Wednesday 21 March 2018

Richard Curran: We do sound like sore losers after Brexit snub from AIG

Minister of State for Financial Services Eoghan Murphy’s complaints over inward investment were dismissed. Photo: Tom Burke
Minister of State for Financial Services Eoghan Murphy’s complaints over inward investment were dismissed. Photo: Tom Burke
Richard Curran

Richard Curran

It is definite "game on" when it comes to picking up financial services jobs after Brexit - but Ireland may not be off to as solid a start as we might have hoped.

AIG chose Luxembourg for its new post-Brexit European headquarters instead of Dublin, then we had speculation Lloyd's of London may be set to deliver more disappointing news by opting for Luxembourg or Berlin.

Dublin is definitely in line to pick up a few bonus investments but there is a background narrative about the regulatory regime running throughout. One lawyer at London firm Slaughter and May was quoted in the Financial Times this week as saying our Central Bank has gone from "a light-touch regulator to being more serious".

Minister of State for financial services Eoghan Murphy has complained that some jurisdictions are using "regulatory arbitrage" to win investment. He raised concerns with the EU financial services commissioner that there should be consistency in the way regulatory standards are applied.

It seems we want to have EU-wide consistency in the application of regulation/supervision but not corporate taxation. The Luxembourg Minister for Finance dismissed Murphy's concerns by saying: "I didn't expect the Irish to be sore losers." Ouch! There is of course that minor matter of a €13bn European Commission tax ruling on Apple's Irish operations. It is hard for Ireland to hang on to the moral high ground on inward investment with that ruling out there.

The real problem seems to be that core regulatory and supervisory principles in financial services that are run across the EU are not yet fully embedded in the system. So, one jurisdiction can attract a project by allowing a financial services company to operate there without perhaps having to locate the same level of supporting capital as somewhere else. It appears there is little scope for complaints like Murphy's to be dealt with through tougher regulation.

The Central Bank is going about its job with the zeal of a convert. The old dichotomy between promoting an industry and regulating an industry remains but the Central Bank no longer has to worry about promoting jobs in Ireland.

If they come, they come. Meanwhile, the Government can throw its toys out of the pram (and they may even have a point) but it doesn't mean Europe will give us a sympathetic ear.

No one unscathed in Nama Project Eagle probe

The PAC probe into Nama's sale of its Northern Ireland portfolio finally came to an end with the publication of its findings.

As expected, it backed up the Comptroller and Auditor General's view that the agency could have got a better price for the loans, which were sold to Cerberus at a sizeable discount in 2014.

Nama's response was somewhat battle-weary. Senior executives from the agency have been before the committee multiple times and they beg to differ with the C&AG and the PAC on the question of the sale. Aside from the dispute over price, there are a number of clear truths about this whole sorry saga.

Nama could have handled the sale process better. It is not certain it could have got a significantly better price as the C&AG has suggested. Nama is still very firmly of the view that it did the right thing.

Cerberus might have done very well out of this portfolio if Brexit had not come along.

The commercial property market in the North was recovering until the middle of last year, when confidence took a big hit.

The Brexit vote saw a 40pc hit to commercial property activity in 2016 -and the worst is still to come.

If Nama had decided not to sell the loans in one big lump, it might have decided to work through them over a longer period of time. This would have been highly contentious, as a State agency in the Republic went to battle with most of the North's property players.

It would have been the financial equivalent of hand-to-hand combat every time Nama moved to liquidate a borrower.

In theory they could have delayed the sale, but for how long? If they waited until 2016, Brexit would have seriously dented the value of the portfolio.

Nama executives are no doubt very comfortable in their view that they did the right thing and "got out of Dodge" when they did with a sizeable cheque.

The agency's statement this week could not have been clearer: "It was the Board's commercial and considered judgement, in full knowledge of the financial implications, that the sale of the Project Eagle loan portfolio provided a better financial outcome than any alternative monetisation strategy."

Unfortunately, the sorry saga has shown up corporate governance deficiencies within the organisation, particularly when it came to the Northern Ireland Advisory Board and the role of Frank Cushnahan.

Nobody comes out of it particularly unscathed.

Brexit heralds a new Dawn for meat sector

Dawn Meats is one of the biggest and most successful meat processors in Britain and Ireland. So it is hardly surprising that it may be close to making an offer to buy Dungannon-based Dunbia. Dawn, owned by the Queally and Browne families from Waterford, is one of those processors which can service the UK market from plants on both sides of the Irish Sea.

The big unknown in the sector is what happens after Brexit? If the UK introduces tariffs on Irish meat imports, large processors might find it easier to service large British customers from UK plants.

Dawn Meats has 3,300 staff through operations at 24 sites across Ireland, Britain and the Continent. Of those, 10 are in the UK. Group turnover is over €1bn but its profit and group margins are not known because the company is unlimited and doesn't have to file group accounts.

Dunbia has 4,000 staff at nine locations. Its biggest is in Dungannon, where it employs close to 1,000 staff. It has two plants in Wales, two in Scotland, two in England and two here. If Dawn were to buy the entire group, it would give it operations at seven more locations in the UK and a group that had a turnover of £787m last year.

Profit margins are notoriously thin in the sector and Dunbia had an operating profit margin of just 1.17pc. Profit before tax last year was £7.1m and net assets £63m.

One in five of all McDonalds burgers sold in Ireland, the UK and Europe comes from Dawn's Co Waterford plant, which is churning out 400m burgers a year.

If the Dunbia deal were to be done, it would give Dawn a consolidation opportunity and increased capacity in the UK where it has very large contracts.

Every Irish meat company with sizeable contracts in the UK has to be concerned about Brexit uncertainty. At this stage the future may still be bright for large processors who can serve the British market from Britain - but it isn't clear what happens to the beef industry back home.

Sunday Indo Business

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