European Commission finally publishes Bank of Ireland restructuring decision

Well it’s taken Senor Almunia nearly six months but finally yesterday the Decision N546/2009 approving the restructure of Bank of Ireland (BoI) was made public, having been initially communicated to BoI on 15^th July, 2010. The press announcement of the Decision last July 2010 is here.

Key points

(1) There are a considerable number of redactions (signified with “[…]”) which obviously blank-out both figures and text.

(2) The first BoI restructuring plan was submitted on 30^th September, 2009. It seems that the “Irish authorities” were not particularly prompt with responses to queries from the EC with an EC query dated 28^th September, 2009 not being answered at least until 5^th November, 2009. There seems to have been extensive correspondence between Brussels and Dublin on this plan – I count 18 requests for information plus two face-to-face meetings. The “final” restructuring plan was submitted to Brussels on 27^th May, 2010.

(3) BoI (including group companies) had 20-30% of deposits in Ireland in 2009 which made it the market leader, with AIB close behind. Does that position put BoI most at funding risk with a deposit flight?

(4) There is a statement at para (34) that ECB funding of Irish banks arising from “Eurosystem monetary operations” is not covered by the banking guarantee. Does that create an option for default?

(5) The restructuring plan has a five-pronged approach (i) deleveraging (ii) building up deposits – loan to deposit ratio is to fall from c160% in March 2010 to c120% in March 2014 (iii) strengthening the capital position and (iv) improving risk management (v) efficiency and cost management leading to greater profits

(6) Deleveraging will including divestment of the following (i) BIAM (done) (ii) New Ireland (iii) ICS Building Society (iv) its stake in the Irish Credit Bureau (ICB) (v) asset management business Paul Capital (vi) the foreign exchange services business Foreign Currency Exchange Corporation in the US (vii) run-off two UK loan books (a) Intermediary Mortgage Portfolio that BOI acquired through the acquisitions of BankAmerica Finance (renamed BOI Home Mortgages) and Bristol & West building society and (f) a Corporate loan portfolio (viii) sale of c€12bn of loans to NAMA

(7) Building up deposits will mean that BoI acquires €20bn of new deposits in Ireland and the UK between March 2010 and March 2014. Additionally the bank is to reduce short term wholesale funding

(8) Strengthening the capital position means debt-swaps and issuing more shares. And in the context of BoI’s precarious position teetering towards majority State-ownership, there is something quite scandalous about subordinated debt swaps that have taken place with discounts less than 50%.

(9) Interestingly the document claims the State owns 35.8% of BoI, not 36.5% as widespread-reported elsewhere (para (82))

(10) BoI is expected to seek a full banking licence in the UK, though there is a commitment (para (134)) not to make any major acquisition

(11) From next January 2012, BoI must make some of its infrastructure (eg ATMs ) available to smaller competitors at a reasonable cost and allow competitors market themselves to BoI customers. BoI must not advertise the support it is getting from the State. Although the government must make moving credit cards and current accounts easier, there is very little mention of moving mortgages.

(12) There will be more jobs with the creation of two new roles, Monitoring and Divestment Trustee, appointments for which the government must propose for approval by the EC.

(13) The government must make it easier for competitors including new competitors to increase their business in Ireland. And the State owned National Consumer Agency will promote information on switching banks. For those of you getting to grips with the news from PTSB and Ulster Bank today, you will alas find little in this document which will help you switch to a lower-cost alternative mortgage provider.

(14) At para (220) the Commission expresses the view that the State will “will receive an adequate remuneration for the capital injected in the bank”. It then goes on to say that “this assessment was carried out in the decision of 26 March 2009”. Surely the Commission considered a more up to date assessment but there is no evidence that it did.

(15) It is plain that this Decision reflects life back in the Summer of 2010 when politicians thought nothing of taking a three-month break. The continuing bank run, lowering of GDP estimates and increased NAMA haircuts have probably rendered the restructuring plan obsolete.

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Paddy McKillen’s son, U2’s the Edge (aka David Evans), the Edge’s wife, Derek Quinlan and the woman who held the rings at the Edge’s wedding ceremony. A plot worthy of Hollywood.

