Cantillon

Inside the world of business

Former AIB chief dines out despite bank bonus criticism

SPOTTED HAVING a bite of lunch yesterday in the Italian restaurant Il Cafe di Napoli on Westland Row, Dublin, was a smiling Eugene Sheehy, the former chief executive of AIB who left in 2009.

Entering the bustling cafe though must have been a slightly uncomfortable experience for the media-shy Sheehy.

Facing the front door is a large billboard poster featuring Brian Carey of the Sunday Timessaying: "Bonuses should make bankers better not richer".

While it might have made him blush, thankfully, it didn’t spoil Sheehy’s appetite.

Nama and KBC could end up in dispute over McInerney

THERE IS a strong chance that McInerney will appeal this week’s High Court decision not to approve the rescue plan proposed for the group by its examiner, Bill O’Riordan of PricewaterhouseCoopers.

The plan involved an investment of up to €48 million by US private equity fund Oaktree Capital, €25 million of which was offered in final settlement of a €113 million debt owed to a syndicate of three banks: Anglo Irish, Bank of Ireland and Belgian-owned KBC, which is secured against McInerney’s development land.

The court found that the plan was unfairly prejudicial to KBC’s interests and ruled against the proposals. If the company believes that it has a strong case, it is likely that it will go ahead with an appeal.

However, if it were not to appeal, it could turn out that McInerney will still be the subject of further litigation down the road.

In that situation, Nama would take over the €80 million or so due to Anglo Irish and Bank of Ireland, but not that portion of the loan due to KBC.

This means that the two parties would have to work together. Nama would be taking over the entitlements of Anglo and Bank of Ireland as they are set out in the original agreement drawn up between the three banks.

It emerged in court that Nama’s entitlements in this situation might not be entirely clear.

Depending on how various clauses are interpreted, Nama may or may not have the right to sell the McInerney assets without the consent of KBC.

One reading of one clause indicates that KBC’s consent would be required, while another reading of another clause indicates that it is not.

As a result, there is at least a possibility that Nama and KBC could end up in dispute.

This week’s High Court ruling acknowledges that that is a possibility – while saying it would be wrong to prejudge whether or not a dispute could actually occur, particularly as the State agency was not a party to the McInerney case.

If such as dispute were to occur, it would mean that a State agency, Nama, which is supposed to act in the public’s interest, would be taking on a private concern, which is supposed to act in its shareholders’, or at least its parent company’s, interest.

In short, it would be a test of just how far Nama’s powers could reach.

Bondholder theory goes up in smoke 

BURNING BONDHOLDERS is a popular election topic but the potential downsides are illustrated by a line from the Bank of Ireland trading update issued yesterday.

The bank’s impairment charge on loans and advances to customers reduced during 2010 compared with the previous year but it is obviously still a substantial figure. Bank of Ireland said that during December 2010, it recognised a €100 million impairment arising from subordinated bonds it holds in another Irish bank. These bonds were bought back for cash by the other bank in January 2011, but at a discount. Bank of Ireland came out the worse, to the tune of €100 million.

The bank that benefited, that “burned its bondholder”, was the mostly State-owned AIB. Its advance would appear to have achieved little net benefit for the overall economy.

The dependence of Bank of Ireland on funding from the European Central Bank and our Dame Street equivalent is also evident from yesterday’s release. The bank said there was increased reliance on funding from the monetary authorities during the year, and the figures for the bank – as against for the group – give some indication as to its scale.

Deposits from banks were €87.9 billion at the end of 2010. The funding from the monetary authorities forms an unspecified part of this. We don’t have a directly comparable figure for 2009, but the group accounts for that year include a figure for the bank for its deposits from banks of €43.7 billion. The notes to the accounts say €8 billion of this was from the monetary authorities.

You can’t do a simple subtraction and come up with a number for the increase in ECB funding, but the figures give some indication of the scale to which our banks, of which Bank of Ireland is one of the strongest, are now so reliant on Frankfurt.

Online

For regular commentary on business and economic issues visit our blog, Current Account, at irishtimes.com/blogs/business

Twitter users can receive links to the latest business news and blog posts by following us at twitter.com/IrishTimesBiz