Group set to expel its last breath as figures fail to convince

ANALYSIS:A survival plan built on optimistically low interest rates failed to add up to the judge, writes SIMON CARSWELL

THE CLOCK is ticking on the final hours of court protection for Liam Carroll’s property development group, Zoe, after the High Court put a stay until Monday at 2pm on two winding-up petitions.

Mr Justice Frank Clarke yesterday delivered a comprehensive 72-page ruling, forensically dissecting why he did not believe seven Zoe companies had a reasonable prospect of survival and should not be afforded the protective cover of examinership.

Zoe’s chances of survival were “at the further end of optimism”, the judge said, after considering the prospects for the property sector and Zoe’s forecasts for sales to July 2011, rental income and its calculations on future dividends from its stake in ferry firm ICG. This would appear to snuff out what must be the group’s last chance of securing up to 100 days’ breathing space under an examiner to trigger its survival plan.

The judge effectively eviscerated the rescue plan devised by accountants KPMG. Despite this, he gave Zoe the opportunity to appeal to the Supreme Court. However, the judge warned the group would need to act fast if it decides to appeal on Monday so creditors such as ACCBank – whose threats over debts of €136 million precipitated Carroll’s first bid for protection last July – would not be disadvantaged further.

Banking sources poured cold water on the prospects of a second appeal being made, given how thoroughly Mr Justice Clarke, a first-class honours maths graduate, deconstructed the complex figures backing the proposed rescue plan. A source close to the case described the judge’s ruling as “bullet-proof” in terms of its chances of being successfully overturned.

Mr Justice Clarke said at the outset his task was to determine whether the companies and wider group had a reasonable prospect of survival after it emerged from a two-year partial moratorium on interest payments to eight lenders owed €1.3 billion.

The application failed primarily on the basis of Zoe’s view that interest rates would remain at about 1 per cent to July 2011 when the interest moratorium expires.

The judge said that economic evidence – he noted the views of Friends First economist Jim Power in particular – suggested interest rates would rise as economies started to recover.

He estimated that the Zoe Group may have to pay between €15 million and €25 million more in interest than was envisaged by the group, due to rising rates. This was a “very significant flaw” in the business plan, he said, and could have “a devastating impact” at the end of the two-year moratorium.

On the prospects of a recovery in the property market, the judge sided with UCD economist Prof Morgan Kelly, whose reports submitted as evidence concluded that values may end up at 50 per cent to 66 per cent below the levels at the peak of the property boom for at least a decade. The judge said the market for property was likely to operate “at the end of the spectrum” identified by the academic economist.

He concluded there was a greater downside risk to prices, at least over the next two years, and that there was “a real and significant risk” that the value of Zoe’s properties will be less than the €1.2 billion projected in July 2011. The judge observed that only one of Zoe’s eight lenders, Bank of Scotland (Ireland), believed the group had a reasonable prospect of survival, while the other lenders just believed their positions would improve under examinership.

He spent considerable time analysing Zoe’s cashflow and income streams up to July 2011 projected under the plan and noted that some figures were wrong and that overall they were insufficient to meet its future interest bill as rates would rise.

The Zoe Group faces a liquidation hearing on two of its companies as ACC seeks to recover its unpaid loans, while the bank’s receiver is poised to move against four other companies with land in the Dublin docklands.

Receivers acting for Zoe’s other banks are primed and ready to act. The group will first have to indicate whether it will appeal – sources said this seemed unlikely.

Banking insiders have dispelled the possibility that other lenders will buy out ACC’s debt as this would set a dangerous precedent in other cases of heavily indebted borrowers. The last gasps of the Zoe Group may be heard in the Four Courts on Monday.