The pursuit of developer Liam Carroll could force a crisis situation for banks owed larger sums, writes SIMON CARSWELL, Finance Correspondent

THE MOVE by Irish Nationwide, a financial institution guaranteed by the Government, to take on Liam Carroll, one of the country’s largest developers, to recover a debt took many by surprise.

All the guaranteed banks and building societies have, since the property market started to collapse, adopted a hand-holding approach with developers working with those who will co-operate to resolve their problems under informal schemes of arrangement to pay debts and finish projects.

In that context, Irish Nationwide’s decision to take legal proceedings against Carroll for €60 million owed on the back of a personal guarantee was unusual given that it has the potential to force a crisis situation for other banks owed far larger sums.

The move, which Carroll is resisting, could also cause complications for the Government as it constructs legislation setting up Nama, which will initially buy the loans of the top 25-50 developer borrowers. Carroll will undoubtedly be at the top or at least very near the top of this list.

The developer’s debts are estimated to run to €2 billion and possibly in excess of this figure.

Allied Irish Banks (AIB), a member of the Nama club, and Bank of Scotland (Ireland), which falls outside the plan, have provided the bulk of his borrowings.

Irish Nationwide chairman Danny Kitchen, who has been running the building society since Michael Fingleton retired as chief executive in April, is taking a more proactive approach to dealing with the property debts that contributed to the building society’s losses of €480 million for 2008.

Kitchen was unavailable for comment yesterday, though he laid down a marker in briefings with staff in recent weeks by saying that the building society would be taking on at least two well-known property developers.

This was interpreted as a new departure from the previous management led by Fingleton.

Carroll is thought to be one of the developers referred to by Kitchen among staff. The case has the effect of showing the society’s defaulting and unco-operative borrowers that it means business.

However, there is also a strategy at play that creates a level of brinkmanship among the banks.

Banking sources said that Irish Nationwide recognised that Carroll has negotiated with trade creditors to pay them between 60 and 70 per cent of their debts to stave off potential actions to recover what are, in the context of his overall debts, small amounts but which could topple his business.

AIB and Bank of Scotland (Ireland) recently provided Carroll with €100 million in funding to complete projects and it is thought that part of this was used to fund the settlements with creditors stopping several winding-up petitions.

By staking its €60 million claim against Carroll, Irish Nationwide is in effect attempting to force the developer’s main bankers to pay up at least part of the society’s debt – similar to the creditors’ deal.

“The banks don’t want the threats to the business so they have set up a fighting fund to pay off trade creditors,” said a banker with knowledge of the situation.

“If Irish Nationwide could get €10 million or €20 million on the €60 million personal guarantee, it would be better than nothing.”

A senior banker said a case like Irish Nationwide’s depends on how the main lenders will react.

“If one bank moves, it leads to the question of what will a lead bank do in this situation,” he said.

“Will they buy out another bank’s debt rather than let the house of cards crumble? It depends on the size of the overall debt and what it would cost to buy out the smaller bank.”

There is nothing, under the terms of the State guarantee scheme stopping Irish Nationwide taking legal action against developers, even though Nama is expected to take a sizeable chunk of the building society’s €10 billion loan book, 80 per cent of which is secured on commercial property.

However, officials working on establishing Nama have met the foreign-owned banks and sought to work with them to stop them taking unilateral action against developers where they have drawn borrowings from several lenders.

In that context, Irish Nationwide’s action against Carroll was seen as coming out of the blue.

Kevin McConnell, analyst at Bloxham Stockbrokers, said the move was “surprising” given that the relationship between banks and developers was “in a bit of limbo period” with Nama legislation being drafted.

“It is inevitable that actions against developers will lead to delays in Nama if the larger banks move,” said McConnell. “It would not be a positive strategy if the banks started to break ranks.”

The Central Bank and Financial Regulator issued a circular to the guaranteed institutions last month warning them that they had to continue to deal with developer customers as normal and to manage the loans in a prudent manner.

The circular was prompted by a sudden withdrawal of fresh credit to developers after the Government unveiled plans for Nama.

Legal sources said the appointment of receivers to developers’ businesses to recover debts before Nama is set up may cause difficulties for the agency, but this could be circumvented if the receiver deals with the agency, after it buys the loans, rather than the bank.

“A legal action is a complication but not a preclusion for Nama,” said one corporate lawyer.

Corporate recovery partner Paul McCann at Grant Thornton says that receivers would normally refer to the banks for major decisions but that Nama could adopt a similar role after buying the loans.

Another senior insolvency practitioner said Irish Nationwide’s action could lead to “a chain reaction” forcing other banks to act, leading to the crystallisation of losses for the banks and sharp mark-downs on property values, which could in turn have implications for the discount that Nama pays for the toxic assets.