased interest margins, on new facilities,” said Paul Fagan, deputy managing director of Farrelly &Mitchell. ‘‘This is to compensate for the body of clients who have no work and no income, and are therefore unable to shoulder any fees or penalties.

‘‘The discussions around these fees and penalties with the banks tend to be very robust; they are an area where tough negotiations are required.”

Farrelly & Mitchell is currently restructuring projects for a number of clients who come primarily from the building, property development and property investment sectors.

‘‘In most cases they’ve been in the building industry for around 15 years and have fundamentally sound businesses,” he said.

‘‘But they need to have their debt restructured. Many of them have never operated in a difficult economic environment and have little experience of negotiating with banks. The banks are equally anxious to get restructuring experts involved, because they need to restructure the debt just as much as the client does.”

Fagan said that typically the client will have suffered steep devaluations in their asset portfolio and will have cash flow problems arising from properties not selling.

‘‘But their borrowings still have to be serviced along with staff costs, and plant and equipment leasing charges. They have an inability to move projects forward because of the credit crunch, and there may also be an unwillingness or inability to make difficult decisions, such as selling off deeply discounted assets or laying off staff,” he said.

Fagan said clients were typically seeking to cut their costs to the point where they had a viable business model, and to get the banks to agree to restructure their debt and continue to fund viable projects, particularly if they had pre-sold a building or had a government contract for social housing or schools.

‘‘They are also aiming to sell assets to reduce their indebtedness drastically but, realistically, property sales are extremely slow so the other two options are the most likely,” he said.

Fagan added that a number of builders who are in need of bank restructuring also have issues with arrears of Vat, PAYE, PRSI or corporation tax.

‘‘While these authorities are very well aware of the current challenges facing the construction industry, it is still critical to be able to meet them and have a professionally prepared plan as to how the outstanding issues will be dealt with,” he said.

‘‘Banks are also being more thorough, which requires businesses to be more professional. There is a lot more investigation now being done by the banks into things like valuers’ reports, surveyor reports, details of the build and design contracts and the levels of insurance and indemnities. The drawdown of loans is increasingly being linked to the work been certified by a bank-appointed surveyor.”

The German property on which the company has managed to save €1 million in debt principal is a retail centre in Roethenbach, which was purchased through the €8 million Alpine Private II fund. The fund was originated and structured by Farrelly & Mitchell last year.

The firm negotiated the reduction with the global bank that had originally financed the deal by offering to move the loan to another bank, and by doing so freeing up capital for the original lender. The debt was taken on by another bank on comparable terms.

Farrelly & Mitchell is planning to open an asset management office in Berlin at the end of this year.

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