Oireachtas Joint and Select Committees
Wednesday, 22 July 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Mr. Michael O'Flynn:
Thank you, Chairman. Good evening all and thank you for the opportunity to address the committee. As you know from my submission, I have been in the property development and construction business for over 37 years. During this time, I worked through the recession of the 1980s and the currency crisis of 1992-1993. At all times, the O'Flynn companies paid every creditor and repaid all borrowings in full plus interest. Our business model was always soundly based. From 1978, the business grew, as did the mix of skills within the organisation, including development, planning, project management, asset management and construction, investment and finance. Development was the origin of the group and was always at the centre of our activities. The key focus for development was to take a total management approach from inception to completion, only building product where real demand existed.
As a group, our plan was to create a strong and valuable organisation which would be broadly based and diversified in so far as is practical in terms of locations, business and economic risk. At the peak in the mid-2000s, the O'Flynn Group employed over 1,000 people directly and indirectly. In the statement to the inquiry, NAMA CEO, Mr. Brendan McDonagh, and not Mr. Frank Daly, as mentioned in my submission to you, indicated a view that diversification reflected an absence of strategy amongst developers. I disagree. Rather, diversification is a recognised and appropriate risk management strategy operated by businesses of scale.
By the end of 2008, the group had fully evolved to a diversified model in terms of its asset type and geographic base. In addition to our development business in Ireland, our varied businesses extended across nine jurisdictions, encompassing commercial, retail, industrial and residential and included a very successful student accommodation business, senior living accommodation and investment properties.
My relationship with banks - I can only speak from my own experience with the banks, that experience runs contrary to some of the generalisations I have heard reported at this inquiry about easy lending which was relationship based and where the loan was up to 100% or more of the value of the asset in some cases. This was certainly not the case in relation to the O'Flynn Group. The cash balances of the O'Flynn Group were always strong and were applied in property acquisitions. Even the years 2006-2008, the average amount of our cash balance was €76 million. In our property acquisitions, a mix of our own cash and bank borrowings was generally applied, with the exception of joint venture arrangements where a lender sought a much higher return based on profit share. In such cases, funding was provided by the lender and time, skills and expertise were provided by us and profits were shared in an agreed proportion.
To be very clear, our borrowings were not speculative. They underpinned specific developments with a strong balance sheet and a credible and strong cash flows to support them. I never issued personal guarantees to any lender in relation to the business and the reason for this was our track record, but also the strength of our balance sheet and by extension, the level of equity which we were bringing to each project. In approving any loan application, the bank had to satisfy itself of the ability of the borrowing company to repay the loan and the security available. I have never provided any form of personal guarantee to a bank to secure an O'Flynn Group loan.
The O'Flynn Group way of operating was to identify a projects that made financial sense and then go about the financing, not the other way around. From time to time, O'Flynn Group companies are required to provide guarantees for the liabilities of other group companies and where we believed it was the right thing to do, those inter-company guarantees were provided.
The global financial crisis - access to finance is the lifeblood of developers in the way raw materials are to a manufacturer. When the global financial crisis hit, that supply was denied to us. Regardless of how strong a company's balance sheet is, if you and your principal customers are dependent on banks for access to cash, you will not be in a position to continue business in such circumstances. I am hugely appreciative and grateful to the State for providing liquidity to our business when the banks were in the extraordinary and unforeseen position of being unable to provide finance. It was the only time in my 37 years in business that I have ever seen a business environment like this and I hope I will not see it again in my time.
The role of NAMA - while the concept of NAMA was well-intentioned, I believe it was destined to realise a less than optimal return to the State.
NAMA was intended to save the Irish banking sector but in fact hastened its demise and along the way added to the burden on the Irish taxpayer. There were alternative and better options, and Lombard Street Research, a macroeconomic consultancy company based in London, outlined those options in a report which was submitted by the Construction Industry Federation to the Department of Finance, a copy of which I have provided to the inquiry.
