Cantillon

Inside the world of business

'Wild west' tag reflects badly on Dublin

It would be an exaggeration to say that the Irish regulator has got a clean bill of health in the investigation in the collapse of Sachsen Landesbank by the Saxony state prosecutor.

What the state prosecutor seems to be saying is that the fault ultimately rests with the board of the bank in Leipzig because they did not know or did not care what the bank’s capital market arm in Dublin actually did and the the risks involved.

In the event it turned out that the activities that its Dublin bank was involved in – borrowing short to invest long in US asset-backed securities – was so risky that it brought the whole bank down when the credit markets froze.

If the Irish regulator was at fault it was for allowing banks such as Sachsen LB to carry out this sort of risky activity in Dublin in the first place.

This was just the another manifestation of the light touch or principle-based regulation which underlay their wider failure to rein in the domestic banks.

But in the case of Sachsen LB the damage was mitigated by the guarantees to the Irish subsidiaries by the German parent which where in effect underwritten by the German state. As a result the losses at Sachsen LB’s Irish arm – which stand at €429 million – were borne by the German tax payer.

It’s not really enough to negate the “wild west” tag that has been given to Dublin in international banking circles, much to the annoyance of the numerous well run and sober banks operating in Dublin.

It is a helpful bit of damage limitation. But in another way what is going in Germany actually highlights the failure of the Irish regime all the more.

The 556-page study into Sachsen LB commissioned by the state prosecutors is part of a case to hold the board of the banks to account for their failure to understand what the bank was doing and the risks involved.

German law is obviously different to Irish law but the Germans would appear to believe that a case can be brought against the directors.

This is is in marked contrast to Ireland where it would appear that nobody thinks that any sort of action can be brought against the directors of AIB, Bank of Ireland, Irish Life and the EBS for what they allowed to happen on their watch.

Eircom doesn't compare too badly

When it comes to Eircom things are often not what they seem, for good or ill. For example, you’d be forgiven for thinking that the company it is a complete basket case given that it’s currently trying to cut 2,000 staff from the payroll having only just emerged from examinership with reduced debts.

That doesn’t tell the full story. A comparison of latest annual reports shows that Eircom actually has the highest Ebitda margin when compared with telco giants Telefonica, BT and France Telecom.

Eircom’s Ebitda margin was a healthy 36 per cent in the year to June 2012, the year in which it emerged from examinership. This compared with a margin of 32 per cent at both Telefonica (owner of mobile operator O2) and BT, and 34 per cent at France Telecom.

Ebitda is effectively the operating profit before interest costs and other finance charges are stripped out. That’s the rub with Eircom. Its Ebitda is being eaten up by interest costs associated to its debts.

The Irish company had net debt of €2.3 billion at the end of June, which was 4.3 times its Ebitda. This is a high multiple in the current constrained financial climate.

Of the quartet, BT is best in class with a debt multiple of 1.5 times with Telefonica at 2.6 and France Telecom at 2.8.

These figures give context to the comments of Eircom’s former chief executive Paul Donovan who, before departing the company, warned that its debt pile post-examinership would still be too high.