ANGLO IRISH Bank is hoping to avoid taking a multimillion-euro hit on a €1 billion property portfolio by giving a property developer an interest-free loan to take it off its hands.
The transaction, if it goes ahead, will allow Anglo avoid the losses it would incur if it had to sell the properties on the open market.
The proposed deal with Blanchardstown Shopping Centre owners Green Property is similar to one done by AIB last year, which saw the bank avoid crippling losses on a troubled UK property portfolio.
Green is understood to have earned significant fees from the AIB deal, which was structured so as to minimise the risk to the property company.
Anglo Irish and AIB are keen to avoid selling the properties on the market because they are not financially strong enough to absorb the losses they would incur. The properties do not qualify for the Government’s bad bank scheme – the National Asset Management Agency – because they are investment properties rather than development properties.
By selling the London portfolio to Green rather than putting it on the market, AIB recorded a mere €56 million loss on a €700 million portfolio despite a collapse of 20 per cent or more in UK prices.
Anglo Irish now wants to sell nine properties to Green in a similar transaction. All are worth substantially less than Anglo paid for them. Five of the properties are in its €640 million Select Geared Property Fund which was launched in 2007.
The bank aimed to raise €225 million for the fund from clients which would be used to purchase properties up to €640 million with loans from Anglo Irish. The advent of the credit crunch meant that Anglo could not raise the full €225 million and had to put up a portion of the equity itself.
The select fund’s assets include the Gaiety Centre shopping development on Dublin’s South King Street, two office blocks in London, the Metquarter shopping centre in Liverpool, and a redevelopment property in Surrey. Anglo Irish also wants to dispose of four properties owned by its private banking arm. The bank has planned to sell the properties on to its private clients, but has been unable to do so.
The bank’s interest in the nine properties is now held by its pensions and investments subsidiary, Anglo Irish Assurance Company (AIAC).
Anglo now plans to advance Green an interest-free mezzanine (short-term) loan to buy the equity stakes from AIAC. The bank refused to comment on what security, if any, Green had to put up.
The original loans taken out by the select fund and the private bank from Anglo to purchase the properties are expected to remain in place and, if the format of the AIB deal is followed, the writedowns will be minimal.
Green declined to comment on the transaction. But a senior source at the company described the deal as “complex and sophisticated” and stressed it is designed to ensure the bank “recovers” its money.
Industry sources point out that the assets are now worth “close to their debt value” and says a mezzanine loan covering the bank’s equity would be “worthless from day one”.
The deals, which allow the banks avoid debilitating losses, will have negative consequences in the longer term because they circumvent the Government’s efforts to clean up the banking system, according to ESRI chief economist John Fitzgerald.
“We will have failed in that objective if there are continuing doubts” about the true extent of the banks’ bad debts, he said.
The Financial Regulator said it is “engaging with the banks and pushing them to recognise more realistic provisions on their portfolios.”