Thursday 19 September 2019

'We had to roll up our sleeves and remind ourselves how to lend' - Ken Murnaghan, Finance Ireland

After overseeing restructuring in several challenging roles, the head of commercial lending at Finance Ireland tells Gretchen Friemann about starting over

Ken Murnaghan outside Finance Ireland’s offices opposite the former Burlington Hotel. Photo: Steve Humphreys
Ken Murnaghan outside Finance Ireland’s offices opposite the former Burlington Hotel. Photo: Steve Humphreys

Gretchen Friemann

Ken Murnaghan is not afraid of change. The head of commercial lending at Finance Ireland, the rapidly-expanding non-bank lender, found himself in a storm when the crash hit.

After jumping ship from a plum posting in Paris, where he led AIB Capital Markets' real estate finance arm, he accepted a role at Ulster Bank in 2007 - as head of commercial property lending.

To some it must have looked like a staggeringly unlucky career move. Rather than overseeing an expansion, as he had hoped, his job became one of acute crisis management.

Yet Murnaghan, tall, softly-spoken and meticulously polite, says he's always relished the shock of the new.

"I had no experience of managing a mass market business and certainly none in downsizing. I do now," he says with characteristic understatement.

Ulster's commercial property loan book totalled close to €15bn when Murnaghan took the reins. By the time he left five years later it had shrunk by over 75pc.

After that stint staunching the bloodletting in commercial real estate, Murnaghan was parachuted into the next red zone - business banking. In 2012 the financial tsunami that had engulfed the banks was ripping through small to medium enterprises.

Ulster Bank threatened to buckle under the strain.

Murnaghan settled down to another stretch of intense restructuring. This time he had ventured in with his eyes wide open. "At that stage it was clear the wider SME sector had been impacted. It also looked like there was going to be an impairment problem in the wider bank and we were probably going to have to very significantly restructure and downsize business banking."

Two years later, the man who had grappled with some of the biggest challenges facing Ulster, and as head of its business banking unit, seemed poised for another leap up the institutional ladder, veered off course and charged headlong into the unknown.

He claims he pursed the opportunity because it offered him the chance "to start a business from scratch".

True to form, Murnaghan downplays the work required in conjuring a business out of air. He does point out that the new division in Finance Ireland did not have the advantage of an existing balance sheet. "As well as building up the team, the franchise and the customers and all that, we also had to build up the capital and funding".

In that context, "every loan counts".

The painstaking growth has paid off. Murnaghan's business, launched in 2017, now controls a €150m-plus loan book and is racing towards the €200m mark. In three years he expects that figure to expand to €500m and is targeting €1bn in five years.

The upswing in momentum however is likely to hinge on a successful maiden securitisation or bond issuance. Murnaghan cut his banking teeth at AIB's leveraged finance unit, a riskier form of finance, typically relied upon by private equity firms to back a takeover deal. Shepherded by Robert Gallagher, head of AIB's corporate markets division and now the chief executive of Activate, a private equity and State-backed lender, Murnaghan turned his hand to securitisation and collateralised loan obligations, an esoteric corner of the market but similar to other securitisation vehicles in that it issues multiple tranches of debt.

In 2015, Dublin-based lender Dilosk forced open a window in the mortgage-backed securitisation market with a €206m bond deal secured against a book of former ICS mortgages.

Murnaghan wants to launch something similar, which would mark a major milestone, and, he says, enable the firm to raise funds at lower rates.

It's all a far cry from the relentless slicing and dicing at Ulster. While Murnaghan is keen to present that experience as a valuable lesson, he conceded "it is wearisome making things smaller and of course it is emotionally draining".

After seven years of restructuring, the entrepreneurial chutzpah of Billy Kane's new venture must have seemed a breath of fresh air.

The two hit it off in 2014 over a cup of coffee. Murnaghan maintains the meeting was intended as a routine "social catch-up". "As head of business banking my job was to talk to people all the time". Kane was scouting for opportunities. He was convinced the retreat of the banks presented an opportunity for more nimble players.

