What to expect as Ireland enters the final act of the economic crash
Agenda: State is still entangled in financial sector via Nama, IBRC and Quinn Insurance
IBRC, formed from the remains of Anglo Irish Bank and Irish Nationwide Building Society, was the first Irish entity to engage in the large-scale sale of non-performing loans. Photograph: Matt Kavanagh
The State’s recession-era involvement in the financial sector cost billions and will have an impact for years to come. From bailouts to nationalisations, there is hardly a household that has not been affected by boom, bust and recovery.
To the outsider, it has been a thicket of controversy and intrigue, of global asset hunts, courtroom and boardroom battles, turf wars, mind-numbing complexity and vast sums of money. For those involved, it has often been a career highlight – a unique challenge forged by a once-in-a-lifetime economic collapse which bent and broke the State’s relationship with the banks. One confides: “I’ve loved it.”
Now, the end of the drama is beckoning for three of the last institutions with which the State is still entangled in the financial sector: the husks of Anglo Irish Bank and Irish Nationwide (INBS) – collectively now the Irish Banking Resolution Corporation (IBRC) – Quinn Insurance and the National Asset Management Agency (Nama).
But what has been the cost to the State and what does the final act hold for these organisations so indelibly associated with collapse?
The administrators and special liquidators of Quinn Insurance and IBRC – Paul McCann and Michael McAteer of Grant Thornton in the first instance, Kieran Wallace and Eamonn Richardson of KPMG in the second – have almost a decade’s work behind them already. From one point of view, the vast majority of the endeavour has already been completed. Both have pursued aggressive, multibillion-euro asset-disposal programmes.
In 2011, Quinn Insurance was sold off and rebranded as Liberty Mutual in a deal that preserved (at that time) all 1,500 jobs in the company. Other former Quinn Insurance assets, including properties, investment assets and even a wind farm, were all sold. Meanwhile, Catalina Ireland, a subsidiary of Bermuda-based Catalina Holdings, purchased Quinn Insurance’s legacy UK and European liabilities in 2015.
As for IBRC, the entity formed from the remains of Anglo and Irish Nationwide Building Society, again much has been completed. It was the first Irish entity to engage in the large-scale sale of non-performing loans when it dipped its toe in the water with Project Evergreen, a €2.5 billion book of corporate debt.
There were doubts that the liquidators would be able to get the loans sold, to the extent that a back-up plan was formed to switch them into Nama if the sale flopped.
However, Evergreen was snapped up, and IBRC followed through with a massive €22 billion deleveraging programme over the next 24 months. It created a market for Irish distressed debt which Nama was subsequently able to take advantage of.
The most trenchant issue facing two of these organisations – Quinn Insurance (under administration) and IBRC – is litigation.
The most immediately visible of these cases is the action by Seán Quinn’s five adult children against IBRC.
It was expected to last at least six months and cost many millions in legal fees, though the two sides re-engaged in talks about a settlement this week after the judge ruled against the Quinn offspring’s efforts to amend their case to argue that they had been unduly influenced by their father.
Lurking in the background is another case to be taken by IBRC against members of the family and companies within the Quinn international property group, which will only proceed once the Quinn children’s case is off the table.
These cases were all put on hold during criminal proceedings, which took place against former executives in Anglo, including its chief executive David Drumm, who is likely to feature as a witness in the Quinn children’s case if it proceeds.
The special liquidators of IBRC have gradually ground down the number of legal cases involving the bank from more than 1,100 when they were appointed to 136, 111 of which it is defending. It has generally followed legal advice before initiating proceedings, taking cases only where it is advised it has a good chance of winning, and has entered mediation many times, resolving about 10 per cent of cases in this manner.
However, alongside the Quinn cases several other legal actions promise to drag on, consuming time, energy and money.
In addition, IBRC is fighting a High Court case taken by Belfast property magnate Peter Curistan, who is alleging fraud against the bank, as well as breach of duty and negligence. Property developer Paddy McKillen and his associate Anthony Leonard are appealing a Delaware court’s decision to deny them the chance of suing the special liquidators in the US state.
For Quinn Insurance administrators Grant Thornton, just one legal case matters. However, it is a whopper. It is suing the former auditors of the insurer, PwC, in a €1 billion action that alleges the accountancy firm was in breach of its duties and acted negligently. PwC has denied the claims.
The case has dragged on significantly longer than anticipated, with delays frustrating the administrators, and consuming millions of euro in legal fees. If and when it comes to court, the case will now be tried against a backdrop of evidence based on memories a decade or more old. The latest indication is that discovery, which is likely to extend to millions of documents, will not start until late this year or early next year.
Well-placed sources with knowledge of the various legal battles involving both parties say there is little immediate chance that a line will be drawn under the actions, most likely via a settlement. In addition to it making sense for the liquidators and administrators, it would require willing participation from their opponents in each legal case. It would also mean accepting the costs for settling cases which those on the State’s side believe can be won, and won with costs in their favour.
