ANALYSIS:BUSINESSMAN PADDY McKillen may claim to own quality properties, even properties that may have not lost their lustre as "trophy purchases" since the boom, but he has massive borrowings with banks that are only still in business because of Government support.

McKillen’s legal action against the National Asset Management Agency (Nama) and the transfer of €2.1 billion in loans to the agency is three days old but already the court is pondering the crucial matter of the bigger picture – that this agency has been created to save the Irish banks and the economy.

Put simply, McKillen believes his transfer into Nama will damage his 35-year-old business, making it difficult to refinance his short-term loans on property investments which he holds for the long term and which are generating enough cash for the interest.

While he takes issue with Nama on the eligibility of his loans for the agency – and with the Nama legislation for being extraordinarily broad to bring him in – he is not picking a fight on this issue.

He claims Nama has breached his constitutional right to fair procedures. The legislation is so great, he claims, that not only was he not told in advance he would be moved into Nama but he had no entitlement to be told the reasons why or an opportunity to challenge the agency’s decision.

McKillen argues that because his loans will be moving to Nama, “a work-down vehicle”, not a bank, this will reduce the value of his properties as the agency will seek to reduce debts more quickly than if he were dealing with his banks.

Yesterday, the three-judge division of the High Court presiding over the case heard more details about McKillen’s concerns.

His counsel Michael Cush read out correspondence which he said showed part of Nama’s incentive to acquire McKillen’s loans was to make a profit – a claim contested by the State. Mr Cush’s opening arguments for McKillen drew to a close shortly before lunchtime. This gave Paul Gallagher, the Attorney General who played a key role in drafting the Nama legislation, a chance to lead the State’s defence argument.

He disputed McKillen’s view that he had performing loans and pointed to Anglo Irish Bank’s concerns about his financial situation.

While McKillen is focused on the adverse effects that he believes await him in Nama, the State case is arguing that the Government’s Nama plan was so devised to save the Irish banks from collapse.

As the court was told, McKillen was unique or virtually unique in that he was repaying his loans and that the transfer of his loans to Nama would damage that. The businessman claims he is an innocent victim in the rescue plan.

The court filings in the case show McKillen is fighting to protect his business empire, while the State is fighting to protect the financial system and the economy.

Anne Nolan, the Department of Finance official overseeing the Government’s banking plan, said in one filing that McKillen has in fact benefited from the State’s actions to save the banks.

McKillen’s main banks – Anglo Irish Bank, Bank of Ireland and Irish Nationwide Building Society – have been propped up with State capital injections and guarantees.

“If his banks had not remained in business, Mr McKillen would have been faced with urgent refinancing, transfer or enforcement of his loans by liquidators,” said Ms Nolan in an affidavit. “Mr McKillen states that his loans should remain with his banks because of the supposed advantages that confers on him but he fails to acknowledge their existence, and as a consequence his highly-valued business relationship with them is dependent on the actions of the State over the past two years.”

McKillen’s counsel challenged this, saying that no liquidator appointed by a bank would have been given the powers Nama has.

However, the judges appear to be taking a wider view in the case, pointing to the fact that the world of banking has changed radically.

On paper, McKillen has a considerably stronger business than most heavily-indebted borrowers moving to Nama. Most of the 850 borrowers moving to Nama with €73 billion in loans are hopelessly insolvent.

McKillen is still paying his way. In aggregate terms, he is generating more than enough income on rent from investment properties in Ireland, the UK, France and the US to service the interest bill on €2.1 billion loans.

However, McKillen is underwater on some of his loans. The tricky matter of what his vast array of properties are worth in a market with few willing lenders and even fewer potential buyers, has left McKillen exposed. This means he is in breach of some of his loan covenants where he must keep his borrowings above a certain loan-to-value ratio.

This may be so, claims McKillen, but it doesn’t mean that he won’t be able to repay the loans. Two of Nama’s experts, Matthew Webster and Ian Goldsworthy of UK bank HSBC, have said McKillen should not be concerned about any guilt-by-association of having loans moved to a perceived “bad bank” agency, if they are well secured and being repaid.

Steven Seelig, the former International Monetary Fund official who has joined the Nama board, even suggested that McKillen could be better off in Nama as his banks don’t have sufficient capital or are under regulatory pressure to diversify into other lending.

Seelig also says that under the Government’s new plan for Anglo, McKillen’s loans would be moved to the new asset recovery bank which will not have sufficient capital for new lending.

On the opposite side, Nobel Prize-winning economist Joseph Stiglitz said Nama’s structure could destroy the value of good loans it acquires. “Such value-destroying transfers hurt the banks, the economy and, most relevant to this case, good borrowers such as McKillen. Nama has disrupted and may well continue to disrupt McKillen’s core long-term real estate business and it will have an adverse effect on the value of his assets and his ability to refinance loans,” said Stiglitz.

As for allowing McKillen fair procedures to argue his way out of Nama in advance, the agency has said if it afforded this opportunity to every borrower it would take at least a year and a half to hold all the meetings and many more years to transfer the loans.

The State argues in strong terms throughout its filings that the Government chose to set up Nama in the national interest.

McKillen is a massive borrower from the now predominantly State-owned banking system, accounting for €2.1 billion out of €73 billion in loans to be acquired by the State agency. As one of Nama’s hired experts in the case, Trinity College economics professor Dermot McAleese, said, even good borrowers are “bound to suffer some adverse collateral damage”.

This high-stakes case – which has crucial implications for the Government’s bank bailout measures – is pivoting on arguments based around the common good versus the good of an individual, and whether Nama is serving one to the detriment of the other, or whether that matters in a crisis.

LOAN AGREEMENTS: NAMA DEFENCE

OPENING NAMA’S defence in the action taken by Paddy McKillen, the Attorney General Paul Gallagher SC yesterday said that his case was based on the need to maintain his banking relationships on “all sorts of understandings”.

He pointed to breaches of loan-to-value (LTV) terms in loan covenants and the expiry of loans without repayment, which would deem his loans non-performing under the Nama legislation.

Court filings show that McKillen has been afforded significant flexibility in arrangements with his main banks, Anglo Irish Bank and Bank of Ireland.

According to Nama’s records, McKillen has borrowed €251 million from Anglo on the value of his 50 per cent share of the Jervis Shopping Centre in Dublin, yet this share had a market value of €118.5 million in November 2009.

The State agency said McKillen had also breached LTV limits on Bank of Ireland loans, including a loan of €24 million on a building at Place Vendome in Paris which had an LTV of 113 per cent against an agreed limit of 82 per cent.

On another transaction - the sale of a property on one of London’s prime shopping street, Bond Street – McKillen would only agree to sell the property if he received any proceeds over £15 million without disclosing the sale price.

Nama refused because he had more than £29 million in debts within that “collateralised group”.

The agency has also claimed that the expiry of a number of loans and breaches of loan covenants “has been the cause of some concern to Anglo Irish Bank”.