Decision could cut valuations under NAMA

THE barrister representing property developer Liam Carroll acknowledged readily the application to have an examiner appointed to six of his companies was a measure “to buy time”.

Rather ominously Chief Justice John Murray asked somewhat rhetorically: “Is time alone enough?”

A few hours later, the Supreme Court provided its own answer to the key question about time in rejecting the appeal by Mr Carroll’s companies against the Commercial Court’s refusal last month to appoint an examiner. Its ruling was based on the court’s damning finding that the group’s survival plan was “lacking reality” and its projections on how the property market might turn around by 2011 were “fanciful”.

The same question about the timing of an upturn in the sector has probably been the most debated topic in business, economic and political circles over the past year as the country awaits verifiable signs of “green shoots” in the property market.

In such circumstances, the outcome of yesterday’s case has huge import beyond the immediate players: Liam Carroll’s construction group Zoe Developments and ACC Bank.

In the worst case scenario, it could theoretically lead to the collapse of the Zoe group with a possible domino effect on other leading property developers if the financial institutions get nervous about the prospect of recouping their money.

Because of Carroll’s dominant role in the sector and the sheer scale of his debts in this case estimated at over €1.2 billion, any compulsory liquidation of all or part of the Zoe group could also fatally undermine the Government’s own attempts to kick start the economy again via its ‘bad bank’ – the National Assets Management Agency.

NAMA is the main plank of the Government’s efforts to get banks lending again and to restore much-needed stability to the wider economy. But the success of NAMA is critically dependent on the discount of the loan value that NAMA will pay the banks to get bad development debts off their books.

NAMA hopes that it will largely be the arbitrator of what discount should apply, with general ballpark figures of 30%-40% being mentioned. Officially, NAMA claims it will apply such a discount by operating a general guideline of paying the property’s “long-term economic value”.

However, any fire-sale of large volumes of development land, which could well transpire in the event of Carroll’s companies being liquidated, would almost certainly see such properties being sold at a deep discount. The market value of such land is undoubtedly far in excess of 30-40% of their book value.

Such a scenario would place NAMA in an invidious position as any perception that it was still paying too much for sites that had lost most of their original value would cause major public unease and associated political hardship.

Clearly, there has been much behind-the-scenes activity between Carroll and his bankers and between the banks themselves over the past fortnight since the Commercial Court refused his application to give six of his firms breathing space of 100 days from creditors through the appointment of an examiner.

Several of the main banks, including AIB, Bank of Ireland, Ulster Bank and Bank of Scotland (Ireland) have moved from a neutral position on the petition for examinership when the case came before the Commercial Court in July to actively supporting the case when it was up for hearing in the Supreme Court yesterday.

It indicates the banks have pinned their hopes on the loans to the Zoe group coming within the ambit of NAMA and the prospect of a higher return than if some of Carroll’s companies are declared insolvent. However, that gamble has not paid off and yesterday’s Supreme Court ruling could lead to an unholy run by the same banks back to the courts to be first in the queue to get their money back.

Ordinary taxpayers and small business owners who have complained at how credit has dried up since the start of the economic downturn last year could be forgiven for seeing red at the willingness of the banks to lend further money to Carroll on top of the €1.2bn they are already owed to pay off his creditors and finance further development work. One might be forgiven for thinking of the old saying about “throwing good money after bad.”

In addition, they have also granted Carroll a two-year moratorium on loan repayments to last until December 2010.

Barrister Lyndon MacCann for ACC Bank yesterday noted that one bank appeared to be providing loans to Carroll’s companies in order to pay interest on another bank’s debt – a description that bears a passing resemblance to a notorious pyramid scheme.

But the readiness of seven of the eight banks owed money by Zoe to continue to provide funding to the troubled developer in the hope of an upswing in the property market provides further evidence of the Faustian pact that both parties entered into back in the mid 1990s. Where once such a symbiotic relationship had the aim of generating huge profits for all, its raison d’être now is one of mutual survival.

Of course, if these supportive banks remain in such generous mood towards Carroll and in gratitude for his custom over the past two decades, they could simply come up with the finance to pay off ACC’s loans of €136m and that particular problem would conceivably disappear in an instant.

Not surprisingly, there was no demonstrable appetite on anybody’s part for that particular bluff to be called up to now. That might have changed with yesterday’s Supreme Court ruling.