Cantillon

INSIDE THE WORLD OF BUSINESS

Battersea Power Station takes another battering

BATTERSEA POWER Station has survived a world war, closure, prog rock and Daleks. This week it was sucked into the fallout from the collapse of the Irish banking system and property market.

Its creditors, the National Asset Management Agency and Lloyds Banking Group, are due to ask a London court to appoint administrators to the property’s holding company, controlled by Real Estate Opportunities (REO), in nine days’ time, assuming an alternative deal is not done in the meantime.

They are confident that the property can be sold and, presumably, that they can recover the €380 million they are owed. Nama is due about one-third of this, and its interest stems from Bank of Ireland being one of the lenders when REO bought Battersea five years ago.

It is almost 40 years since Battersea stopped generating electricity. Since then, various proposals have been put forward for the site including a theme park, offices, leisure and retail. REO’s £5.5 billion (€6.4 billion) plan is the latest and probably the most ambitious. It has won the approval of the nearby community, local authority and London mayor Boris Johnson.

Nama and Lloyds may be confident of getting a buyer and, presumably, so is another creditor, Victor Hwang’s Oriental Properties, which is also backing the administration bid. The total debt due to these three is close to the €590 million or so that REO paid for the property in 2006. Last June it was valued at €590 million, indicating that there is a chance everyone involved could break even.

But the cost and difficulty of redeveloping the site could weigh heavily on the mind of any purchaser, so there is no guarantee that it will realise this value.

Given that it saw off Pink Floyd, Hawkwind and the Daleks, Battersea should easily survive its current crisis. The real question is: how much will the creditors – including the Irish taxpayer – get out of a sale?

What to do with unwanted assets

THE INCREASING volume of noise around the difficulty of completing the three-year deleveraging of the banks suggests that alternative methods may need to be considered to “right-size” the banks and purge them of the €73 billion of excess assets and other loans deemed non-core.

The Department of Finance’s head of banking, John Moran, was the first to warn against “dumping assets at any cost” in October, pointing out that it was “incredibly worrying” that it was happening against a backdrop of a €2 trillion deleveraging by banks across Europe.

Central Bank deputy governor Matthew Elderfield added his concerns last week, saying the pace of deleveraging may need to slow to ensure Irish taxpayers get a fair price for unwanted assets before the end-of-2013 deadline.

EBS chief executive Fergus Murphy went further this week, saying European bank recapitalisations and the debt crisis could pose challenges for deleveraging in 2012. He suggested coming at it another way through forms of structured finance or off-balance sheet structures.

This has been explored in the past and is worth revisiting. In the run-up to the EU-IMF bailout last year, the idea was floated of warehousing excess assets in a special-purpose vehicle to get them out of the banks quickly.

But it didn’t wash with the European Central Bank, which wants its disproportionately large volume of loans to the Irish banks back as quickly as possible.

The 11th-hour collapse of the Irish Life sale to Canada Life owner Great West Lifeco shows that the

State will struggle to sell even the best of financial assets. The two sides were so far advanced towards a sale that plans were being made to book a hotel to announce the deal.

Parking assets and buying time – in a revised plan blessed by the EU-ECB-IMF troika – may be necessary if the European banking crisis deteriorates and cash does not become available to finance buyers of a fast-growing pool of unwanted assets.