Resale of business loans by vulture funds to individual investors ‘alarming’ – FF

Fianna Fáil Spokesperson for Finance Michael McGrath has said he is alarmed by the practice of commercial loans being offered for sale by agents acting on behalf of vulture funds to individual investors who are not regulated entities and who have no understanding of the underlying business the loan relates to.

According to Deputy McGrath, a trend is now emerging whereby vulture funds, who bought large portfolios of loans at huge discounts, are now breaking them down into smaller parcels of loans and offering them for sale to individual investors. These loans can cover a range of business types including shops and pubs to manufacturing businesses.

Deputy McGrath commented, “When banks started selling bundles of loans to vulture funds, we were told that individual businesses had no need to worry as long as they continued to service the debt. I and others warned at the time that vulture funds would take a short term outlook to maximise their profit with absolutely no regard for the interests of the underlying businesses the loans related to. This is now manifesting itself.

“It has been brought to my attention that agents acting on behalf of some of these funds are offering business loans for sale to people in business or known high net worth individuals. This is all perfectly legal it would seem. Under legislation passed last year, the new owner of the loan merely has to appoint a regulated credit servicing firm to manage the administration of the loan. The previous and current government has refused to insist that the owner of a loan would have to be regulated.

“This trend opens up the prospect of competitor firms are being offered the chance to buy the debt connected with a rival business. As it stands there is nothing to stop any investor from buying a debt connected to a business so long as they comply with the requirement that an intermediary is appointed to administer the loan. Personal guarantees are also often attached to these loans putting an individual’s financial well-being in the hands of people who may – to say the least – not share their best interests. Business loans are now being offered for sale around the place and are usually promoted on the back of the property or properties underpinning the loan. This is happening totally unbeknownst to the borrower.

“The original Irish owners of these loans would have invested high levels of equity in their business in the form of hard cash, retained profits and many years of hard work. When there is an enforcement, the equity is often wiped out and lost to the original owners, the Irish economy and the taxpayer. Anyone who has seen a commercial loan agreement will appreciate that the terms are very much stacked in favour of the lender and it is easy for the owner of the loan to call it in and initiate enforcement action.

“The law in this area is very weak at the moment, and it is our intention to introduce legislation to fix this problem. The first step should be to require the owner of credit to be a licensed financial institution and this needs to be done without delay. By not insisting on this, the government has facilitated a free marks for the sale of loans with no regard for the original borrower or the underlying business they are trying to run.”