Oh and let’s not omit Mulryan Properties LLLP (principal: Derek Quinlan, yes really!) and Ronan Properties LLLP (principal: Dean McKillen, Paddy’s son, yes really!). The following is the story of how five apparently separate companies sought to develop luxury real estate on 157 acres of adjacent plots in Santa Monica, southern California only to have their plans rebuffed last week with the planning authorities having discovered that the applications mightn’t have been as separate as they first appeared.

Last week, a Staff Report of the California Coastal Commission concluded it was appropriate to decline five separate applications to build five separate residences ranging in size from 7,000 to 13,000 sq ft in the Santa Monica mountains in west Los Angeles. No story there – planning authorities reject planning applications all around the world every day for a variety of reasons. Yes, the fact that one of the applicant companies is apparently controlled by U2’s the Edge (aka David Evans) adds some chachacha to the bureaucracy but the applications were essentially about building houses – nothing extraordinary there. The Edge did go to the trouble of building a website to explain his vision for the project. And indeed some aspects of this story are not new – in 2009 Gemma O’Doherty in the Irish Independent wrote about the scheme and the involvement of Derek Quinlan.

But it is the people behind the applicant companies that is of interest. Now if it was the Dun Laoghaire-Rathdown county council examining the applications, they would probably have picked up very quickly that the applicants were connected to large-scale property developers – in Ireland, the names Ronan, Mulryan, Quinlan and McKillen have practically become household names on the back of the property boom that swallowed the country in the mid-2000s but alas has today spit the country back out. The folks at the California Coastal Commission can be forgiven for not being familiar with the fact that Johnny Ronan and Sean Mulryan are two of the Top 10 NAMA developers with debts in excess of €1bn (USD $1.4bn) each. Derek Quinlan is also a NAMA Top 10 developer and were it not for the legal case that Paddy McKillen took against NAMA last July in which he has had partial success today, he too would be a NAMA Top 10 developer. It should be stressed that there is no evidence to connect Johnny Ronan or Sean Mulryan to the applicant companies in the Santa Monica scheme – at present it seems like a co-incidence that two of the applicant companies bear the surnames of two of the most prominent property developers in the State.

So precisely what happened in west Los Angeles? Back in 2007 the Edge bought a 157-acre plot in the Santa Monica mountains with views out to the Pacific and over Malibu. A scheme developed to build five luxury single-family residences. Derek Quinlan became involved. The planning applications have been around for nearly four years and have undergone some changes but were finally exhaustively examined last week and a conclusion was reached that it was appropriate to deny them. The land apparently cost USD $9m in 2007. According to the 2009 Irish Independent story, the five properties might have been expected to fetch USD $40m each.

In 2007/8 six separate applications were made by five separate companies as follows:

(1) Lunch Properties LLLP (LLLP means limited liability limited partnership and is a form of company allowed in the state of Delaware in the US where the five companies are registered), whose principal is James Vanden Berg, the project manager

(2) Vera Properties LLLP, whose principal is the Edge (aka David Evans)

(3) Mulryan Properties LLLP, whose principal was Derek Quinlan until July 2010 when control passed to Tim and Gillian Delaney. Tim Delaney was a Vice President at Polygram Records until 1999, the record company that produced U2 albums. There is no evidence of Sean Mulryan, one of Ireland’s most prominent developers being associated with this company.

(4) Morleigh Properties LLLP, whose principal was Morleigh Steinberg (the Edge’s wife) until April 2010 when control passed to Chantal O’Sullivan (of O’Sullivan Antiques and the woman who held the rings at the Edge’s wedding) and Lisa Menichino

(5) Ronan Properties LLLP, whose principal was Jacqueline Cremin (a director of Quinlan’s companies) until April 2010 when control passed to Dean McKillen, son of Paddy McKillen. There is no evidence of Johnny Ronan, one of Ireland’s most prominent developers being associated with this company.

(6) A joint application between Mulryan/Morleigh

The planning applications were examined last week and a conclusion reached was that it was appropriate to deny the applications for a number of reasons, interference with environmentally sensitive habitat areas and the development diminishing the scenic beauty of the area included. But one of the key issues investigated by the planning authorities was whether the five applicant companies were connected and they concluded after some digging that they were. That conclusion had implications as to the planning modalities, but the point of interest on here was the connection between the Edge, Derek Quinlan and Paddy McKillen (via his son Dean) and the fact that two of the companies, Ronan Properties LLLP and Mulryan Properties LLLP, bear the name of two of Ireland’s most prominent property developers. There appears to have been some concerted effort in 2010 to change the apparent ownership of the five application companies as detailed from page 73 of the California Coastal Commission report but it seems that the Commission decided that the applicant companies were in fact connected.

