Public and private agendas writ large in Blackstone-O’Flynn row

He might be a racing fan, but developer Michael O'Flynn had few reasons to cheer during Galway week. US fund Blackstone moved to take control of his property and construction empire, placing its trading companies under the High Court's protection and appointing receivers to some other elements.

Events unfolded in a sudden and dramatic way last Tuesday. Early on, Blackstone affiliate Carbon Finance appointed the receivers to parts of the group, including the shares of its parent, Colebridge International, on foot of demands for the immediate repayment of about €20 million in personal loans to O'Flynn and his brother John.

The receivers then ousted the board and installed new directors. At a hearing in the afternoon, Carbon had the group's four key companies placed under High Court protection and had an interim examiner appointed to them.

Control of assets Blackstone acquired the O’Flynn group’s

€1.8 billion debts from Nama on May 16th, giving it the right to take control of the assets against which the loans are secured in the event that the Cork-based business cannot repay them or defaults on some of their terms. The US investor’s Dublin-registered affiliate, Carbon, oversees the management of its interests.

The O’Flynn group argues that control of the assets is at the centre of all this and told the High Court on Thursday that this is the sole purpose behind Carbon’s actions. Its senior counsel pointed out that one of the reasons it put forward for seeking to have an examiner appointed to the group was to restructure its debts. But he argued that as Carbon is affiliated to the creditor, it did not need court intervention to do this.

Examinership is designed to provide breathing space for firms that are insolvent, or close to it, but which can show they have a reasonable prospect of survival. The aim is to save businesses and jobs, often at some cost to creditors, so as a rule they are not inclined to use it as a means of securing debt repayment. In this case, Carbon told the court and issued a statement that saving jobs is one of its priorities. While it did not present an accountants’ report with its petition, it produced figures to support its claim that the four entities involved, headed by O’Flynn Construction Company, were insolvent.

The case gives us a glimpse of how Nama works and the contrasting approach taken by the investors buying developers’ loans from the State agency. A dispute over the terms and conditions attached to the debt lies at the root of what happened last week. The O’Flynns say that when the loans were transferred to Blackstone, the US investor was bound by the same terms and conditions as was Nama, but its interpretation of them threatens to force the business into default.

In most cases, Nama collected income generated by the businesses whose loans it bought from the banks and returned some cash to them to allow them meet expenses. The O’Flynn group negotiated a different deal with the agency. Instead, with Nama’s approval, money was transferred to bank accounts used to pay the group’s running costs. And the surplus was used to service debt. Michael O’Flynn maintains in his affidavit that rent from its properties was enough to cover all of this.

Given that Nama did not appoint receivers to the O’Flynn Group as it did with a lot of other developers, it was presumably satisfied that the business was meeting its commitments. We can also take it that, for whatever reason, it was happy to have less control over the cash generated by the group than it had over the money which flowed from other developers’ businesses.

Different creditor Nevertheless, the O’Flynn Group and Carbon are now in dispute. The

differences include the creditor’s refusal to approve transfers of cash to the accounts used to fund the group’s day-to-day expenses and over how money raised from the sale of a London property should be used.

We can only speculate on why an agreement that was working is no longer doing so. The obvious reason is that the parties have changed in that Blackstone is now the creditor rather than Nama. It is fair to say that organisations such as the US fund and the State agency are likely to have different priorities.

Nama has a role in delivering Government policy whereas Blackstone has to deliver a return to the investors that fund deals such as the purchase of the O’Flynn loans. It would argue that it has to act to protect their interests.

It looks like the High Court will have to adjudicate on this dispute. Only a brave soul would predict the outcome but it is a fair bet that this will not be the only such dispute to end up before a judge.