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Inside the world of business

Ratings agency in no mood for personal insolvency plan

IF THE view of Moody’s is anything to go by – and it still appears to be, despite the credibility hit taken by ratings agencies in recent years – then the omnipotent funding markets will not like the Government’s personal insolvency proposals.

The inclusion of mortgage debt write-offs in out-of-court settlements has left the banks cold about the possible damage to their well-replenished capital bases.

Moody’s included an alarming statistic in its report on the proposals, saying that it estimated a quarter of Irish mortgage debt is “susceptible” to write-down.

Based on total Irish mortgage debts (including landlords’ property loans) of about €140 billion, this amounts to about €35 billion.

This is well in excess of the €5.8 billion of losses on residential mortgages expected under the base case in last year’s stress tests.

But Moody’s provides a caveat.

The agency says that total mortgage loans in negative equity will be about 75 per cent based on its expectation of a peak-to-trough house price decline of 60 per cent.

“In the unlikely event that all negative equity loans were to be written down to the market value of the home, we estimate that 25 per cent of all mortgage debt would be written off,” they said.

Still, the agency is raising the warning flag of moral hazard.

Moody’s warned that the proposals would erode “full recourse” Irish mortgage lending where, currently, a default does not only mean the loss of a home but carrying the debt for at least 12 years.

The agency said that it therefore sees “reduced incentive” for performing borrowers to continue – and delinquent borrowers to resume – mortgage repayments to qualify for a mortgage write-down.

The banks might be able to recover debt written off from the house prices rising but Moody’s doesn’t expect prices to increase materially in the next five years so the banks won’t be able to recover losses “in the foreseeable future”.

Expect the banks to use this point of view to lobby on what a terrible idea non-judicial mortgage debt write-offs really are and how it will affect their funding costs.

Buoyant bonds?

THE GOOD news about Irish bonds just seems to keep on coming. Hot on the heels of the New York Times front page story on Franklin Templeton punting $2.49 billion on Irish gilts came the announcement that LCH Clearnet, the biggest bond clearing house in Europe has cut the deposit it requires clients to place with it before they can use it services to trade Irish bonds.

The margin for long position has been cut from 35 per cent to a still chunky 25 per cent but it is still a indication that Irish yields are steadily heading the right direction.

But the real extent to which sentiment towards Ireland has taken a permanent turn for the better is hard to judge.

An indication could come later this month when the NTMA is expected to dip its toe into the bond market once again. As Goodbody Stockbrokers pointed out yesterday the agency will be tempted to offer another bond swap to coincide with the next tranche of three-year money from the ECB, pencilled in for the 29th of this month.

Last time out the bulk of the offer was taken up by the Irish banks who had little to lose by taking part, which took some of the gloss off the transaction.

A more significant level of participation by overseas banks and US banks in particular in the next bond swap would be a real sign of progress.

Martin’s Elan legacy

THERE’S NO getting away from the feeling that Kelly Martin has delivered at Elan. The turnaround specialist brought in to restore order to a company in financial disarray but with a promising science back in 2003 has brought the group to a position where its debt is lower than its cash and investments held.

As he prepares to stand down later this year, Martin can also point to success in delivering the company’s blockbuster multiple sclerosis treatment Tysabri to market – and returning it there following a health related withdrawal from market. He also devised a way of retaining some ownership of the companys valuable Alzheimer’s pipeline drug bapineuzumab while securing much needed investment in its development from Johnson Johnson. Key figures on “Bapi” will be published later this year but all sides are still optimistic on its future.

Finally, with the disposal of the group’s Athlone-based drug technology unit, he has reshaped the business as a straight neurological biopharma play.

For the medium term, success will continue to be delivered by Tysabri, with chief financial officer Nigel Clerkin alluding several times to the 45 per cent of a growing market that should now feel safer taking the drug following the development of a test for antibodies to the JC virus – a key trigger for the sometimes fatal brain condition that nearly undid Tysabri early in its shelf life.

Clerkin noted that Tysabri currently has just 10 per cent of the treated patient population, despite its proven efficacy. With the population expected to hit 800,000 by 2016, that means up to a sixfold increase in the drug’s target sales – and every 10,000 new patients adds $100 million to the bottom line. Not bad as a legacy.

The European Central Bank holds its regular monthly rate-setting meeting just ahead of a crunch Eurogroup gathering that is expected finally to put the stamp on a new deal for beleaguered Greece.

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