The collapse of Icelandic lender Kaupthing has prompted a long, complex and legally fraught clash between the agency and the property tycoon
At the centre of Vincent Tchenguiz’s dispute with the Serious Fraud Office is Britain’s largest portfolio of residential freeholds. Worth about £2bn, this business formed the core of his empire and entitled a maze of UK and offshore companies he controlled to regular inflows of small but dependable ground rent payments from hundreds of thousands of leasehold homeowners in Britain.
In March 2008 Tchenguiz pledged shares in the offshore holding companies controlling these assets to Kaupthing as collateral in two connected deals.
The first batch of pledged shares went to plug what was said to be a £200m shortfall in an existing loan agreement between the bank and the business interests of Vincent’s brother Robert. Robert was Kaupthing’s largest customer, receiving loans of £1.8bn – borrowings used to build big stakes in Sainsbury’s and pub group Mitchells & Butlers. Both these investments had fallen sharply, leaving Robert deep in negative equity with the bank.
The second batch of shares were put up by Vincent as security for a £100m loan to his own operations. Kaupthing administrators have said some of this advance went to pay off loans to other banks, but £40m represented the repayment of a loan made by Vincent Tchenguiz personally to an investment vehicle linked to him.
Asked for comment on these assertions, Tchenguiz said: “The purpose of the loan was to provide working capital for Tchenguiz Family Trust group companies.”
Administrators appointed to run Kaupthing after the bank collapsed fired executives who had been dealing with Vincent Tchenguiz. On closer scrutiny of the shares put up as security, the administrators appear to have been shocked by the terms the bank had been prepared to accept. What concerned them most was the amount of senior loans piled upon Vincent Tchenguiz’s property empire.
Deutsche Bank, Bayern LB, HBOS, AIB and Merrill Lynch were all priority creditors. After accounting for these debts, how much value as security could fairly be ascribed to the holding company shares pledged by Tchenguiz to Kaupthing?
Bank paperwork showed administrators that Kaupthing’s former bosses accepted that shares put up to repair the security shortfall in the bank’s loan to Robert Tchenguiz had a value of £222m, based on a complex calculation using projected cashflows for 150 years and assumptions about likelyinterest rates and inflation over the period. This approach to valuing the security appeared to baffle administrators, despite Tchenguiz’s claims it was normal practice and had been carried out by experienced actuarial firm Oliver Wyman.
In a civil court battle, since settled, with Vincent Tchenguiz companies, Kaupthing administrators have argued that a market-based valuation of the pledged shares as security to help his brother “was nil”. Tchenguiz dismisses this assertion as an untested opinion, noting it was put forward when administrators themselves stood accused by him in that lawsuit of failing to understand how to preserve value in the property empire. “It suited their purpose,” he said, noting that many senior figures involved in the administration had departed.
Furthermore, administrators have suggested that rather than being well positioned to act as a white knight for his brother’s unravelling investments in early 2008, Vincent Tchenguiz’s own business interests were under pressure. In civil court filings, lawyers for the administrators stated: “By late January 2008 companies owned directly or indirectly by the Tchenguiz Family Trust needed [a] loan to alleviate defaults arising and to be able to repay overdue debts that could not be refinanced by existing lenders.” In response, Tchenguiz said: “This is merely their opinion. Bear in mind that in 2008 there was a global credit crunch.”
As well as trying to understand the collateral deals, administrators faced a headache when they attempted to enforce control of the security in question.
A month after Kaupthing collapsed, administrators gave notice that the loan to Robert Tchenguiz’s empire had defaulted and was to be terminated. As a result, Grant Thornton was appointed receiver over the relevant property holding company shares.
But, the Tchenguiz camp has claimed, the appointment of receivers was disastrous, triggering several senior lenders to call defaults on their priority loans. In a bitter, costly legal dispute, Tchenguiz blamed the bank for destroying £1.5bn of value in the business. The row ended in a confidential out-of-court agreement and the property tycoon has subsequently put the ground rent portfolio up for sale. Lawyers for Tchenguiz suggested the forced sale was triggered by SFO meddling.
Drawing on information from Grant Thornton and others, the SFO applied to the high court in March last year for a warrant to search Tchenguiz’s home and offices. The judge had been impressed by the SFO’s case controller, who was described as having an “encyclopaedic knowledge” of the case.
In truth, however, the facts the SFO had presented contained several errors, most shockingly a claim that Tchenguiz had misrepresented the value of security pledged to Kaupthing by not declaring existing senior loans to his freehold property empire. The most cursory of checks ought to have shown this was not the case.
In his fightback against the SFO raids, lawyers for Tchenguiz have told the courts: “The SFO have caused serious and ongoing disruption to the operation of companies associated with Vincent Tchenguiz … By way of example, lines of credit have been disrupted, adversely impacting the group’s ability to trade. The [Tchenguiz Family Trust] group has been forced to enter into a process of a £2bn restructuring and sales of its core business.”
But while Lord Goldsmith tells the high court there is nothing at all out of the ordinary about Tchenguiz’s dealings with former Kaupthing bosses, it is clear that this is most definitely not the view put forward by administrators acting for the bank’s creditors in their battle last year with the property tycoon in the civil courts.