Another potentially complicating factor for the liquidation of IBRC is the Cregan commission, set up in the wake of allegations made in the Dáil about the sale of Siteserv’s loans to businessman Denis O’Brien. The latest projections put the final cost of the commission in the region of €30 million, but political enthusiasm for the project appears to be thin on the ground. The Taoiseach has asked for options to reduce the timeframe or the cost of the production of a final report by the end of this month, with publication of the next interim report thought to be imminent.
While IBRC and Quinn Insurance have consumed hundreds of millions of euro, neither of them has captured the public imagination like Nama, the most important and most visible intervention by the State in the financial system.
Now, with almost all its loans sold, Nama is focusing on wind-down.
However, confidential briefing notes obtained by The Irish Times show that the manner in which it is winding down could, counterintuitively, keep Nama active in some respects for longer than has previously been disclosed. Minister for Finance Paschal Donohoe told the Dáil last year that Nama could remain up and running to the end of 2021, a year later than had previously been envisaged.
However, just a week after his update to the Dáil, the Minister was given a briefing note by officials which shows that the agency is suggesting a significantly longer life for itself, focused on the delivery of housing – and that an extension could be worth hundreds of millions of euro to the State.
Nama’s board believes there is a “significant potential gain to the State” – worth up to €400 million – from adopting a “long-term hold” strategy towards strategic housing sites that it currently controls. The debts on the sites relate to between six and eight “connections” who had their loans transferred into Nama.
The board told officials at a meeting in October of “the merits of retaining Nama in a much-reduced form after 2021 in order to extract full value from these sites”. However, the agency warned that it needed certainty at an “early stage” in order to manage debtors and retain expert staff to work on the programme.
Outside of strategic decisions such as this, Nama will be expected to hit its target to deliver 20,000 houses. According to the briefing note, as of last October, it had delivered 8,200 units with more than 2,500 homes under construction. All told, it has a current capacity on its sites for 42,000 units, but much of this is without planning, and it is projected to fall to a little over 19,000 over the next two to three years as developers refinance their debts, or they are sold, and Nama loses control over the sites.
According to the notes provided for Paschal Donohoe, the residual portfolio is concentrated in the holdings of two major debtors, and a number of sites where Nama has appointed a receiver. This includes the former Irish Glass Bottle site in the docklands, delivery of which is a key strategic priority for the agency.
Its main strategic goal – the repayment of its debt – will be achieved easily. Nama is currently forecasting a surplus of €3.5 billion, which will be given back to the exchequer. While this represents a significantly better return than had been predicted at almost all points in Nama’s life, it must be remembered that the toxic loan agency represents just one aspect of the State’s financial involvement in rescuing the banking sector. Many more billions in recapitalisations, and elsewhere, will not be paid back.
Paying the cost
Of course, all this comes at a cost. The State has paid out hundreds of millions of euro in fees to liquidators and administrators, as well as associated costs for legal advice, consultants and other service providers,
The latest indication is that the liquidation of IBRC will cost up to €306 million by the time it has finished its work, currently projected to be in 2022. KPMG, as liquidators, have been the biggest single beneficiary so far, with €144 million billed by the special liquidator to date.
Predictably, blue-chip law firms have also cashed in. Linklaters has been paid €20.5 million, while A&L Goodbody has been paid just under €39 million. Arthur Cox has billed €5.7 million, while both Maples & Calder and Byrne Wallace have been paid in the region of €2.8 million each.
Meanwhile, professional advisers, including stockbrokers and property valuers, have shared another €18.1 million.
It is thought that current projections are that the final bill will come in at the lower end of the projected range of costs – but that could still run the State to a minimum of €291 million.
As a State agency, Nama has not charged fees for services to the taxpayer. However, at the peak of its powers, its annual pay bill came in at more than €40 million; in 2012, its average annual salary was €100,000. It, too, has paid out significant fees to third parties. As of July 2017, the agency had paid more than €39 million in fees to law firms.
In 2013, then minister for finance Michael Noonan said consultants and advisers had been paid more than €143 million since the agency’s inception, with a large proportion of this sum – almost €75 million – spent on due-diligence fees connected with the acquisition of loans and the review of debtor business plans. More than €115 million was paid to receivers, with Grant Thornton topping the list of recipients.
According to figures from the Department of Finance, Grant Thornton has also received more than €25 million in relation to the administration of Quinn Insurance. This, of course, is dwarfed by the figures being collected via the 2 per cent levy on the value of gross written motor premiums, which was partially set up to cover the costs of the collapse of Quinn Insurance. Latest estimates from the department are that €69.1 million was raised under the levy last year, bringing the total since 2012 to €435.8 million.
It seems that the impact, and the cost, of the recession will be with the State for some time yet.
€435.8 million collected under insurance levy
€306 million: potential final cost of IBRC liquidation
€115 million paid to receivers by Nama
€25 million paid to administrators of QIL
€40 million: peak annual payroll at Nama