Boom-era debts take toll on big-name builders

ANALYSIS:It was a year of drama for the construction industry as many struggled to survive

THE HAEMORRHAGE of the building and property businesses continued unabated in 2011. Figures compiled by insolvency specialists Kavanagh Fennell show that by the beginning of December, builders accounted for 379 of the 1,495 companies that had gone bust over the first 11 months of the year.

Most were smaller and medium-sized operations, but 2011 claimed a number of big names, not least McInerney Holdings, the century-old home building specialist whose hopes of a venture-capital backed rescue expired in July after an examinership that lasted almost 11 months.

McInerney lost its appeal in the Supreme Court against an earlier High Court decision to refuse a rescue plan put forward by examiner Billy O’Riordan of PricewaterhouseCoopers. The plan had involved a €48 million investment by US investor Oaktree Capital.

The case went through a series of twists and turns and broke new ground in the interpretation of the law, as the High Court found that an examiner can, in theory, force secured creditors to settle for a figure less than the amount they are actually owed.

This had never been properly tested in court, as in previous examinerships, secured creditors had agreed to a haircut as part of the final rescue plan. While the case may have established the precedent, it was not much good to McInerney as the courts found that the rescue plan – or scheme of arrangement, to give it its full title – was unfairly prejudicial to Belgian-owned KBC, one of three banks owed €113 million.

The result was that the trading companies were placed in receivership, giving the banks control over their assets, which largely consist of undeveloped building land that the group had originally earmarked for house building.

Then, at the end of July, rebel shareholder David Nabarro managed to rally enough support to reject the board’s proposal to wind up McInerney Holdings plc, which was effectively a shell with no assets. Nabarro acquired 21.45 per cent of McInerney through the winding up of contracts for difference over its shares, which were held by Seán Quinn. He launched a “Save McInerney” campaign as the examinership process was nearing its end.

Every effort was made to find an equitable resolution for shareholders and to scrutinise the dealings between the group and the now defunct Anglo Irish Bank. He was co-opted on to the board and shareholders are presumably waiting eagerly to hear details of his next move.

By contrast, another specialist house builder, Manor Park, met its end more quickly and quietly. In late October, Bank of Scotland appointed Tom Kavanagh of Kavanagh Fennell to the company at the request of the directors. The company, owned by businessman Joe Moran and his family, owed the bank €170 million. The debt, combined with falling property values and slow sales, proved too much for the business.

In May, Ulster Bank appointed Kieran Wallace and Cormac O’Connor of KPMG as receivers to the Elliott construction group, which owed the financial institution €120 million. Creditors had been closing in on the Cavan-based company for some time and at least one was known to have taken steps towards seeking a winding-up order in the High Court before the receivers moved in.

In Cork, State assets agency Nama and Bank of Ireland appointed Paul McCann of Grant Thornton as receiver to key companies in the Bowen Construction group in July on foot of a number of secured debts. The High Court had already appointed John McStay of McStay Luby as liquidator to its main trading entity.

Weeks previously, the British High Court appointed insolvency specialist Zolfo Cooper as administrators to Bowen’s London-based arm, Bowen plc, as the business was unable to pay its debts as they fell due.

There was a bright spot as Nama was able to sell one of the Bowen subsidiaries, BMD, to its managers in a deal that saved 200 jobs. BMD is a mechanical engineering specialist that works mainly for clients in industries such as pharmaceutical manufacturing.

BMD was not directly affected by Bowen’s liquidation and receivership, although its immediate parent within the group felt a change. According to its management, it was trading well without the millstone of property-related debt that hit much of the rest of the group.

Property debt was the central theme running through the high-profile failures in the construction business. Many of them took on these liabilities during the boom and the liabilities ultimately proved their undoing. The slump in values left many in breach of loan-to-value covenants with the banks, or just simply meant that they had little hope of ever recovering the money and repaying their lenders.

The slide in property values showed no signs of slowing. The most recent official figures for residential values show they fell almost 16 per cent between November 2011 and November 2010. Nationally they are down 43 per cent from their peak five years ago; in Dublin they have fallen 54 per cent.

There are other signs of attrition in the market. In 2006, the exchequer received almost €3 billion in stamp duty payments from property transactions. In 2010, it stood at €200 million.

Commercial property was largely moribund, but there were some deals done. Real Estate Opportunities – whose main shareholder is John Ronan’s and Richard Barrett’s Treasury Holdings – sold the Montevetro building on Barrow Street, Dublin, to Google for just shy of €100 million. Also in the capital, retailer Penney’s bought a new building on Mary Street as a flagship store and offices, for a reported €25 million.

The Coalition’s promise to come up with legislation ending the controversial upward-only rent reviews in existing commercial leases froze all activity, as the uncertainty seemed to put off the few investors who were looking at property.

Upward-only reviews are blamed for squeezing large numbers of businesses as they are trying to use recession-era revenues to pay for boom-era rents. Some landlords are willing to negotiate, but others are proving less tractable.

The last government found it could do nothing about upward-only rent reviews in existing contracts as its attorney general advised it that this could hit landlords’ constitutional property rights. During the election campaign, Fine Gael said it would tackle the issue.

Minister for Justice Alan Shatter took on the task, but found there was no way of getting around the same problem. In a budget-day joint statement with his colleague, Minister for Finance Michael Noonan, Mr Shatter said any measure to deal with the problem could expose the State to compensation claims from landlords, and so the issue was dropped.

While cutbacks in State capital spending mean more bad news for the construction industry, the budget held out some hope for the property market. Mr Noonan increased mortgage interest relief for first-time buyers who purchase in 2012.

He cut stamp duty to a flat 2 per cent and announced the State would give a capital gains tax exemption to anyone buying commercial property and holding it for seven years. It’s likely that we will have to wait until the end of 2012 to see if these measures have any impact.