With Paddy Kelly on the brink of bankruptcy his could be a test case for other developers unable to repay loans, writes Arthur Beesley
IN DEBT to the tune of hundreds of millions of euro, developer Paddy Kelly declared this week that he is on the brink of bankruptcy. With no sign of any imminent recovery in the property sector, what happens next may stand as an important test case for other developers who are no longer able to repay their loans.
What is more, Kelly’s long-standing and deep business relationship with the newly nationalised Anglo Irish Bank means that any bankruptcy proceedings in his case will have implications for taxpayers. This is because the State will be on the hook for any losses the bank incurs on loans he cannot repay.
The outcome of such proceedings may also set precedents in respect of Anglo’s dealings with other big clients. Many of them were already in deep trouble last autumn when PricewaterhouseCoopers (PwC) examined Anglo’s books in the wake of the Government guarantee. Given the pressure they then faced, many were mothballing development projects, running up interest bills and trying to sell off assets. Conditions have worsened appreciably since then.
In business for more than four decades, Kelly and his Redquartz Developments vehicle ranked for many years among the biggest players in the high-stakes world of speculative property development. A Lloyds “name” who executed a remarkably prosperous rebound from near-ruin after the insurer’s disastrous flame-out in the late 1980s, his buildings bestride Dublin and beyond.
Kelly, a Rolls Royce afficionado who lives in Shrewsbury Road, grew up in Clonmore near Portlaoise and attended vocational school in Roscrea. At first he built houses locally with his brothers. Later he built council houses. In the 1970s he built Castlecourt in Booterstown, venturing later that decade into the British market. From these modest beginnings – he lived in a £1,000 mobile home when first married, having failed to find a flat – he would build an empire with projects valued in billions of euro.
In Dublin, recent completed projects include: the €500 million Smithfield Market commercial, retail and residential development; three IFSC projects worth a total of €205 million; the €175 million Sir John Rogerson’s Quay project; the €150 million Gallery Quay building; and the €134 million Belfield Office Park.
In Limerick, he built the €30 million Clarion Hotel. At Arthur Street in London, he built a €75 million office block. His proposals for the redevelopment of Bray Golf Club were costed at €1.5 billion.
Each of these developments was banked by Anglo Irish, an institution now in the hands of the State following its nationalisation in January.
The interests of the Redquartz group don’t stop there. Retail ventures it backed include convenience store chain Fresh and office supplier Biz Superstore.
It also backed private healthcare business Charter Medical, hotel groups Choice and PREM and the Real Gourmet Burger restaurant chain.
In 2005 Redquartz negotiated the purchase of leading pub and restaurant operator Thomas Read Holdings, a business that has been in examinership since last November.
In short, Kelly is immersed in the heady world of deal-making and development.
A man with an immense appetite for debt and an ambitious hunger for win-win transactions with business partners, he is described by a source who knows him well as the grand strategist and philosopher-in-chief in his company. His son Simon Kelly often looks after the day-to-day aspects of the business. Two other sons are also involved.
When markets rise, vast fortunes can be made. When markets collapse, the losses can be catastrophic. Although Kelly might have hoped to spread the already high level of risk in his Irish business by undertaking big projects in the US and continental Europe, the diversification of his interests appears to have gone badly awry, as all three economies went into severe decline.
The evaporation of liquidity in the property sector generally – within Ireland and internationally – means there simple isn’t enough cash coming into Kelly’s business. Site work on many of his current projects has come to a halt, it is understood.
Most particularly, Kelly has encountered acute difficulty in the $1 billion (€744 million) project at Sarasota Quay in Florida. Years behind schedule, investor equity in the project has been severely depleted. The €100 million Pragelato Village Resort project, location of the 2006 Turin Winter Olympics, is known to have underperformed. Both of these projects are banked by Anglo.
In January, Anglo sent receivers in to another Kelly venture, Tulfarris House and Golf Resort in Co Wicklow. The debts of that business exceed €22 million.
While the total value of these projects is vast, the amount of actual indebtedness at present remains unclear. Anglo’s top 15 clients each owe in excess of €500 million to the bank. It is not known whether Kelly ranks among those 15, but his exposure to the bank is large.