UPDATE: 2nd April, 2011. The agenda for the California Coastal Commission meeting for April 2011 shows that the above applications are still listed for “future” business which means they may be dealt with in the coming months.

UPDATE: 7th June, 2011. The agenda for the California Coastal Commission meeting for June 2011 shows that the applications will be examined on Thursday 16th June, this following several postponements.

UPDATE: 18th June, 2011. The Commission said “No!” by 8-4 though The Edge’s spokesperson said he may appeal the decision. “We’d like to be treated fairly, like any other applicant that comes before the Coastal Commission” said Fiona Hutton as reported by Reuters.

UPDATE: 27th August, 2011. The September 2011 agenda for the California Coastal Commission’s meeting to discuss planning applications in the Malibu area has been published (available here) and it reveals that there is pending litigation by four of the five companies which were exclusively revealed on here earlier this year to be seeking to develop luxury real estate in the hills overlooking Malibu on the California coast. The four companies which are apparently suing the Commission are Lunch, Vera, Mulryan and Ronan – all are LLLPs apparently registered in the US state of Delaware. The fifth company, Morleigh Properties is not listed. Although I don’t have the hand the detail of the legal action, the Commission did turn down plans by the Edge and his associates earlier this year and at the time, the Edge’s spokesperson, Fiona Hutton, indicated that the Commission hadn’t heard the last from the applicants : “we’d like to be treated fairly, like any other applicant that comes before the Coastal Commission”, she’s reported as saying.

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Paddy McKillen v NAMA – the Supreme Court rules – Paddy wins on narrow point. Substantive part of appeal not yet judged.

There might be some raised eyebrows at the speed with which Paddy McKillen’s case against NAMA has been dealt with. To remind ourselves, here are the key milestones

1^st July, 2010 – Paddy McKillen submits application to Ireland’s High Court for a judicial review of NAMA’s dealings with his loans
14^th July, 2010 – Application made by the State (unopposed by the applicant) to have the matter transferred from the High Court to the Commercial Court
19^th July 2010 – approval to transfer case from the High Court to the Commercial Court, case set down for 4 days in October, 2010
5^th October, 2010 – the case opens at a special three-judge division of the High Court
14th October, 2010 – the hearing at the High Court concludes
1st November, 2010 – the judgment at the High Court is handed down – Paddy loses on all counts.
18th November, 2010 – terms of appeal to the Supreme Court decided by the High Court
15th December, 2010 – opening of appeal hearing at the Supreme Court
23rd December, 2010 – hearing of appeal at the Supreme Court concludes
3rd February, 2011 – judgment from the Supreme Court

But this was an important case to the financial well-being of the country as it threatened one of the government’s key planks in sorting out the financial crisis (and to remind ourselves they were the guarantee, NAMA, recapitalization and restructuring). If NAMA’s acquisition of loans (€71bn+ so far) is undermined then NAMA might face all sorts of challenges by developers unhappy with their treatment at the hands of the agency.

The Supreme Court has ruled on two of the five strands to the appeal and have determined that NAMA’s decision in December 2009 to absorb Paddy’s loans was not validly taken as it pre-dated NAMA’s coming into being on 21^st December 2009. However it would appear that all NAMA need do is formally decide to absorb his loans. So not much of a victory for Paddy.

The other strand ruled on – whether the EU intended that NAMA only take non-performing loans – NAMA’s position was upheld, that is, that the agency is entitled to absorb both performing and non-performing loans.

The other three strands, consultation, fairness and constitutionality of absorbing Paddy’s loans have not been ruled on since the Supreme Court decided NAMA’s decision to absorb the loans was invalid. It is expected that NAMA will formalize now its decision to absorb Paddy’s loans in which case, the Supreme Court will then rule on the other three strands. Yes, it’s a little bizarre.