I believe there are four reasons why NAMA has and continues to fail to maximise the return to the State. Firstly, the time that it took to create this new organisation, staff it, resource it, and deal with the European Commission on competition matters, decide on a valuation mechanism, value the loans on a loan-by-loan basis and ultimately transfer the loans, which was costly. The concept of NAMA was first mooted in April 2009 but it was April 2010 before NAMA was able to even commence the review of business plans of the first tranche of borrowers. It led to continued financial uncertainty over an extended period. Secondly, I firmly believe that from the outset NAMA lacked experience in many important areas but most notably in the area of asset management and development. This had very significant consequences in terms of early action to enhance the value of the assets under management. Thirdly, NAMA failed to distinguish between developers who knew what they were doing and had a track record in business but who were thrown into turmoil by the global financial crisis, and part-time developers or people who had gone into the development business without having any understanding of the fundamentals involved. While in NAMA, I presented a comprehensive, professionally assisted business plan designed to ensure that the O'Flynn Group could continue in its current form and that all debt could be repaid over time at par. We applied very significant resources to the preparation of our business plan, which extended to some 2,000 pages, and believed that it offered a realistic timeframe to allow the group to operate a successful recovery strategy, which in turn would result in full debt repayment over time. This plan was examined in detail on behalf of NAMA by FTI Consulting, a global business advisory group experienced in complex businesses, who conducted a comprehensive exercise with which we co-operated fully. Although our engagement with FTI was positive, our business plan was rejected by NAMA without explanation or any meaningful engagement whatsoever. Instead we were required to implement a business plan designed by NAMA personnel unfamiliar with our extensive and varied businesses across nine jurisdictions.
The NAMA plan did not accommodate full debt repayment. Although we had no part in designing it, we were required to implement it and yet remain responsible for the full amount of the loans. Despite attempts on my part, NAMA refused to engage with me to see how this plan could be achieved. To this day, I am bewildered as to why this was the case but the net effect is the taxpayer suffered a loss that could have been avoided in respect of the O'Flynn Group loans. To be clear, we did not get a loan write-down. NAMA took over the O'Flynn Group €1.8 billion loan book and sold to the Blackstone at a discount. However, we continue to owe Blackstone the full par value of the loans. The discount taken by NAMA on the sale of the loan has cost the taxpayer but could have been avoided, had NAMA been prepared to work with us and to take our business plan on board. We are fortunate that following the resolution of our dispute with Blackstone we still have a business, albeit a smaller one, on which we are building up again and contributing to the economic growth of the country. However, both the tax man and the O'Flynn Group would have benefited, had NAMA taken a more strategic approach to our business and assets. While I can only speak for my own business, I know there were other developers where NAMA has lost out, also because of their failure to identify and work with these people though an agreed business plan to maximise the return to the State.
Finally, there was an in ... there was an inability of NAMA to recognise the cyclical nature of the economic downturn, and take a longer-term view of asset realisation and maximisation of proceeds. We are all ... we are already seeing assets purchased from NAMA being sold on at significant profits. A combination of a failure to identify developers who knew their business and a lack of recognition of where Ireland and Europe were on the economic cycle has resulted in a significant loss for the State. Had NAMA picked developers who knew the business and had a track record, the State would have realised more proceeds and, in addition, some of the office and housing shortages we are now ... which are now emerging due to the lack of activity in recent years could have been avoided.
Much of the debate around NAMA has come to be dominated by its profitability as a measure of its success. This should not be the case. By paying low prices for assets and by taking good loans as well as bad, it was always likely that the entity would generate a profit. However, this profit has been achieved at the cost of an earlier recovery in the banking system and serious damage to some developers, who had loans acquired and who lost an opportunity to work out those loans.
It also ignores the huge hidden cost of fees which are not included on NAMA's balance sheets but, instead, added to the account of the borrower.
