Tax receipts expected to be well above Budget target

TAX receipts due next week are expected to be well above target. The "schedule D" receipts, from the self employed, will be analysed by the Department of Finance next week and are expected to confirm the buoyant state of the nation's finances.

The Minister for Finance, Mr Quinn, has now revised his estimate for the current budget surplus upwards to between £200 million and £250 million this year.

The surplus, or balance of tax receipts over spending, will be welcomed by the authorities. However, Mr Quinn warned that tax receipts are not expected to keep growing at this rate. The surplus comes despite significantly higher spending than Mr Quinn had forecast.

However, Mr Quinn is continuing to warn that spending is running well ahead of target - by as much as £200 million at the last count.

The spending increases are mostly due to increases in health, agriculture and social welfare.

However, the increases in social welfare spending are slowing down. The clampdown on social welfare fraud was partly responsible for the drop in the number of claimants on the live register in October.

At the end of October it stood at 267,586, representing a drop of 11,155. That number is expected to decline further in November.

Despite the drop, a gulf remains of around 75,000 between people describing themselves as unemployed in the Labour Force Survey and those receiving unemployment benefits from the State.

Mr Quinn has also repeated his warning that public sector pay remains the most serious obstacle to substantial tax reform in the next Budget.

Nevertheless, exchequer borrowing is likely to come in well ahead of target at around £300 million.

In a paper last week, Mr Michael Tutty, second secretary at the Department of Finance, outlined a case for £800 million in tax cuts over three years.

But economists have warned that the budget surplus should be used to reduce the national debt and not as a tax giveaway at the next Budget.

"The bottom line is that the borrowing requirement adds to the level of outstanding debt," said Mr Jim Power, chief economist at Bank of Ireland.

"Tax receipts will not be as strong next year, so there is no doubt but that the money should go towards debt repayment." McInerney Properties has been like the living dead, hobbling from crisis to crisis, for more than four years. Its fortunes will change once the shareholders and creditors agree, next month, to the complicated financial restructuring which was announced last week.

However, despite the substantial write offs by all the interested parties, McInerney Holdings, its new name, regrettably will not start off with a clean slate. It could be argued that it should have gone a little further and planned to raise more than £6 million in the proposed placing. Its managing director, Barry O'Connor, disagrees, explaining that raising more now would have given away the company too cheaply. That view could well be right.

The injection of the £6 million and the transfer of debt for equity, will transform its balance sheet. A negative net worth of £8 million, for example, with be turned into a net worth of £900,000, according to a pro forma balance sheet as at December 31st, 1995.

But net borrowings will still amount to £3.9 million, providing an unacceptably high gearing of over 400 per cent. That is historic and immaterial and, more importantly, the gearing will improve considerably. McInerney should generate a net profit (after loan stock redemption) of £500,000 this year, bringing the gearing down to 240 per cent. The following year, 1997, it could generate £1 million (there will be no redemptions), bringing it down to 100 per cent.

However, the balance sheet is stronger than what appears. Some sources suggest that a revaluation of its properties and land bank could add a further £3.5 million to its net worth. That would throw a healthier complexion on its balance sheet.

Investors do not like highly geared house building companies. McInerney should seriously consider having a rights issue next year and make shareholders aware of the market value of the assets. It could also consider selling some investment properties to make it more liquid.

McInerney is right when it says the restructuring proposals endeavoured to strike a balance between the needs and rights of all the parties. All are being asked to make a substantial contribution and the biggest contributors are:

The existing ordinary shareholders. At the moment they own 100 per cent of the company. Under the proposals that holding will drop to 4.5 per cent - this can rise to 20 per cent if they take up their full entitlement under a clawback arrangement in the placing. Their shares which had been traded at around 5p (they fell to 1.75p on Friday) are valued at a mere 0.6p.

They have little option but to accept the deal. They may own 100 per cent of the company, but that is 100 per cent of nothing.

They should also seriously consider taking up their entitlement even though the payoff is not around the corner. ICC, in an unusual move, has been prepared to pay 35p for each of the new 10p shares, for its 28.4 per cent stake. Justifying the injection of £2.5 million, ICC expressed confidence that the business can grow "significantly in the next few years", and noted that the restructuring is "effectively refloating McInerney as an attractive quoted investment vehicle at a time when questions are being asked about the usefulness of the Irish Stock Exchange in raising capital for growing companies".

Also, the existing McInerney management are putting up over £500,000 so they have a lot to lose if it goes wrong. Existing shareholders will have the right to subscribe for 68.2 new shares at 35p per share, for every 1,000 shares held.

The preference shareholders. They are being asked to take 13p in the pound and will be paid in new shares.

Non trade financial creditors and contingent creditors. They receive 7p in the pound and in return get new shares/cash.

It is obvious that a lot of people were rooting for McInerney to be kept in business. As the largest national house builder with a traditionally high reputation, it is worth saving. It has a strong market presence in Dublin, Cork, Limerick and Waterford which gives it a good geographic spread.

While it has reduced its exposure to the leisure interests in Spain and Portugal, it is still in those markets. But that is the only potential negative. It can now have a more concentrated focus on the continued buoyancy of the Irish market and shortly take its place among the companies whose shares can be seriously considered by investors.