Thursday 22 February 2018

'You can be clever - but if you're not lucky, you're in trouble'

Seven years after his PTSB Finance division fell victim to the crash, the car finance veteran is steering his new firm, backed by US hedge fund Magnetar, towards a loan book of €775m by 2020, writes Gretchen Friemann

First Citizen’s Chris Hanlon
First Citizen’s Chris Hanlon

Gretchen Friemann

First Citizen's Chris Hanlon considers himself one of the lucky ones. Seven years on from the forced sale of the car financing and leasing division he ran at Permanent TSB, when the economic crash swept away most of the old guard of Ireland's banking industry, Hanlon stands out as a survivor.

After years of uncertainty money is flowing in the door.

Carved out of the then rapidly-crumbling edifice of the former Irish Life & Permanent, First Citizen is growing steadily and is on course to expand its lending book to at least €775m by 2020.

Hanlon, a veteran of the car financing industry, was knocked down in the rush last month when the firm's €158m portfolio of bonds was snapped up by yield-starved European investors.

The maiden securitisation of the triple A-rated car loans marks a turning point for the business, shifting the loans off the balance sheet and providing fresh funds for the next phase of growth.

In the same week as the bond auction, Magnetar, a US hedge fund, took a two-thirds stake in the business and injected much-needed equity.

Hanlon frequently welcomes his hedge fund backers to First Citizen's sparse offices on James Joyce Street in central Dublin, which overlook a grim block of partially-boarded up flats. "It's probably not the most attractive of areas but I think it's coming up," he says, flashing a sunny smile.

Hanlon, deeply tanned from a spell in Portugal, and clad in a crisp white shirt and silk-brocaded tie, is not one to dwell on negatives. While he concedes the fear of failure provides a greater motivator than the allure of success, his guiding philosophy offers a variation on the famous Churchill maxim, 'Keep buggering on'.

"I'm at this a long, long time," he says, leaning back fully in his chair. "I've seen everything slow and fast. It all happens in the end if you go to work every day. It's the day you stop going to work you've got a real problem."

This dogged determination marked his reaction to the fire sale of PTSB Finance, the asset financing arm he had built up and led for two decades and which, at its peak, oversaw a €2bn loan book.

In 2009, despite surging unemployment, cascading loan arrears and mounting repossessions, Hanlon and his colleagues within PTSB remained confident the worst was over.

Then, on the afternoon of March 31, 2010 - a year before the bank's State bailout - he read on PTSB's website his division had been earmarked for closure.

Hanlon shrugs, without bitterness. "That's big organisations for you." He admits he found the decision "very disappointing" but insists, "you get over that fairly quickly". Besides the "danger was so large, I knew I couldn't afford to wallow in this".

Before long he was petitioning the board to "consider other ideas". "They said to me, well I don't think you are going to get any other ideas, and I said to them, that's my problem."

Pulling down the shutters in any case was no easy solution, according to Hanlon. "Closing down a finance company that has over 1,000 cars on finance and nearly €225m in new cars, that's a difficult task"

By then however, the bottom feeders were out in force as Ireland's sinking economy drew a swarm of private equity and distressed debt specialists.

After a process run by Davy, Deutsche hoovered up PTSB Finance's motor loan book along with the management business for €287m, indicating the discount was far deeper than the near 20pc haircut reported at the time.

The deal sparked criticism from some quarters but Hanlon argues against the current trend towards revisionism. "There was no commitment to do further lending from Deutsche. Now I know looking at it from today's perspective, that seems extraordinary, but in 2011, 2012, the Troika had only moved in and no-one knew when they were going to move out."

By 2013 "the picture had improved dramatically" and the ambition to resurrect the remnants of PTSB Finance and forge back into motor lending as First Citizen finally looked a realizable ambition. But he needed to buttress Deutsche's support with a new investor.

After rebuffing a takeout approach from an international bank, he settled on Magnetar. The Chicago-based hedge fund, best known for harvesting colossal profits from the US sub-prime housing debacle, underwrote the lending to the tune of €51m.

