Economics 28/07/09: NAMA & Liam Carroll's Case

Of course, the news is in - NAMA got Cabinet approval around 7 pm tonight. This does not change much - we still have a battle to wage to ensure that proper taxpayer protection and risk management, as well as investment strategies and stop-loss rules are put in place, but we are now one step further away from seeing it done.


Per RTE report (here), the High Court has delayed its decision to Friday afternoon on an application by six companies controlled by property developer Liam Carroll to have an examiner appointed to them. There are several significant implications of this for NAMA.

First: it is now clear that any decision will hang over the weekend, providing for increased uncertainty in the banks shares valuations in the days before Monday. Irish banks shares are currently valued as a call option on success of NAMA. If Carroll is not granted an examinership, this will open up a floodgate for the banks to race to force the receivership on other developers in a hope of salvaging whatever value they can under the prospect that NAMA will distort the seniority structure of debts. This, in turn will act to reduce the scope of assets left for NAMA to pick off the banks balancesheets and will force the banks to write down the loans under receivership. The resulting decrease in the future valuation of the big 3 Irish banks will translate in the fall of the value of a call option, thereby reducing the price of the banks shares. Forcing the Carroll decision to Friday afternoon leaves the markets in a serious uncertainty for the next 3 trading days – an uncertainty where anyone staying long in Irish banks shares has a 50:50 chance of not coming out alive, comes the opening bell on Monday.

Second: about that 50:50 chance. Reading into RTE report, one gets a serious sense that examinership might be denied to Carroll. “Senior Counsel Michael Cush said the companies, and the wider Zoe group of which they are a part, had historically been very successful property development businesses. But he said more recently they had experienced difficulty due to credit problems, the downturn in the property market, and problems with investments. In particular, he said difficulties arising from the development of a new headquarters for Anglo Irish Bank at North Wall Quay in Dublin had created significant difficulties. He said Vantive Holdings is now clearly insolvent, as are three other companies related to it. If liquidated, he said, the estimated deficiency of the group as a whole would be over €1 billion.”

This indicates that indeed, aside from historical record, there is no chance for a recovery of the business and that receivership, not examinership should be applied.

Mr Cush also said that “following the drawing up of a business plan in 2008, seven of the companies' eight banks had supported the continuation of the businesses. He said this had required huge forbearance from the banks. Part of the plan, he said, had seen AIB and Bank of Scotland Ireland make available additional finance to pay back third party unsecured creditors, which had since been done. Another feature of the plan saw seven of the banks agree to a moratorium on repayment of the loans and the rolling up of interest. But he said ACCBank, which is owed €136m, or 10% of the six companies' bank debts, had taken a different view, and its intention to have the companies wound up had prompted the application for examinership.”

This is also significant not only because it is showing the scale of banks’ willingness to roll over for large developers – itself hardly a laudable practice – but because it shows clearly that currently insolvent businesses continue to accumulate liabilities (rolled up interest and fresh demands for continuity funding) that are simply cannot be repaid, ever. Again, examinership is not warranted here, since loss minimizations should require an immediate appointment of a receiver to wind down the companies. In fact, this claim invalidates the ‘hardship’ argument about receivership resulting in €1bn loss on current obligations, as it shows that this loss is only going to increase under the case of examinership that will not be able to introduce any chance of reducing the probability of such a loss.

Mr Cush “said that given time, forbearance of the banks (none of which is opposing the examinership application) and the orderly disposal of assets, there has to be a prospect of survival for the companies. He also pointed out that the companies are not envisaging having to write off any of the money they owe the banks, and intend repaying in full.” This is simply impossible under the conditions outlined by Mr Cush in previous paragraphs.


“The court also heard that since the new business plan was put in place [in 2008], the companies had sold 39 residential units, worth €11.7 million.” Which, of course puts these companies cash flow at maximum €23mln pa, with expected loss of €1bn and the combined debt of companies of ca €1.4bn. Now, at 11% yield, the cost of servicing this debt will be around €154mln pa – hardly a sign of ‘survivability’ of the companies.

“Summing up, Mr Cush said it was a most unusual application for examinership as it was not being opposed by any creditors, no debts were being written down, and 90% of creditors were co-operating, all of which must satisfy the requirement for there to be a reasonable prospect of survival.” What Mr Cush neglected to mention is that the lack of opposition by the debtors is simply a jostling for seniority between Irish banks, not a reflection on survivability of the firm.


Carroll’s case shows conclusively that NAMA will transfer liability of the banks and developers onto the taxpayers that is well in excess of the original borrowings. Rolled up interest, operating capital injections and other soft budget constraints for insolvent businesses, like Carroll’s empire were accepted by the banks solely on the anticipation of a state bailout (otherwise these banks actively engaged in destroying their shareholders’ wealth by undertaking knowingly reckless decisions). Once again, the markets have neglected this risk. They might have to reprice that call on Irish banks shares now, or risk being repriced by the more proactive traders comes Monday.