What next? A formal decision by NAMA to absorb Paddy’s loans. Then a judgment from the Supreme Court on the other three strands to the appeal. I would expect Paddy to lose but not as comprehensively as at the High Court. What then?  An appeal by Paddy beyond these shores to the European Court of Justice? Maybe, but more practically important is how NAMA will now act. Bizarrely the agency decided to refrain from absorbing Paddy’s loans pending the outcome of the Supreme Court appeal. Meanwhile there has been a flurry of activity with one of Paddy’s key assets on which there is substantial NAMA-eligible lending, the three luxury Maybourne hotels in London, Claridge’s, the Connaught and the Berkeley. The owners of Britain’s Telegraph newspaper have recently acquired 25% of the Maybourne group and are said to be about to acquire Derek Quinlan’s 35% interest in the group which would then give them a controlling interest. Paddy McKillen is reported to own 37% of the group and Kyran McLoughlin and others 3%. There are conflicting reports about the group’s €784m of debt with some suggestion that NAMA has extended the loans (through its control of NAMA banks pre-acquisition, one would guess) and other reports suggested the loans needed to be redeemed at the end of January 2011 (three days ago!).

Remember you will find extensive background (including dates, participants including representatives, witness statements etc) and detailed updates on this case under the dedicated tab, Paddy McKillen v NAMA.

Money and Banking Statistics: December 2010

UPDATE: Whilst this judgment today might have limited effect on NAMA’s dealings with Paddy McKillen (the agency has refrained from absorbing Paddy’s loans pending the outcome of the appeal and it seems a relatively simple matter to ratify the decision today to absorb Paddy’s loans which places Paddy back at step one), there may be serious consequences on NAMA’s dealings with other developers’ loans where the decision to acquire was made before 21^st December, 2009. Before examining potential consequences, it might be worth remembering that NAMA paid Arthur Cox the sum of €911,250 including VAT in respect of that firm’s work for the agency in 2009 and €247,667 to Allen and Overy in the UK. It’s not entirely clear from the Comptroller and Auditor General’s report from which these sums are extracted, what the remit for these two giant legal firms was but there may be questions to ask about any advice given in respect of pre-formation actions.

Remember that NAMA required the banks to provide the first valuations before Christmas 2009 and NAMA’s valuation date is 30^th November, 2009. This implies to me that the decisions made in early December 2009 to acquire loans affects more than just Paddy McKillen. Of course NAMA famously decided not to absorb Paddy’s loans pending the outcome of the present legal proceedings. But NAMA has absorbed some €71bn of loans. In some cases such as those listed below, NAMA has been associated with quite serious actions in respect of these companies and individuals. Is the legal status of these actions now in question? No doubt we will see in coming days.

Company	Status
McENANEY CONSTRUCTION LIMITED	Receivership
PADDY BURKE (BUILDERS) LIMITED	Receivership
MELLVIEW CONTRACTORS LIMITED	Receivership
ARCADIA DEVELOPMENTS LIMITED	Receivership
LYNDONBARRY ESTATES LIMITED	Receivership
MELLVIEW PROPERTIES LIMITED	Receivership
Michael McNamara and Company	Receivership
Radora Developments Limited	Receivership
John J Fleming Construction	Receivership
Pierse Building Services	Liquidation
Pierse Construction	Liquidation
Whelan Group (Ennis) Limited	Liquidation
Whelans Limestone Quarries (Contracts) Limited	Liquidation
Whelans Limestone Quarries Limited	Liquidation
Whelans Quarries (Carraigtwohill) Limited	Liquidation
Shannon Explosives Limited	Liquidation
Paddy Shovlin/Anthony Fitzpatrick/Patrick Fitzpatrick	Judgment
Cicol Limited	Liquidation

And NAMA has apparently overseen other actions by the bigger developers – disposing of yachts and Bentleys not to mention €2bn of property assets in 2010 for example. If a developer feels he suffered a loss as a result of NAMA’s actions, does he have any redress?

UPDATE: The NAMA Chairman, Frank Daly has issued a press statement which expresses disappointment at the judgment, thanks the legal team, claims the ruling affects Paddy McKillen’s loans only and states that NAMA will study the decision and reflect on options. So no immediate move to confirm or ratify the decision, which is interesting. Also not sure if the claim that this judgment just affects NAMA’s actions with Paddy’s loans is correct.

UPDATE: Decision now published by the Supreme Court in two parts (here and here)

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