Warning banks face €1bn writedowns

A HIGH Court ruling in a recent examinership case could leave banks facing writedowns totalling more than €1 billion on loans secured against commercial property, two analysts say.

John Cantwell and Ciaran Callaghan of stockbrokers NCB said in a note published yesterday that the High Court-approved settlement in the Ocean Bar examinership case was a blow to the banks because it could cut the amount they can recover against secured loans in such cases.

Using the banks' own figures, the analysts assume that 15 per cent of construction and property loans are at risk, and that examinership could be used in 10 per cent of insolvency cases.

In that scenario, they calculate that the subsequent reduction in security for the three most affected banks would come to €447 million for Anglo Irish Bank, €415 million for Allied Irish Banks and €263 million for Bank of Ireland - a total of €1.125 billion.

Examinership allows insolvent companies to seek High Court protection from their creditors where they have a reasonable chance of survival. Examiners have up to 100 days to come up with a rescue package, known as a "scheme of arrangement". Under the legislation, secured debts can be "compromised" or reduced, and the difference between the full amount owed and the reduced figure is then treated as an unsecured debt.

In the Ocean Bar case, the pub's owner, Birchport, owed ACCBank €1.37 million, which was secured against the lease on the property. This figure was cut to €950,000, repayable over 15 years. The balance will be treated as unsecured debt, and the bank will recover 10 per cent of this figure.

Mr Callaghan and Mr Cantwell say established case law implied that loans secured on assets were secured for the full amount owed, and not a lower figure in cases where its value has fallen. "This new judgment is a blow to the banks because it potentially lowers their security in examinership situations, which are expected to increase significantly over the current downturn," they say. They expect more troubled businesses and developers to go into examinership over the next two years as the downturn hits home.