Anglo's plan for Quinn on rocky ground

 

ANALYSIS:Trying to reconcile all interested parties on a rescue of the insurer is proving very difficult

THE ALTERNATIVE plan proposed by Anglo Irish Bank to circumvent next Monday’s hearing to confirm the appointment of administrators to Quinn Insurance stands on rocky ground. The plan suggested by the State-owned bank, which is ultimately aimed at securing repayment of €2.8 billion in loans from the Quinn family, has many continuously moving parts to it and throws up as many problems as it attempts to solve.

“It’s like trying to herd cats,” said one well-placed source of the attempts to reach agreement amongst the various parties – the Financial Regulator, the Quinn Group, the group’s bondholders and syndicate of banks and the State-owned bank – on the proposed rescue of the insurer.

Anglo’s loans are secured on the family’s shares in the Quinn Group and their international property portfolio, putting the bank in the worst possible position – it has the largest exposure and the weakest security out of all the lenders owed €4 billion by the group and family.

“Anglo has the biggest exposure but the least strongest negotiating position in this,” said one source. In the event of the group’s collapse, which it has warned is a possibility if it loses its most profitable division, Quinn Insurance, Anglo would be at the back of the queue of creditors being repaid after the group’s 20-plus bondholders and the syndicate of eight Irish and UK banks.

The most likely outcome of a full administration would be the sale of Quinn Insurance to a much larger insurance company. As the Quinn Group and its most senior executive have said, this would mean that the Quinn family would be unable to repay Anglo’s loans.

This explains why the bank is frantically seeking an alternative to administration of the insurer.

The bank presented a broad outline of its plan to the regulator on Tuesday and will present a more detailed plan today, showing how the bank would be affected by taking effective control of the Quinn Group and its attempts to boost the solvency of the insurer.

The regulator has responded coolly to Anglo’s plan – not just because it would stretch the country’s credibility among international investors and the regulatory community if a bank, which itself had received a €12.3 billion State bailout, was allowed to bail out the largest Irish-owned insurer.

It would arguably be a bailout too far. The regulator would have serious reservations about a bank that is struggling to cope with its own substantial problems – for which a solution has yet to be approved by the European Commission – coming to the rescue of a struggling insurance company.

Then there are significant state aid hurdles set by the European Commission that must to be overcome if Anglo took effective control of such a large insurer, effectively requiring approval to become a State-backed bancassurer.

The bank would also be taking a share in the Quinn Group and an interest in its conglomerate of investments including cement and glass manufacturing, wind energy, hotels, pubs and golf courses.

The regulator would essentially have to sign off on Anglo’s plan twice – as both the banking supervisor and the insurance supervisor bearing in mind the future health of both Quinn Insurance and Anglo Irish before approving it.

The bank is trying to tick the various boxes that would allay the regulator’s concerns about Quinn Insurance: it would have to raise solvency ratios at the insurer to the regulator’s levels; remove the guarantees provided by the insurance company’s subsidiaries over the debts of the wider group; and change both the ownership and management of Quinn Insurance.

However, Anglo’s bailout of Quinn Insurance could throw up much more complex problems.

The bank is proposing to take control of the Quinn Group, restructure it and its debts, and bolster Quinn Insurance by putting in a new management team and ownership structure before eventually selling it off.

Anglo is understood to have assigned a value of €800 million to Quinn Insurance, but tentative approaches to the insurer’s provisional administrators from various parties have placed the value of the business at €300 million to €400 million at most.

The regulator would therefore be concerned Anglo is assigning too high a value to the insurer.

The bank has proposed taking control of the wider Quinn Group, potentially through options or warrants under which it would take outright ownership of the group if certain conditions were not met in future.

The bank would insist on Mr Quinn and his management team ceding day-to-day control of the group and while he might remain on as chairman of the group, this would only be a figurehead role for the founder of the 37-year-old business in relation to the insurer.

The warrants would enable Mr Quinn and his family to retain an economic interest in the group.

The difficulty for Anglo is that Mr Quinn must cooperate if its rescue plan is to work.

The trickiest part of the deal – which would likely meet the greatest public opposition – would involve Anglo taking on Quinn Group’s €1.2 billion debts to bondholders and the syndicate of banks. This would involved the swapping of corporate debt for Irish sovereign debt owing by the State through Anglo - bonds that could potentially fall under the Government guarantee.

In other words, the bondholders and banks would then be owed their debts by Anglo, not the Quinn Group.

However, given that this would be regarded as a more secure form of debt, Anglo may seek to apply a haircut on the loans as part of the deal. Obviously, the bondholders and banks are not thought to be keen and negotiations are continuing.

The bank may also have to indemnify against the group’s guarantees to the tune of €448 million to raise the solvency ratios at Quinn Insurance, though a wider debt restructuring could remove the guarantees in full.

Anglo will outline the impact of the additional risks to the bank under its plan when it meets the regulator today in a bid to sell it as an alternative to administration.

A well-placed sourced stressed that discussions between the bank and the regulator were not at an end. “There is a lot of persuasion yet to be done,” said the source.

Discussions are continuing between Anglo, Quinn Group executives, the bondholders and the syndicate of banks as they try to hammer out a deal that could avoid the road to administration.

Matters are complicated further by the regulator’s ongoing investigation at Quinn Insurance and these inquiries could yet move up a gear.

The regulator is understood to be keen to proceed to formal administration in the belief that it is the cleanest solution for Quinn Insurance leading to a potential sale of the insurer to a larger, more financially secure suitor.

Monday’s High Court showdown is fast approaching.