Business focus: Wall Street giant Cerberus faces scrutiny over appetite for bad loans

Michael Bow
Northern Rock collapsed in 2007 and five years later the government sold the mortgages to Cerberus: Peter Macdiarmid/Getty Images

Browsing the internet one morning, a hotelier noticed something familiar about the property up for sale on the website he was visiting: it was his hotel.

He knew his business had been in trouble for some time. His bank, Lloyds, had recently sold a bunch of loans backing the business to another company after he got into difficulty. Administration loomed but what he didn’t expect was how swiftly the new owner, Cerberus Capital, would call time on his business.

“He hadn’t been told he was going into administration yet, that’s when he saw his hotel,” said Alison Loveday, chief executive of law firm Berg, an associate of the anonymous owner.

“It’s an extreme example but Cerberus doesn’t want to get into a dialogue with these owners.”

Cerberus, a Wall Street titan founded a quarter of a century ago by former equities and debt trader Steve Feinberg and named after a three-headed dog in Greek mythology, is no stranger to controversy.

Dubbed the “dog that eats debt” by author Ian Fraser for buying bad loans purged from bank balance sheets after the financial crisis, the US firm owns thousands of UK mortgages and business loans, giving it a seat at the top table of the UK economy.

For some, including bank shareholders and mandarins in the Treasury, Cerberus is a useful foil, helping to expunge the worst excesses of the financial crisis from UK balance sheets.

For others, they represent a hard-driving Wall Street culture at odds with its role in the SME sector.

As its Wall Street ways bleed into the real economy and touch the lives of ordinary people — it has recently been linked to a bid for Co-op Bank — MPs and lawyers are raising the pressure on the group amid allegations of “aggressive” tactics with business borrowers and concerns about its structure.

Cerberus’s modus operandi is simple: buy loans banks don’t want at a lower price than their face value and recoup as much money as possible by trying to get the borrowers to pay them back.

Since 2010, more than 1.2 million people have been transferred to Cerberus, included customers from state-linked lenders like Lloyds, RBS, Ulster Bank and Clydesdale in the UK.

Billionaire from the Bronx

Born in the Bronx, “blue-collar billionaire” Feinberg rose from humble beginnings as a whip-smart equity and debt trader at Drexel Burnham in the Eighties to co-found Cerberus when he was just 32. He snapped up gunmakers like Bushmaster, leading some big US pension investors to disavow the investments after a spate of school shootings. The 57-year-old has nudged into politics, being one of the first Wall Street execs to back Donald Trump’s presidential bid. Worth a reported $1.25 billion, he’s tipped to serve in the Trump administration, potentially overhauling US security services like the CIA.

Perhaps, given its role as the world’s biggest debt collector, Cerberus could be forgiven for taking a clinical approach to dealing with bad debts.

Cerberus is owed about $80 billion (£64 billion) in total by these borrowers and had no hand in creating the loans, many of which were poorly crafted in the pre-2007 credit bubble days.

Borrowers blame the banks, too, but lawyers have raised concerns about the way Cerberus comes after people for the money they are owed.

“Our clients describe them as very aggressive and intimidating,” says MBM Commercial partner Cat Maclean, who represents around 20 former Clydesdale Bank customers. “There’s a lot of moving of the goalposts at the very last minute. It’s extremely difficult to do anything but comply.”

Peter Levaggi, partner at Charles Russell Speechlys, has represented about 40 clients against the group and said: “They are difficult to deal with, they want to get as much as they can. They think the banks are all pussycats and terrified of criticism. Cerberus is extremely robust in comparison.”

Commercial lending is outside the bounds of Financial Conduct Authority regulation, meaning contracts can have a dizzying variety of terms and little protection for business borrowers.

Cerberus tends to use the myriad quirks in business contracts to its advantage, lawyers say, leaving borrowers with less flexibility than if they were dealing with a normal bank.