By that stage global distressed debt investors were already piling into the soured loan market, carting off vast portfolios of toxic debts. Kane thought the feeding frenzy offered opportunities further down the food chain.

Murnaghan, whose cautious, often quaint phrases belie a more adventurous spirit, seized upon the idea. "I said well, gosh, that is interesting. If I was looking at that, I would look at it this way and this way, and literally thought no more about it until he called a day or two later."

The next challenge was finding a backer. Murnaghan claims he pitched the idea at "least 50 times" to numerous private equity and institutional funds in London. But even Kane's strong reputation failed to soothe anxieties.

"Our story was credible." But asking for a pile of money that could be "lent out to Irish people to buy property, well that was a hard sell in 2014 London. We had a lot of our doors closed in our faces".

Murnaghan argues the negotiations may have taken longer too because "we wanted to raise the money but lend it out ourselves. A lot of hedge funds and private equity firms were of the view they should have a veto right on lending decisions. In other words you are acting a little like a broker or a middle man".

Eventually they hooked a whale. US-based funds giant, Pimco, signed up in 2015, committing €25m of equity; cash that was matched by a further €30m from the national sovereign wealth fund, ISIF.

The following year, and with wholesale funder HSBC on board, although Murnaghan, with typical reticence refuses to confirm the bank's involvement, Finance Ireland, set out its stall as a niche commercial property lender. The new division - aimed at small-time investors requiring €1m to €10m in debt financing - formed a vital third strand to the organisation's existing motor-finance unit and debt-servicing arm.

More importantly, the firm, established in the 1990s by Kane and then resuscitated by the prominent entrepreneur in the post-crash years, remains on course to eventually grow to challenger bank status.

Kane has spoken of this ambition in the past. Murnaghan reiterated an initial public offering of takeover remain the "likely exit routes" for investors.

But the whiff of animal spirits extends across the board. All the directors, including Murnaghan hold equity stakes. So too do the senior lending managers. "We're all invested in how to make this bigger and better for all of us."

So far the business has issued over 80 loans at an average size of €1.75m. Murnaghan calls it "granular", meaning, he explains in measured tones that even at this soft pitch seem to echo through in the firm's elegant boardroom.

"We all had to roll up our sleeves and remind ourselves of how to lend".

Finance Ireland is housed in a prominent period house, opposite the former Burlington Hotel. It was snapped up by Kane in 2014, for €4.65m, who buttressed the deal with a €3m loan from AIB. Ironically, the partially nationalised bank sold the 10,000sq ft to an investment firm in 2013 for €4.75m. It forked out €3m to break its lease.

Each successful mortgage deal is celebrated by the team. Murnaghan points out the financial evisceration triggered by the crash was not limited to the banks. Borrowers also took a hammering. The experience taught them "how to manage a lender". In this 'new environment' businessmen eager to escape the clutches of a distressed debt or private equity fund have become particularly skilled in navigating a financial tightrope. "They know how to manage their loan relationship sufficiently well so they are still in control of their assets, and I suppose not so sufficiently well that they have encouraged their lender to foreclose against them," says Murnaghan.

So it has been an "education" for us. "We have had to figure out how to lend safely" in this market.

Murnaghan, clean-shaven, clad in a sharp suit, and exuding the rectitude the public, long ago, once associated with the banking profession, swiftly shuts down the conversation when asked about the anticipated loan default rate on the book. Instead he bemoans the industry's patchy data on this front, pointing out this paucity of meaningful information remains a key obstacle for international investors.

But at the end of this year Murnaghan, who once chucked in a Green Card for the US after becoming enthralled by the fast-paced life in Hong Kong where he wound up working as a tax consultant for EY, will have spent the guts of four years at Finance Ireland.

The question is will this small, rapidly maturing business manage to confine the restless ambition of a banker that by his own admission has thrilled at the opportunity to pursue sharply diverting paths.

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