The real scandal of Cerberus €1.6bn Project Eagle Deal - you paid for it, and how Noonan’s amendment protects Cerberus.
The Irish Media seems to have swallowed the line that Noonan’s proposed amendment will close the vulture fund loophole. Some of the articles even imply that the vulture funds have taken a massive tax hit from this amendment (oh the horror).
IRISH INDEPENDENT: Vulture Funds reeling as new tax slashes massive profits
Fear not vulture, as my in-box continues to be crammed with Big 4 (and non-Big 4) emails explaining why, with appropriate advice and structuring (which will cost you), all of the future Irish tax avoidance that the existing vulture was expecting, can be preserved (understandable, given Big 4 wrote amendment).
Discussed in more detail here:
It is amazing that we have a full media attack on Project Eagle, CA&G Report, and all-party consensus in the Dail, that an investigation - and a statutory one - is needed into the €1.6bn sale to Cerberus.
IRISH EXAMINER: High cost of NAMA failings in CA&G Report
RTE: Watchdog Audit finds NAMA incurred £190m Loss on Project Eagle
However, PIN readers of this (long) thread, can inspect the Cerberus Promontoria Eagle 2015 Accounts (the link to the SCRIBD file in via this PIN thread half-way down to Vulture #5) to see where the real scandal is:
Of course, before we get into the real scandal, what you find first, is that the Cerberus vehicle that bought the Project Eagle portfolio from NAMA is, of course, a Section 110, designed by the “usual Dublin advisor team” of A&L Goodbody (2nd only to Matheson in Section 110 Irish tax avoidance schemes), SFM Ireland (Irish anti-avoidance tax rules don’t allow the Directors of Cerberus to be Directors of their own Irish tax avoidance vehicle; don’t laugh), and PWC (who, with KPMG, are likely the main authors of Noonan’s “cosmetic” amendment to Section 110, which is designed to preserve the tax schemes of Cerberus, and all the other Section 110 of the vulture funds.).
All profiled here: Putting it together, the Vultures + Vehicles + Dublin Lawyers + Dublin Accountants + Irish Charities
So, in crude numbers (I am deliberately simplifying / rounding a lot, for fuller clarity here):
ALL IN STERLING
Project Eagle portfolio bought for c £1.2bn
Cerberus used c £780m of “non-recourse” Debt mostly from Nomura Japan @ L+3.5% @ €27m p.a. cost
Interest income on portfolio of c £111m
So, this portfolio was almost a decade old when sold to Cerberus. This means that it is “seasoned” in the distressed debt vernacular (i.e. the interest income is likely now very solid having been paid for c 10 years though the GFC; distressed debt heaven).
Cerberus therefore bought Project Eagle at an un-levered yield of over 9.25% (8-9% yield was standard in 2013 from NAMA)
Net of the Nomura loan, Cerberus put c €420m of their own money into the deal, on which the STARTING INCOME YIELD (i.e. ignore capital gains) was exactly 20% (€111m in income less €27m in interest, divided by €420m in equity).
If Cerberus hold Project Eagle for 10 years (standard distressed debt hold period), they will convert their €420m into €1,260,000 (€420m x 20% x 10 + €420m). Without a Section 110, Cerberus would incur Irish taxes over almost €250m on this gain alone (*)
(note: see this post re tax calcs: thepropertypin.com/viewtopic.php?p=886824#p886824)
(*) note: as we saw in the Mars Capital Ireland case study (see link below), there is a common mistake commentators make about the sustainability of this income. Project Eagle’s loans had a par value of €4.6bn, so Cerberus paid 27p in the £1 for them. On average, where a borrower repays a loan early (and Cerberus loose future 20% p.a. income), Cerberus will make an even bigger gain on full par recovery of the loan. So powerful is this dynamic that Cerberus, in specific cases, will be willing to take even 50p in the £1 from the borrower, and will be no worse off then taking the 20% for the 10 years. Ireland was distressed debt heaven for vultures in 2013-2015, as it had a rare combination of factors not found elsewhere:
(1) well seasoned loans (most over 10 years old, and have been through the “fire” of 2010-2012, so their income was solid).
(2) deep discount to par value (underpins income yield and gives even bigger capital gain windfall where loans repaid early).
(3) unleveraged acquisition running yields close to 10% (leveraged yields closer to 20%, per Project Eagle).
(4) complex bankruptcy laws (very hard for borrower to “walk away” like in US, underpins interest income).
(5) Section 110 structure - free of all Irish taxes, Irish VAT and Irish Duties (unlike the US or other PIIGs in Europe).
However, those who knew Project Eagle know, with any decent recovery, Project Eagle is worth AT LEAST 50% of its original loan value. That is another €1,000m to Cerberus, or €2,260m on their €420m equity. That is over €500m in Irish taxes avoided.
**Like we saw in the Mars Capital Ireland / OakTree Case Study, Cerberus is going to avoid Irish taxes (+€500m) that are at least as big as Cerberus’s actual equity investment (+€420m).
As with Mars Capital Ireland, the Irish Taxpayer has paid for ALL of Cerberus’ Projecg Eagle investment.**
MARS CAPITAL IRELAND CASE STUDY
So while the media gets into a fluff over Cerberus getting a £190m bonus because poor practice (or worse), remember that our Government of ex. school teachers, have given Cerberus (and all other vultures) an even bigger deal.
Remember also that NAMA knew it was selling to Section 110 (and Frank Daly was at presentations on S110)
Now read the post on the “sham” of Noonan’s Section 110 “loophole closure” Amendment:
(i) Next year, the Cerberus Promontoria Eagle Accounts show a revaluation of the assets on 5th September 2016 to €2.6bn, to shelter all capital gains at 0% (with Irish bond yields going negative, PWC will produce a 100 page report supporting it).
(ii) Next year, the “internal” €420m of Cerberus Promontoria Eagle Loan Notes (how Cerberus structured their “equity”; all owned by a Cerberus Luxembourg company) will have had their interest-rate confirmed by PWC as being an “arms length” rate.
Why Noonan’s Section 110 Amendment is Built to Fail
Of course, it is likely that Cerberus will wrap their Project Eagle Section 110 inside an “Orphaned Super QIF” so that media / public cannot download their accounts and see what Irish taxes they are paying (or not paying, more likely). This is what the Big 4 are now recommending to their vulture clients, along with structures to neutralise Noonan’s amendment.
Orphaned Super QIFs are discussed here. thepropertypin.com/viewtopic.php?p=886779#p886779
All the IBRC are paid back and almost all the NAMA financing is paid back (i.e. no rush with remaining NAMA assets, better to wait).
Unlike Apple, Vultures don’t supply any jobs etc. (the Apple arguments don’t apply)
Why is Noonan protecting Cerberus’ (and all other Vultures) avoidance of +€500m in Irish Taxes?
Stephen Donnelly article on Cerberus 2015 Project Eagle Accounts shows that the interest income has risen to £165m and that Cerberus’ income yield (ex Capital Gains) is now running at over 30%. The profits are now so vast that Cerberus has been forced to re-structure half of Project Eagle’s assets out of its Section 110 SPV into a new tax avoidance vehicle.
IRISH INDEPENDENT: Time to tax ‘vultures’ like the rest of us.