But the deal hinged on the future securitisation of the loans. "If we had got this wrong, if the team had got it wrong, Deutsche Bank would be looking for their money back and Magnetar wouldn't be investing."

First Citizen based its maiden securitisation on loans issued to car dealers, from February 2014 onwards, when the lending platform fired back into action.

Hanlon is now targeting a second securitisation of €200m-€250m by 2019.

Yet uncertainty about the debt markets' reception to the bond auction forced Hanlon and his team to toe a conservative line, restricting the firm from engaging heavily in personal contract plans, or PCPs, which account for 70 pc of lending on new cars,

Instead the firm focused on capturing a "smaller return for a prime customer on the basis that we could ... securitise it at a better rate".

The most senior bonds within First Citizen's securitisation portfolio achieved yields of 0.4pc. When, as Hanlon characterises it, "we switched the machines back on" the firm lent money at fixed rates of 8.9pc, compared to close to 8.5pc on offer back then from Bank of Ireland and AIB.

Aside from the two pillar banks, Billy Kane's Finance Ireland on the other side of the city, represents Hanlon's fiercest competitor.

The two businessmen go back three decades but rarely meet these days. Kane enlisted Hanlon's help in the mid-1980s to head up a motor financing unit at Woodchester, an aggressively acquisitive bank that was later taken out by GE, and in the early nineties roped him in again to build out the asset financing business at Irish Permanent.

On the car financing front,Finance Ireland and first Citizen bear strikingly similarities; both processing high volumes of applications on a lending platform that straddles multiple sectors.

Aside from car financing, First Citizen, also plays in the agri and equipment finance space and is now forging into commercial real estate as well eyeing an incursion in to the unsecured personal lending.

So why not unite the two?

Hanlon argues against this in the short-term, pointing out, paradoxically, that two "small finance companies put together might equal one small finance company. You still don't have the scale".

He maintains car dealers prefer greater competition in financing market and so the elimination of one brand may invite in another, larger player. Not that Ireland's car market delivers scale to any prospective entrant: new car sales top out at close to 150,000 a year, compared to 2m in the UK.

"At the moment we all kind of tussle it out. We all know the same guys, we all know the same dealers. It's very difficult for someone to come in with another brand."

Yet if the firms expand, a merger may become inevitable. Hanlon characterises an "initial public offering" as the perfect exit, and raises the prospect of a roll-up IPO that could fuse First Citizen with Finance Ireland.

Kane recently laid bare his desire to pursue a trade sale or float his company, which is backed by US funds giant, Pimco, and the nation's state investment fund, ISIF, within three to five years.

If that move threatened to render First Citizen "sub-scale" Hanlon claims "that would be a good time to talk". But these are considerations for another time. "The market is still normalising," he emphasises, "and I think that will continue until 2020. That's my time horizon."

As Ireland's economy continues to outpace the wider eurozone, Hanlon also intends to rev up its share of the mushrooming PCP market. The car loans, effectively a leasing arrangement as the borrower rarely takes ownership of the car, and instead finances its depreciation, have been blamed for inflating a fresh sub-prime lending bubble in the US.

Hanlon dismisses any fears of a similar scenario in Ireland, partly on the basis the market is too small. But the "lack of transparency and the conflict of interests" generated leave him "with huge reservations about the way the product is sold here".

First Citizen's swift success on the car financing front is not matched in all areas of the business. Brexit slammed the breaks on the nascent agri-finance unit, backed with €40m from the European Investment Bank's offshoot, the Strategic Banking Corporation of Ireland along with a €10m slice from Magnetar.

Hanlon, ever sanguine, insists it merely means he's "running six months behind" the business plan. "But if you meet me in a year from now I'm probably running six months ahead of it." Plans to expand the product range and sell outside the narrow agri segment are already underway.

Despite the inevitable, unforeseen challenges, Hanlon clearly values his new-found autonomy. "If I had stayed in PTSB, I would have retired at 60." Hanlon, a baby-faced 57-year old attributes his revived fortunes to luck. "You can be very clever but if you're not lucky, you're in real trouble. I'm lucky."

Not that he's testing fate a third time. "Success is in front of you but failure," he taps his left shoulder, "is just there."

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