Cantillon

Inside the world of business

Grey market leaves One51 in the shade for time being

ONE51’S RESULTS for 2009 were something of a mixed bag. A 13 per cent drop in earnings is not calamitous in the context of the collapse in the Irish economy and global markets last year.

Its margins held up and the investment group managed to shave €49 million off its net debt, a prudent move that gives it covenant headroom with its lenders.

But the results call into question Philip Lynch’s decision to invest in two listed companies, Augean and Irish Continental Group (ICG). Lynch has made unsuccessful runs at both in the recent past and One51 took a €42.5 million hit relating to the fall in value of its holdings in these groups.

ICG’s share price has recovered this year and the ferry company appears to be in good shape financially. It is also kicking back good dividends to investors and is rid of Liam Carroll’s block stake. But One51 paid more than €20 a share so it has some way to go before it gets its money back.

British hazardous waste group Augean issued a profit warning this year and One51 was diluted by a placing last year.

Challenges also face its operating units. Breadmaker Irish Pride operates in a cut-throat market, while trade through Greenore Port in Co Louth is down.

Its recycling businesses have also suffered from a softening in metals prices. At least the future for its renewables business appears brighter.

Davy yesterday put a 54 per cent premium on the stock, with a price target of €4.30. This is a “sum-of-the-parts” valuation.

The problem is that One51 trades on the grey market, which can be highly illiquid in times of recession. Limerick businessman John Hegarty is currently trying to shift seven million shares at €2 each, without much success. On that basis, it will be some time before shareholders see €4.30.

Endowment mortgage woes

AS THE Irish banks struggle to extricate themselves from the disastrous outcome of their reckless lending during the property boom, the problems of a previous era returned to haunt them this week.

A Dublin couple were awarded damages in the Circuit Civil Court as a result of what the court decided was negligence in the advice given to them back in 1991 when they took out an endowment mortgage.

Simply put, Mr Justice Matthew Deery preferred their version of events – that Bank of Ireland had advised the now pensioner couple that an endowment mortgage would deliver better returns and more security than the more traditional annuity (repayment) mortgage.

He said documents failed to support the claim of the local bank manager that he had warned them about the downside of an endowment mortgage.

In an endowment mortgage, a homebuyer invests in a life policy that is designed to meet the capital sum owing at the end of the term. Monthly payments meet the interest bill and the life policy premium. The office of the Financial Regulator has previously told an Oireachtas committee that, between 1989 and 1992, endowment mortgages accounted for more than a third of all homeloans approved in Ireland.

Despite the subsequently expressed misgivings on the efficiency of endowments in meeting their targets, many people held on. Assuming an average 20-year mortgage term prevalent at the time, a large number of these have been maturing since last year. Lawyers in the case before the courts this week estimate that hundreds of similar cases are working their way through the legal system.

Bank of Ireland says it intends to appeal the verdict to the High Court but, given the judge’s comments on the documentation in this case – and the more general recent criticism by the judiciary of bank documentation on loans during the boom years – banks could be facing another sustained period of morale-sapping adverse publicity even if the sums involved are minute by the standards of more recent crises.

CIF’s built-in pleas

BECAUSE INDUSTRY lobby groups always argue that what’s good for their business is good for everyone, the rest of us are always going to react with healthy scepticism.

The Construction Industry Federation (CIF) is no different, except its arguments face more cynicism than usual as many believe builders have had too much influence as it is.

However, at this stage the CIF is lobbying the Government for the sake of survival rather than anything else. When it comes to building, the State is the only show in town, but the rate at which it and its various public bodies are beginning construction projects is slowing rapidly.

With few new projects coming on stream to replace those that are now almost complete, more job losses and closures are inevitable.

More than 200,000 direct and indirect jobs have been lost in the industry since those numbers peaked at 400,000 in early 2007. Even the CIF accepts that this shake-out had to happen. But it wants the bleeding to stop, and sees building that are, on the face of it, necessary public projects as the best way of achieving this. Essentially it’s the “good for us and everybody else” argument: we need the infrastructure, the builders need the business.

It has some merit. But the emphasis should be on the fact that it is the rest of us who need these things, and not on the fact that builders need them to stay in business. If we maintain that perspective, we should even get a good deal; after all, these people are desperate for the work.

NEXT WEEK:The Organisation for Economic Co-operation and Development, which counts most of the world's developed economies among its members, holds its annual forum and ministerial meeting in Paris from Wednesday, at which it will release its latest economic outlook.

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