Cerberus said it prefers consensual resolution with the vast majority of disputes, but others disagree.

“Cerberus is not interested in building a relationship or having a potential commercial discussion,” says Loveday. “It doesn’t provide overdrafts and it’s not a bank so it’s not regulated in the same way a bank is.”

Most borrowers who owe money to Cerberus deal directly with an independent third-party company, which are regulated by the Financial Conduct Authority. But some borrowers do come face to face with Cerberus’ UK employees, based near New Bond Street.

Hotel Horror

David Knights, former co-owner of a five-strong South-East hotels chain Hollybourne, says the business had a £16.6 million business loan from Lloyds Bank when it was sold on without its knowledge to a Cerberus subsidiary in December 2013 for a figure thought to be around £10.5 million. Knights said they were called to a meeting in London and told in no uncertain terms that the money needed to be repaid immediately.

“I’ve never been in a meeting like that in my life and I’ve had plenty of dealings with funding people,” he says. “It was not a very pleasant meeting — it felt very intimidating. One of them said, ‘You have to understand, you will go home and think about this tonight, all night, probably not sleep and in the morning you’ll be thinking about the same thing. I will not think about this until the next time we meet’.”

Knights says he offered to pay Cerberus £12.1 million to retain control but the request was refused, forcing Hollybourne into administration. Cerberus, as main creditor, appointed its own choice of administrator.

The business was subsequently sold on. Cerberus declined to comment.

The US giant employs about 40 people at the office, to run the portfolios and collect as much cash as possible to increase returns for investors.

People who have worked at the group describe a fast-paced, high-pressure environment with each portfolio of loans typically run by a single manager. “It is very much an aggressive, performance-driven culture in terms of achieving cash and returns objectives set by the fund,” says one former employee.

Another person who has worked with the firm said: “They are ruthless. There are some very good people there but for most of them it’s just a question of numbers and nothing to do with the people — all they’re interested in is a return.”

It’s not just business lending under the microscope — homeowners who have their mortgages with Cerberus have also prompted concern.

Former customers of Northern Rock were turned over to Cerberus in 2015 when the Government’s UK Asset Resolution sold a £13 billion book of old Rock mortgages to the group, who then sold £3.3 billion worth on to TSB.

Despite the National Audit Office calling the sale as “value for money”, a follow-up study by the Public Accounts Committee (PAC) found Cerberus-owned customers were paying relatively more for their mortgages than TSB customers.

Cerberus owns the mortgages through an independent company called Landmark, which unlike TSB is not a deposit-taking bank and is funded through the wholesale markets.

Landmark therefore failed to feel the benefit of last August’s 0.25% Bank of England base rate cut, although it did eventually cut rates by 0.15% two months later.

“By random chance if you were assigned to Cerberus you would end up paying a different interest rate,” said PAC chair Meg Hillier MP. “That to us seems really unfair and no customer could have predicted this.”

The PAC, which took evidence from Cerberus in September, also raised concerns about Cerberus’ complex tax structure — its funds are routed through the Cayman Islands and then the Netherlands — after a National Audit Office report indicated the Treasury could have made £250 million extra in tax receipts over five years if a UK bank had snapped up the Granite portfolio.

“There were plenty of finance organisations with slightly less complicated tax arrangements that were in the market,” Hillier says.

The Government says it would go against EU competition law to take into account tax jurisdictions, while Cerberus says it was “completely transparent” about its tax arrangements, arguing the government has got £53 million of tax from the sale so far.

Cerberus says it complies with all tax laws and is a good corporate citizen.

Last week the Government sold Bradford & Bingley’s buy-to-let mortgage loan book that Cerberus was reportedly chasing.

Prudential and Blackstone won the auction and, according to sources, the Government decided to force the buyers to pledge to adhere to its fair treatment of customers rules.

A sign, perhaps, that the issues raised by lawyers and MPs are percolating through to the watchdogs policing the UK’s financial system.