Cantillon

Inside the world of business

Emergency lending a thorny subject

EMERGENCY LENDING assistance (ELA) to the Irish banks continues to be a thorny subject primarily because of the level it has reached. The Central Bank steps in to lend to the Irish banks where they have no eligible collateral to borrow cheaply from the European Central Bank.

ELA funding reached €51 billion at the end of December, on top of €132 billion in ECB drawings.

A report by Citigroup last month asked probing questions about the collateral held against this lending and queried whether the Irish Central Bank was provided loans at risk of insolvency. ELA accounted for 24 per cent of the total assets at the Central Bank, said the Citi analysts, and the bank’s €1.5 billion capital reserves could be wiped out with losses on the loans of €51 billion.

Anglo Irish Bank, the bank most in need of ELA as it has run out of ECB eligible assets, is the heaviest user of such funding. The bank has pledged promissory notes – the State IOUs provided to recapitalise the bank – to draw on the ELA loans and the Central Bank is known to have applied heavy haircuts on collateral to cover the risk.

Governor of the Central Bank Patrick Honohan has previously insisted that its ELA lending was well collateralised so the Central Bank had nothing to worry about. In fact, ELA lending is thought to be over-collateralised.

Stockbroker Davy said yesterday that the State’s exposure to losses on the State’s emergency funding may be limited. Anglo, Irish Nationwide and EBS building society have €30 billion in promissory notes to tap ELA funding. Anglo repaid a debt of €750 million falling due yesterday to senior bondholders. The bank plans well in advance of these regular maturities falling due.

However with deposit flows into Ireland dwindling, emergency lending is likely to be Anglo’s only source of funding for some time as the bank goes into wind-down with the submission of its joint plan with Irish Nationwide to the European Commission by yesterday’s EU-IMF deadline.

Elan investors keeping their fingers crossed 

INVESTORS IN Ireland’s largest indigenous pharma company Elan will get an update of the progress of its key drug, the multiple sclerosis therapy Tysabri, today when the group’s US partner in the venture, Biogen Idec reports figures for the fourth quarter of 2010.

After a disappointing third-quarter when figures came in below market expectations – even though revenue from the drug grew 9 per cent over the three months – investors will be hoping for a strong end to the year.

Investors will have to wait a bit longer for news of the Irish group’s pipeline progress, with Elan reporting its quarterly figures a week after the joint venture partner.

However, they will have been unsettled by news of layoffs at the company’s research and development hub in California.

The company confirmed recently that it had laid off 130 people, about 10 per cent of its workforce.

The departing staff were informed of the news last November although most are leaving the company only this week.

There was no public announcement of the job losses at the time.

The fact that about half of those leaving are involved in the group’s RD operations will raise questions about the company’s pipeline.

In the past Elan has rightly made much of the importance of building up expertise in the complex area of neurological drug development and of the strength of its pipeline prospects. Investors will want to be reassured that the company is not becoming infected with the pipeline stagnation that has bedevilled so many players in the pharma sector.

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