As the first tranche of sales of the Irish Bank Resolution Corporation (IBRC) loan book auction concluded, it was looking as if the organization, placed into liquidation by the Irish government in February of this year, would face its end respectably. However, that hope has now dimmed with a host of legal challenges in Ireland and in the US on the very same day that a US court granted bankruptcy protection to the former bank.

IBRC

Shaky foundations

Founded in 2011 by the merger of failed banks, Anglo Irish Bank and Irish Nationwide Building Society, the IBRC came from less-than-auspicious beginnings. Certainly, there were worries that the organization would be mired with legal battles and struggle to sell off loans, even at written down values.

Yet, from the Evergreen portfolio, although some deals remain to be finalized and there are several possible legal challenges, just three trading businesses remain unsold – The Four Seasons Hotel in Prague, the Racing Post newspaper and Jury’s Inns. In the case of the hotels, they may not need to be sold, as they are performing well. The deal at the Racing Post is complicated by a licensing arrangement with former owner, Sheik Mohammed Bin Rashid al-Maktoum, and may be traded.

That’s just three out of 13 in the Project Evergreen portfolio – all others have been sold. The success prompted Minister for Finance, Mr. Noonan to say:

“I am pleased with how the special liquidation is progressing and these sales to third parties will help to reduce the total amount of assets to transfer to NAMA.”

However, analysts point out that the Evergreen portfolio contained loans that would be easiest to sell. Projects Rock, Sand and Stone could be more difficult to shift. Conceivably, more of these could wind up in NAMA (National Assets Management Agency), the ‘bad bank’ set up by the government.

IBRC facing legal challenges

There have already been a number of legal challenges. Hickey’s Pharmacy, a nationwide chain of chemists, is seeking a judicial review of the sale of its IBRC loans, which are being sold to Lone Star, an American private equity firm. Shareholders say the loans are performing and it would be disastrous for the company if they were sold. And not without good reason – the firm made a pre-tax profit of €3 million in the year to the end of February 2013 after interest charges of €1.1 million on its €30 million bank debt.

Property tycoon, Paddy McKillen, is also taking legal action against the IBRC to stop the liquidator from selling his loans to the Barclays brothers. McKillen recently lost a £20 million court battle in London against the brothers over control of three of the city’s luxury hotels. The case will be in court in March.

Now, the Liberty Group in the US has just said they are suing the IBRC, along with the Tampa Port Authority, following collapsed efforts to acquire the waterfront commercial property over which Anglo Irish Bank had a $27 million loan.

Optimistic valuations

Given the legal challenges and the fact that many deals have been shrouded in secrecy, it’s difficult to know just how successful the liquidation of the IBRC will be. The liquidators, KPMG, appointed by Minister Noonan, won’t report to creditors until February and some say that their figures are overly optimistic.

KPMG’s Kieran Wallace has said that he doesn’t expect independent valuations to be below the book value of the loans in IBRC, written down from €26 billion to €16 billion.

We know that well-performing loans have sold for 80c to 90c on the euro, but NAMA paid just 43c. Two-thirds of IBRC’s loans were non-performing at the beginning of 2012 and both residential and commercial property has continued to decline since then. Since most loans are investment property related, we can reasonably expect more loans to end up in NAMA than previous estimates suggest. That’s not good news, considering NAMA has little experience in managing company loans and no experience in managing residential mortgages.

Failed sales

News appearing this week doesn’t make good reading either. The sale of NAMA’s €843 million of junior Anglo bonds was abandoned when bids failed to meet the reserve price. And, it has just been revealed that US equity group Apollo bought a portfolio of Irish home loans for €307 million – less than half their nominal value.

Noonan’s assumption that the liquidator will sell with no further write-downs in value is already looking like wishful thinking. The government could be facing a significant shortfall in value when the true figures come to light next year.