IRISH BANKS -- HANGING ON BY A THREAD

UNCLAS SECTION 01 OF 02 DUBLIN 000280 SENSITIVE SIPDIS STATE FOR TREASURY VIMAL ATUKORALA E.O. 12958: N/A TAGS: PGOV PREL ECON EFIN EI SUBJECT: IRISH BANKS -- HANGING ON BY A THREAD REF: DUBLIN 183 DUBLIN 00000280 001.2 OF 002 ¶1. (SBU) Summary: ACCBank, the Irish subsidiary of Rabobank has begun to aggressively pursue non-performing loans to property developers through the Irish legal system. To date, the courts have allowed the borrowers 100 days to reorganize, enabling the National Asset Management Agency (NAMA) to assume related assets held by banks covered by the guarantee scheme at a discount rate of its own choosing. Should future cases be decided in favor of ACC (or another bank),the major Irish banks could be pushed to a point where nationalization would be the only viable option and NAMA would need to dispose of its assets more quickly than expected. End Summary. ACC- The Giant Killer? -------------- ¶2. (U) In recent weeks, ACCBank, Rabobank's Irish unit has taken legal action against several large developers in an effort to collect on underperforming loans. ACC has exposure of just Euro 21 million to one of the development companies (Tivway),well under ten percent of Tivway's total borrowings. By contrast, Ireland's largest bank, AIB, has exposure of roughly Euro 300 million. To date, ACC has been unsuccessful in its attempts to collect, with courts deciding to place both Tivway and another property development company, Zoe Group, into examinership. Both now have 100 days (roughly until the end of October) to restructure and during that time, none of their debts can be enforced. Rabobank, which carries a AAA credit rating, has made it clear that exiting the Irish market is a priority, as insiders have recently expressed concern that the bank's exposure to the Irish market may cause the rating to slip. Industry analysts predict the pace of these legal actions to quicken as other foreign banks seek to maximize their recoveries. Whither NAMA? -------------- ¶3. (SBU) Should a legal challenge by ACC (or any other bank) result in a borrower being placed into receivership, NAMA could crumble. Initial expectations are that assets would be transferred to NAMA at a 30% discount to book value. The logic behind this is that the market will eventually stabilize and holding assets would allow the value to recover from the current lows. However, receivership would necessitate an immediate fire-sale, with most assets of troubled developers worth at most 25% of book value. As loans to developers often have a complicated cross-guarantee structure, placement of a small loan into receivership could force the liquidation of a much larger enterprise. In such an event, banks would be forced to mark to market a large portion of their asset bases, necessitating substantial capital injection. Under this scenario, it is unlikely that either AIB or Bank of Ireland could escape nationalization. ¶4. (SBU) On July 21, Emboff spoke with Rossa White, Chief Economist for Davy. White indicated that while receivership would create significant problems for NAMA, it is highly unlikely that such an action would occur. Further, NAMA legislation is expected to be in place by the end of September, and all assets from the six largest banks will be transferred to NAMA prior to the end of the 100 day examinership period. ¶5. (U) On July 23, NAMA officials indicated that they were making plans for foreign banks not covered by the state guarantee scheme. However, nothing is definite at the moment, and officials indicate that they expect asset transfer to begin in December. Comment -------------- ¶6. (SBU) While the current time horizon indicates that the six banks covered by the state guarantee will remain sufficiently well-capitalized to return to business as usual following the transfer of assets to NAMA, trouble remains on the horizon. Virtually all large loans to developers were syndicated across multiple banks, several of which are outside of the state guarantee plan. These banks have little incentive to bide their time, and unless a satisfactory plan to include them in the guarantee plan is finalized, they will most certainly press for a quick settlement of the underperforming portion of their asset bases. NAMA officials may find that they need to dispose of assets more quickly than they had anticipated. DUBLIN 00000280 002.2 OF 002 ROONEY