There are other failings that I think should be identified: the lack of any real oversight of NAMA in relation to the ... to the exercise of the extraordinary powers vested in it; the special Oireachtas committee to examine matters in relation to NAMA, as provided for in the NAMA Act, was never established; the refusal by NAMA to allow partial refinancing joint ventures or any other means of attracting outside equity; the so-called section 172 policy - section 172 precludes the sale of loans by NAMA to borrowers who are in default in respect of those loans; NAMA, however, operated a policy which, in fact, went far beyond what the legislation provided. Although our loans were not in default at the time they were sold, NAMA's process precluded any proper commercial discussions between us and, thus, prospective purchasers of our loans. It was irrational and, in my view, potentially unlawful that we were precluded from having such discussions with potential purchasers. I believe that the State should be allowed to get the best return from the sale of assets, irrespective of who the highest bidder is.
Most NAMA borrowers are prevented from speaking frankly of their personal experiences within NAMA, either because their loans are still controlled by NAMA or because they are subject to confidentiality arrangements. I've outlined in much greater detail in my submission my experiences of NAMA and a ... and the serious shortcomings of same. I should stress, however, that I have encountered some very decent, professional and fair-minded people who worked in NAMA. However, I have also had some very poor experiences. The only remedy a borrower can seek in NAMA is to seek judicial review of decisions made by NAMA. Not only does the expense of such application put it beyond the reach of most borrowers but any such application is certain to be regarded by NAMA as unco-operative and, therefore, in real terms, would be the end of that borrower in NAMA. To be very clear, I had no role or involvement or was not consulted on the transfer of my loans, or the loans of the O'Flynn Group, when the various financial institutions entered NAMA. I equally had no involvement in the price at which these loans were transferred, the haircut suffered by the banks and the cost to the Irish taxpayer as a result. In fact, at the time my loans were acquired, NAMA ... NAMA insisted that the borrowers did not even have the right to make representations in relation to the acquisition of their loans. The Supreme Court subsequently determined that NAMA was wrong in that regard.
Neither the acquisition of our loans from the banks nor the sale of them by NAMA had any impact on the amount we owed. At all times we remained liable for the full par debt. I've already repaid my personal loans in full, which I believe is a vindication of the fact that they never constituted a systemic risk and should not have been acquired by NAMA. The O'Flynn Group submitted a business plan which would have allowed full debt repayment but this was rejected and, instead, despite remaining liable for par debt, we were required to implement NAMA's alternative plan under which full repayment could never have been achieved. I was not permitted to be a party to the selection of the winning bid for my loans nor the price paid for those loans. It's important to know that we co-operate fully with all prospective bidders to maximise the return to the State and this has been acknowledged by NAMA. People talk about NAMA being a developer bailout but that is not my experience.
To be very clear, as I have said already, I am hugely appreciative to the State for stepping in to provide liquidity when the banks became unable to operate and I wanted to repay that. The taxpayer lost money, of that there is no doubt. However, I have a business that is now much smaller than it was before, resulting in a direct loss to the economy. The main winners in all of this have been the private equity companies who have the funding and are able to buy loans and assets at a time in the economic cycle where the value realised by the State was far from optimal. As the positive economic cycle has progressed, these assets and loans are now being realised at a significant profit.
The future: looking to the future, development always requires skill and judgment to be done well at a significant scale. It's always capital intensive and it is always a risky undertaking. It is essential that a professional developer sector is re-established to ensure that Ireland's future property needs are satisfied to meet the requirements of a modern, growing economy. Part of the re-establishment of a professional development model would have to entail less reliance on bank finance and a greater dependence on a different funding model, where the equity comes from professional investors. But as well as the development sector learning lessons from the crisis, there are also lessons to be learned in the area of zoning, planning and building regulations. We should not lose the opportunity to correct all the systemic issues which ... that contributed to the demise of the property sector in Ireland. The property ... the property market is cyclical. The O'Flynn Group and its various companies have been through a number of peaks and troughs but we have adapted to meet circumstances and to continue in business. It is easy in the current climate to forget the positive contribution made by the ... by the construction-property sector to the economy. A functioning property and construction sector, with properly-managed, experienced companies, is essential in every economy. Ireland is no exception. Thank you, Chairman.
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