Behind the headlines: Anglo Irish empire is expanding and getting more risky
Published 05/08/2010 | 05:00
THE accusation it was a one-trick commercial pony bedevilled Anglo Irish Bank ever since it listed on the stock exchange in the early 1970s.
American investors used to snort derisively and label Anglo Irish a "monoline'' bank, meaning it essentially only offered one form of lending, secured on commercial property, some of it developed, some of it speculative.
But now take a look at the institution under chief executive Michael Aynsley. It is proposing to take control "on a contractual basis'' of Arnotts department store, the Heritage Golf Hotel and spa in Laois, the Quinn insurance company and potentially the McCabe pharmacy chain, according to a weekend report.
This is in addition to two hotels in New York, over 200 apartments in Lower Manhattan and no doubt endless other property assets we don't know about, because its financial statements don't go into that level of detail.
The reason for Anglo's expanding empire is clear -- it has to seek to recover monies when borrowers are simply no longer paying, through a variety of routes.
In years past the bank was able to threaten borrowers with calling in personal guarantees or just calling in the actual security underpinning the loan. But these threats were issued when personal guarantees still had real money attached to them and when security underneath a loan could be depended upon to clear that loan, and more in some cases.
Now Anglo is having to take over real live trading businesses, with all their uncertainties and unpredictability in terms of cash flow. The immediate question which arises is how Anglo, a bank whose skill base has been hugely degraded in the last decade, going to make sure it can recover value from the direct ownership route?
How is the bank going to people the boards of these companies? How is it going to make sure it has in-house (or bought in) industry experience across insurance, retailing and hospitality to reach definitive judgments about what kind of recoveries are possible from borrowers in the real economy?
Anglo is already for reasons of funding and balance sheet size, a highly risky bank from a state perspective. Its movement in the whole area of direct ownership of trading business only increases this. Will the EU, the government and even the Financial Regulator wear it?
Arnotts presents challenges on all these fronts and is the ultimate microcosm for new expanded Anglo. The problem in this case is that the loans won't get paid solely because Arnotts improves its trading performance.
The property assets have in some way to pay their way too and therein lies the problem.