Cantillon

Inside the world of business

INBS gets top mark for speed but nil for profit share deals

IRISH NATIONWIDE Building Society is regarded as one of the bad boys of the recent property boom, over-extending itself as a savings and home loans operation by moving into the heady world of development.

The building society is just weeks away from taking a capital hand-out of up to €2 billion from the Government to stay in business and fill the hole created by its development lending.

Some €8.5 billion to €9 billion in loans, more than 80 per cent of the society’s loans, are heading into the National Asset Management Agency (Nama), leaving behind a shell of €2 billion in home loans and €5 billion in deposits.

However, the building society’s new management team, led by chief executive Gerry McGinn, has won plaudits for being among the best in class. Irish Nationwide has been one of the better lenders in getting paperwork on its loans together, as well as completing valuations and legal due diligence for the first loan transfers to Nama.

But this may not help its case when it comes to reducing the so-called “haircut” on its loans.

Nama is understood to have taken a very negative view of the various profit shares that Irish Nationwide has taken on some loan deals.

The building society’s former chief executive Michael Fingleton was, in the good times, adept at extracting a profit share or equity component in a successful development project.

However, Nama has made it clear that it will value these at nil when assessing the society’s bespoke loan arrangements with some of its biggest borrowers – not that there is any prospect of them turning a profit in the current climate.

Cold climate for baguettes

THE KNOCK-ON effects of frozen credit markets on even financially strong Irish companies such as bakery group Aryzta continue to be chilling, judging from comments made by Aryzta chief executive Owen Killian yesterday.

While its interim results show an operation with reducing levels of debt, decent cash generation and a proven ability to refinance the debt it does carry, Aryzta has not been immune to the stalemate in credit availability.

This is because its direct customers – the convenience stores and food service operators that sell its par-baked baguettes and pastries under labels such as Cuisine de France – have been starved of the loans they need to “maintain and develop their consumer-facing investment”, as Killian put it. In English, this means they’re being denied the money they need to make their stores attractive to passing carbohydrate-craving consumers. It also means that it’s much more difficult for a company such as Aryzta to convince more outlets to install the ovens they need for finishing off par-baked products. For the bakery group, the relationship is clear: displays of freshly-baked goods drives consumer footfall, which in turn drives demand for rustic-styled rolls and sweet viennoiserie.

But when potential customers postpone investment decisions and existing ones are forced to put off upgrades, inevitably the product offering, like the bread, goes stale.

Little sympathy for builders

THE CLAIM made by the Construction Industry Federation that Government spending on infrastructural projects has declined dramatically is hardly a major surprise. At a time of unprecedented pressure on public expenditure, State investment in public infrastructure is bound to take a hit, despite the Government’s insistence that it is continuing to invest.

Unfortunately for the CIF, its claim that employment in the sector is plummeting – while true – will elicit little sympathy. The construction-driven boom-to-bust economy and the perceived excessive salaries in the construction sector at the height of the Celtic Tiger, means there is little sympathy for builders.

The CIF also lost some credibility earlier this month, after it emerged that its estimates that there were 35,000-40,000 excess new housing units in the state, conflicted dramatically with two reports by Maynooth and UCD which put the figure closer to 300,000-plus.

Nonetheless, the CIF does have a valid broader point to make. Investment in infrastructure is crucial to economic development and the Government does appear to be broadly committed to the NDP, although it is expected that the plan will be inevitably reconfigured.

What the CIF needs to accept is that “infrastructure” is now as much about broadband and digital infrastructure as roads and bridges. The CIF is right to lobby for continued capital investment but in the future economic landscape, the construction lobby is unlikely to play the same central role that it once did.

TODAY

The National Treasury Management Agency holds the third of its monthly auctions of Government bonds, looking to raise up to €1.5 billion.

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