Inside the world of business

When is a bank loan not a loan?

THE SCENARIO outlined in the Philip Lynch and family case against AIB is truly head-scratching stuff. How such a successful and experienced businessman could, as the High Court judge found, have a “vague and uncertain” understanding of the difference between recourse, in the context of bank loans, and security, is hard to fathom. (A loan can be secured against an asset but the bank still have full recourse against the borrower.)

The judge said that one view of Lynch’s evidence was that the businessman was “deliberately obfuscating”. Reading the transcript of his cross-examination made for very difficult reading, he said. Nevertheless the judge was satisfied, “unbelievable as it may seem to others”, that Lynch’s understanding of the issue was as his evidence suggested.

While the Lynch family evidence was that the €25 million loan had to be non-recourse or they would not go ahead with the deal, the judge found that the available evidence suggested the bank was never asked for such a loan. Nor was there any evidence that developer Gerry Conlon, who was dealing with the bank, was ever told of the family’s view. Overall, Mr Justice Peart found, the family’s make or break view on the recourse issue “is something which appears to have been kept from all other actors in this transaction”.

Head-scratching indeed.

Former Anglo bank is

a better class of junk

CANTILLON HAD to rub his eyes when he saw this press release arrive in his inbox the other day. Standard & Poor’s had decided to upgrade the ratings of Irish Bank Resolution Corporation, the banking equivalent of an undertaker that is burying the remains of Anglo Irish Bank and Irish Nationwide Building Society.

The agency said the bank had a “developing outlook” which “reflects our view that IBRC is progressing well in its transformation from a volatile bank to a more stable wind-down entity.”

It’s probably not worth getting too excited, however. The agency is upgrading the State-owned bank’s rating from CCC to CCC+ so it is still junk, just a better type of junk.

S&P tells us that IBRC’s income primarily comes from interest earned on almost €29 billion of State-issued promissory notes and “to a lesser extent, the margins from a shrinking loan book”. The €2.5 billion of former Irish Nationwide residential mortgages is 42 per cent non-performing with 31 per cent of the book covered off in loan loss reserves.

On the incendiary issue of burden-sharing with bondholders, Standard & Poor’s says burning the remaining €2.6 billion of senior unsecured and unguaranteed bonds remains a decision for the Government, “though subject to ECB approval”.

The agency said it could downgrade the bank “if the likelihood of the Government introducing burden sharing. . . increases”. Little chance of a downgrade then given the Government’s position.