Whatever the exact level of his overall indebtedness to Anglo and any other banks – in some accounts, it is in the region of €500 million – Kelly has made it clear that his liabilities now exceed his assets.
The immediate catalyst for Anglo’s decision last month to stop further drawings on a facility it granted him in February 2008 is not known. As a result, however, Kelly told the Commercial Court in an affidavit last Monday that he has not been able to honour his financial commitments. In light of that, he could not give assurances as to his ability to comply with a court order requiring him to pay rents of some €131,000 on outlets used by Mango ladies’ fashion chain.
The upshot is that Kelly is now taking active steps to explore the possibility of starting a process leading to implementation of a personal scheme of arrangement under the Bankruptcy Act. The reference to bankruptcy legislation – instead of the Companies Acts – is generally perceived to reflect a high level of personal guarantee on his debt.
So what happens next? If Kelly decides to proceed down the bankruptcy route, he can opt to do so within the court system or outside it. Either choice presents potential benefits and drawbacks. Yet, for a man accustomed to great success, both are fraught with unpalatable choices. The court in a typical bankruptcy appoints an “official assignee”, an insolvency professional charged with winding up the business. Doing that, however, could take as long as 12 years with court approval required for every disposal and creditors required to sit it out until their share of the proceeds can be realised.
Kelly’s reference to a scheme of arrangement suggests he does not have this in mind. Under part four of the 1988 Bankruptcy Act, he could make an ex parte application for court protection from his creditors in advance of an attempt to reach an arrangement with all his creditors.
In such a scheme, they would accept a fraction of the monies due to them – a set number of cent in the euro – in full and final settlement of the debt. The agreement of a three-fifths majority of each class of creditor would be required for a scheme of arrangement to take effect.
“The court route – under the 1988 Act – affords a measure of protection to individuals in financial difficulty to give them some breathing space, within which to reach a settlement with their creditors. We are waiting for a test case to see the extent to which it allows protection from secured creditors,” said Norman Fitzgerald, head of litigation and restructuring at Eversheds O’Donnell Sweeney.
Instead of going to court, Kelly could appoint a private trustee charged with agreeing a voluntary arrangement with all creditors. While appointment of a trustee is not a precondition under law to attempt to broker a scheme of arrangement, it could foster confidence in the process among creditors.
The danger here is that some creditors might not agree to the terms on offer, prompting individual claims against him. The very act of assigning assets to a trustee is in itself deemed to be an act of bankruptcy, opening up the risk of individual creditor claims.
“The non-court route requires consent from 100 per cent of the creditors. It has the advantage of privacy and reduced cost, but can be a dangerous process and needs to be undertaken with great care,” Mr Fitzgerald said.
Although there is a widespread perception that other big developers may be encountering similar difficulties in their business, Kelly may well prove be the first player of significant scale gravely wounded in the trenches of Ireland’s property collapse to seek creditor help in the sick bay.
As such, his next steps will be followed with great interest. If he does proceed down the bankruptcy route and creditors agree a scheme of arrangement, there would be great interest in the rate in the euro at which banks agree to settle his debt.
While every bank’s relationship with each major developer is unique and subject to the vagaries of the current malaise in the market, any bank agreement in Kelly’s case might well set a bar for other banks and developers in similar trouble.
Further questions arise in respect of the impact of Kelly’s woes on his relationships with his business partners in various joint ventures. One possibility is that some of his partners issue a very large number of new shares in their projects, diluting his interest to the point of insignificance. Another is that banks end up taking on his equity interest in the project.
In the normal run of events, however, members of the sort of business partnership that Kelly typically enters into have “several” liability over their interest in a project. This means the banks are not empowered to seek repayment of any of Kelly’s outstanding liabilities from partners.
When Kelly was burned in the Lloyds debacle 20 years ago, his position was made much worse by the fact that his wife was also a “name”. This meant he could not shelter any family assets in her name. He suffered a huge setback at that time, but it didn’t dim his appetite for risk.
Whether he can find a way back from his current adversity remains to be seen. Only weeks before he reaches the age of 65, he cannot have imagined that he would find himself at this stage in his career in such straits.
Although certain sources familiar with his business affairs believe he has the potential to recover solvency in a couple of years if the Irish and international economies turn around, his own declaration in court this week suggest it may be too late for that.
