Cantillon

Inside the world of business

No credit for being a semi-State

THE COLLATERAL damage from the State’s tumbling credit rating has spread to the semi-State sector with the downgrading of Bord Gáis to Baa1 from A2.

The company now receives no “uplift” from being owned by the Government and is judged on a stand-alone basis. It is a sobering moment indeed when the implicit guarantee of State ownership is judged to be worthless.

The outlook for the rating is negative, with Moody’s flagging the possible further deterioration of the Government’s finances and the possibility that it might be broken up or sold on foot of the ongoing review of State assets.

This is presumably meant as a warning shot across the bows of the review group headed by Colm McCarthy which is due to report by the end of the year. What goes for Bord Gáis presumably holds for other heavily indebted State companies such as the ESB and the DAA.

But perhaps the most perturbing aspect of the Moody’s review is that it holds out the prospect of Bord Gáis – and presumably the ESB and the DAA – enjoying a higher credit rating than the sovereign over the medium term.

This is because the regulatory structure may prevent the Government doing what governments normally do with state-owned utilities when the exchequer finances are under pressure: make them cut prices and squeeze more taxes and dividends out of them.

Such an outcome would represent the ultimate “triumph” for a regulatory regime that seems to act in the interests of every stakeholder except the consumer.

An easy way to dodge the bonus backlash

On December 1st the Minister for Finance answered a parliamentary question about bank bonuses. In the case of AIB there was a fairly detailed disclosure of amounts paid and in the case of Bank of Ireland a rather vague reference to payments to a small number of people.

The AIB bonuses triggered a wave of public anger that provoked a Government that has been scrupulous to the point of idiocy about respecting process and governance in its dealings with the banks to threaten to collapse AIB if it paid them.

The Bank of Ireland payments failed to impinge on the public consciousness until last week and even then in a much more subdued fashion.

Bank of Ireland – which is also dependent on the taxpayer for its survival – simply refused to answer any questions. The Government has sought a report from Bank of Ireland about one reported payment.

The disparity between how AIB and Bank of Ireland have been treated over the bonus issue indicates that the Government is blind to the ethical issues at the heart of the controversy and continues to be bullied by the banks it has rescued.

The nuclear response that eventually ensued in the case of AIB showed the extent to which public reaction caught them off guard and forced their hand.

But it seems there is only so much public anger to go round – even when it comes to bonuses for bankers – and Bank of Ireland had dodged a bullet for the time being.

Seasonal goodwill only stretches so far

PITY IS not something most people feel when they consider the actions of senior Anglo executives but if you were feeling particularly seasonal you might feel a twinge of it for finance director Willie McAteer.

McAteer used his 3.5 million shares to back a large loan he had from Bank of Ireland but the value of the shares, reportedly, had to be 1.5 times that of the loan.

When the share price began to go south during 2008, the prospect arose of McAteer having to sell his stake. It appears his chairman Seán FitzPatrick and his chief executive David Drumm played roles in having a loan issued to help him settle matters with the Bank of Ireland.

As the bank’s 2008 annual report disclosed, the loan was backed by the shares but was otherwise non-recourse. By the time the annual report was published, all three bankers had retired and the loan was now full recourse.

The report did not name the directors who had loans but the following paragraph referred to McAteer.

“A loan on non-recourse terms to a former director of €8 million (2007: €nil) secured on ordinary shares in Anglo Irish Bank Corporation plc. The facility in respect of this loan has been renewed since 30 September 2008 on a full personal recourse basis. Under the Anglo Irish Bank Corporation Act 2009 . . . all of the Bank’s ordinary share capital was transferred to the Minister for Finance.”

In other words, the shares were now worth nothing. But before we get carried away, we should also consider this looks like another loan of the bank’s money to support the bank’s share price, with the person taking out the loan not taking any associated risk. This sort of practice brought down the bank and banjaxed Ireland.

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