Resolving credit distress after COVID-19 – new articles and data from the Central Bank

Over the last fortnight, the Central Bank has published several articles and new data on trends and policy challenges relating to credit.

This includes articles on payment breaks for mortgages by Ed Gaffney and Darren Greaney and for firms by David Duignan and Niall McGeever, as well as enhanced statistics on mortgage arrears by David Duignan, Andrew Hopkins, Ciaran Meehan and Martina Sherman. The new data shows a “persistently high number of PDH [owner-occupier] mortgages that remain in long-term arrears some ten years on from the financial crisis”.

To coincide with a Central Bank Webinar on Distressed Debt on Monday 28 September, Fergal McCann and Terry O’Malley published an article on “Resolving mortgage distress after COVID-19: some lessons from the last crisis”. The article is presented as a “stock-taking exercise as COVID-related [payment breaks] begin to expire”. It draws on the lessons of the last decade, emphasising the need for early engagement and a focus on long-term sustainable solutions. The paper also provides rich new information on the financial position of borrowers as they engaged with the restructuring process over the last decade, highlighting the sharp falls in living standards that had been experienced by many. It also provides clear evidence of the role of deeper up-front payment relief in explaining lower re-default after modification Finally, it highlights the need for lenders and credit servicing-firms to put in place plans and capacity to help customers in financial distress.

Stimulus package amid pandemic could transform Ireland for the better

Paul Sweeney in The Irish Times here.

The General Court’s Ruling on ASI’s Head Office

Last week we wondered whether the General Court of the European Union would take a broad or narrow view of Apple Inc.  In it’s state aid finding the European Commission took a narrow view.  This is from the day the finding was announced:

As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its "head office" when this "head office" had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

The "head office" did not have any employees or own premises. The only activities that can be associated with the "head offices" are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission’s assessment, are the only profits which can be attributed to the "head offices".

As we said last week, while the key decisions that drove ASI’s profits might not have been not documented in ASI’s board minutes they were made outside of Ireland.  And here is segment of the courts’ ruling on this central matter:

(2)    Decision-making by ASI and AOE

303    With regard to ASI and AOE’s ability to take decisions concerning their essential functions through their management bodies, the Commission itself accepted that those companies had boards of directors which held regular meetings during the relevant period, and reproduced extracts from the minutes of those meetings confirming that fact in Tables 4 and 5 of the contested decision.

304    The fact that the minutes of the board meetings do not give details of the decisions concerning the management of the Apple Group’s IP licences, of the cost-sharing agreement and of important business decisions does not mean that those decisions were not taken.

305    The summary nature of the extracts from the minutes reproduced by the Commission in Tables 4 and 5 of the contested decision is sufficient to allow the reader to understand how the company’s key decisions in each tax year, such as approval of the annual accounts, were taken and recorded in the relevant board minutes.

306    The resolutions of the boards of directors which were recorded in those minutes covered regularly (that is to say, several times a year), inter alia, the payment of dividends, the approval of directors’ reports and the appointment and resignation of directors. In addition, less frequently, those resolutions concerned the establishment of subsidiaries and powers of attorney authorising certain directors to carry out various activities such as managing bank accounts, overseeing relations with governments and public bodies, carrying out audits, taking out insurance, hiring, purchasing and selling assets, taking delivery of goods and dealing with commercial contracts. Moreover, it is apparent from those minutes that individual directors were granted very wide managerial powers.

307    In addition, with regard to the cost-sharing agreement, it is apparent from the information submitted by ASI and AOE that the various versions of that agreement in existence during the relevant period were signed by members of the respective boards of directors of those companies in Cupertino.

308    Moreover, according to the detailed information provided by ASI and AOE, it is the case for both ASI and AOE that, among ASI’s 14 directors and AOE’s 8 directors on their respective boards for each tax year during the period when the contested tax rulings were in force, there was only one director who was based in Ireland.

309    Consequently, the Commission erred when it considered that ASI and AOE, through their management bodies, in particular their boards of directors, did not have the ability to perform the essential functions of the companies in question by, where appropriate, delegating their powers to individual executives who were not members of the Irish branches’ staff.

And to repeat this is what we said on here in 2016:

Even if these companies are not deemed to be tax resident in Ireland can it be established that their profits should be taxable in Ireland?  Is the presence of a branch enough to deem the profits of the parent taxable here?

There are a couple of ways of approaching this but the key aspect is the agreements granting the rights to use Apple Inc.’s intellectual property outside the Americas to these companies.  All of the licensing and cost-sharing agreements were negotiated and signed in the US, at board meetings which took place in the US, and by directors and key decision-makers who were exclusively based in the US.  None of the key risks, functions and assets that underpin the creation and ownership of the intellectual property had a connection with Ireland.


Court annuls Apple state-aid finding.

The ruling of the General Court is here (press release).  The Commission statement is here.

David McWilliams and Aidan Regan on using low interest rates

From Saturday’s The Irish Times, David McWilliams writes:

Luckily for us, there is no financial constraint for a craic bailout. The ECB has set interest rates to zero. The NTMA borrowed billions this week at negative interest rates. This means that money is free.

The State needs to spend when the private sector is saving, which is what is happening now. The country should issue a perpetual bond, as George Soros is advising the EU to do, or a 100-year bond as Austria did two weeks ago, to cover spending.

At zero interest rates and with the ECB ready to buy whatever the government issues, fiscal policy becomes monetary policy. This means the Government just issues IOUs, gets the money and can spend the money whatever way it chooses. A craic bailout should be first on the list.

And in the Sunday Business Post, Aidan Regan proposes:

Here’s how it works. The government issues a 20 year fixed interest rate bond that amounts to the equivalent of 10 per cent of gross national income. This equals around €30 billion. The Irish state could issue this type of long term bond tomorrow at effectively zero per cent. If you adjust for inflation, it would mean that the markets will pay the government to do it.

Taking this sum of money, the government would create a rigorously independent body to oversee the creation of a new national wealth fund. The board of the fund would employ various asset management experts to invest the money on behalf of the state. They would be mandated to generate a capital return of anything between 4-8 per cent per annum.

Basic mathematics would suggest that the probability of the Irish state generating a return greater than 0 is high. And anything above 0 means the state can pay off the debt while creating wealth and value for its citizens. If the compound interest return to the people’s wealth fund was 5 per cent, the Irish state could repay the debt issued to create the fund in less than 15 years. After this point, all capital returns go back to Irish society.

But more importantly, the state now owns the capital assets that it bought to generate the return. The Irish state has gone from being a debtor to a wealth owner. It has created value. If Apple or Amazon stocks go up, then so does the wealth of Irish citizens. This is because they now own a part of these profitable tech firms through their national wealth fund.