Mr. Neil McDonnell:

ISME thanks the committee for the invitation to address the issue of debt transfer to so-called vulture funds. I was to have been accompanied here today by a member company which is going through a debt restructuring, but it was made very clear to its representatives that the offer being negotiated currently would not be honoured if the company appeared before the committee.

ISME members are not ignorant of the fact that some borrowers are unable to repay their debts and that lenders must have recourse to debt resolution mechanisms. We are also aware that many of the funds to which SME debt is sold are willing to come to negotiated settlement arrangements with borrowers. What is incomprehensible to many SMEs, however, is that these banks seem incapable of coming to what are, in many cases, straightforward arrangements without having recourse to selling debt to third parties. These debt sales are cost additive in terms of professional and legal fees. They are also highly complex and impose on borrowers a stress and workload they would never normally encounter as part of their normal business lending. Added to the fact that debt sales are normally confined to distressed borrowers, these factors place a major strain on the customer. These sales typically take place at a substantial discount to the book value of the debt and one wonders why those taking the business decision to sell that debt cannot come to an agreement with their customers at, or close to, the written-down value at which they are selling that debt. We know of one member company which was recently informed that its overdraft of some €20,000 had been sold by a pillar bank to a fund.

The most common complaint we encounter about the sale of debt to funds concerns the unreasonable exercise of personal guarantees. We understand that lenders need some degree of security for the funds they extend, and personal guarantees can form part of that. However, personal guarantees are never extended by borrowers on the basis that they can be suddenly or peremptorily exercised. Borrowers view them as a last resort, not something to be used to exert heavy, short-term leverage. Some institutions maintain personal guarantees after the debt raised against them has been discharged. This is immoral. Settlement agreements also typically involve confidentiality and gagging clauses. Included in the written submission provided to the committee are the testimonies of two ISME companies involved in debt sale and restructure, one of which has been promised some debt forgiveness, while the other has repaid 100% of its debts sold. I do not propose to read them out but I note that the debt forgiveness arrangement set out involved the sale of a family home, while in the other case the business was liquidated at the cost of redundancies for all the employees working therein.

The ISME bank survey will be published later today. We ask our members regularly now how many have had their debts sold. The figure that will appear in the press release today indicates that 10% of our members have had their debt sold by their lenders to third parties.