ENGAGEMENT BETWEEN EBS and Irish Nationwide has moved up a gear with the completion of a draft due diligence report by PricewaterhouseCoopers (PwC) outlining the financial details of the proposed union of the two building societies.
The draft report which will now be discussed by the boards of the two building societies in consultation with their auditors will lay out a road map for the planned union.
It has been confirmed for the first time that EBS, the larger of the two mutuals, will absorb the Irish Nationwide business and the bigger society has taken the lead by compiling draft heads of terms for the proposed deal.
The transaction will involve EBS taking over Irish Nationwide through a so-called “transfer of engagements”. This will see the remaining €2 billion loan book at Irish Nationwide – following the transfer of €8 billion of its loans to the National Asset Management Agency (Nama) – and retail deposits of more than €4 billion moving on to the €20 billion EBS balance sheet.
The draft document sets out the main areas where the two lenders must reach agreement and will eventually lead to formal, contractual documentation being compiled and agreed by the parties.
Formal discussions between EBS and Irish Nationwide on a potential union of the building societies began before Christmas at the instigation of the Government.
Discussions between the two sides are due to intensify over the next four to six weeks as both institutions start transferring the first loans owing by the top developers into Nama, triggering capital requirements for both lenders.
The loans of the 10 most heavily indebted developers must be transferred by February 12th, though banking sources stressed that this deadline may move out depending on the pace of the loan transfers.
The first transfers are expected to lead to a capital requirement for EBS and Irish Nationwide as they prepare their 2009 financial results over the coming months.
The two building societies are expected to require up to €2.4 billion in capital from the Government to absorb the losses incurred on the discounted sale of property development loans to Nama.
Irish Nationwide requires a substantial capital injection to meet the shortfall on loan write-offs incurred by the financial institution in the 2009 financial year.
A PwC team, led by head of transaction services Denis O’Connor, has examined the financial records of both EBS and Irish Nationwide to assess the loan impairments at both institutions and the likely capital requirement.
PwC has been engaged by the Department of Finance to assess loan losses and the capital needs across the banks since the height of the financial crisis during 2008.
The accountants are thought to have provided a range of figures which will then be discussed by each building society with their auditors before the final capital injection from the Government is eventually determined.
The two parties met last week to kick-start merger discussions again following the Christmas break and last month’s approval by members of the two building societies to issue “special investment shares” to the Minister for Finance in return for the required Government capital injection.
EBS chief executive Fergus Murphy and director Emer Finan are leading the discussions with Irish Nationwide chief executive Gerry McGinn and chief financial officer John McGloughlin.
EBS is being advised by a team from NCB Stockbrokers, managed by the firm’s head of corporate finance Liam Booth, and a team from KPMG, which is managed by the accountancy firm’s head of corporate finance Keith Browne.
Irish Nationwide is being advised by Goldman Sachs and a team led by London-based corporate financier John Brennan, who is working with senior executive Hugo McNeill on the deal.
