Up in the air

Barrett jetted back from China to handle the crisis, and the sociable developer was dispatched on an enforced sabbatical in Tuscany. All the while, Treasury Holdings owed Irish banks a total of €1.9 billion. It owed the state-owned Anglo Irish Bank alone €1.2 billion.

Yet nothing had changed for Ronan, who was still enjoying the champagne lifestyle. With his pink palazzo on Burlington Road in Dublin 4 and a sprawling country estate at Enniskerry, Co Wicklow, Ronan did not seem to buy into the new reality.

Events last week show that the new reality is rapidly catching up with him.

Last week, Real Estate Opportunities (REO), which is 67% owned by Treasury, said its ability to continue as a going concern was contingent on, to a very large degree, the support of Nama.

REO, which plans to develop Battersea power station in London, is deeply in the red. It reported a deficit on shareholder funds of more than £700m (€850m).

It needs to renew £815m of bank borrowings, now controlled by Nama, and is seeking a deferral of interest payments and new working capital facilities. It will also require “ongoing financial support” from Nama beyond 2012.

Motley Fool, an online investment site, last week described REO as a “cigar butt” and said it wouldn’t “touch the shares with a barge pole”. Nama and the Irish tax-payer, on the other hand, can’t avoid REO.

The priority is to get back the £815m lent originally by Irish banks to REO — plus a further €1 billion advanced separately to Treasury Holdings. A moment of truth is approaching for both Ronan and Nama.

The dilemma for Nama, ironically a tenant in a building developed and co-owned by Ronan with developer Paddy McKillen, is whether to support his companies and risk scorn, or to move precipitously and risk triggering losses. Will it be a case of work out or bailout?

“It is going to be incredibly difficult to reconcile what Nama is saying publicly about pursuing developers for every last cent on one hand, and supporting work-outs on the other,” said Joan Burton, Labour’s spokeswoman on finance.

“If you look at Treasury, it is clear that it has very high-quality assets. The concern is the financial structures around them.”

Treasury is one of Nama’s better clients. John Bruder, a former banker at Allied Irish Bank and Treasury’s managing director, was also one of the first industry figures to welcome the agency’s establishment publicly. Last August, he called Nama “a positive step for the economy”. In REO’s statement last week, the company highlighted to its shareholders that Nama is a “work out” agency not a “liquidation” agency.

REO submitted its final business plan to Nama last May. That plan forecasts that the company will repay all the £815m it owes to Nama within the agency’s eight-year lifetime. To do so will require Nama to continue to work closely with the company, however.

Nama has already agreed to extend until August 2011 an existing £125m loan facility, originally advanced by Bank of Ireland, on the Battersea power station project. REO is also seeking working capital to finish the fitting-out of Montevetro, an office building it is developing in Dublin’s Grand Canal Dock. The agency is likely to acquiesce.

In both instances, Nama can justify the decisions. Rolling over the Battersea debt is designed to help the project through the planning process. Also, under the terms of EU approval for the establishment of the agency, Nama cannot act in a fashion that is prejudicial against the interests of a lender in another state. Battersea is cofinanced by Lloyds.

The Montevetro loan has not yet been approved, but it is likely that the agency will rubber-stamp it. REO says it has received “a number of live inquiries” on the Grand Canal Dock offices.

Getting the Battersea loan repaid is contingent on a series of events. REO hopes that planning for the £5.5 billion development could be achieved as soon as this August. Meanwhile, the company and Cushman Wakefield, its advisers, will begin roadshows to find an international investment partner for the development.

If the planning and funding fall into place, Battersea will be spun out into a separate, publicly listed vehicle jointly owned by REO shareholders and the international partner. All going well, a comprehensive refinancing of the project will then take place and the buy-out of the Nama debt will proceed well ahead of the new loan maturity date of August 2011.

It is a far from straightforward process, which is complicated further by the need to undertake a complex bond restructuring. REO owes almost €370m to various loan note and preference shareholders. The company recently hired Talbot Hughes McKillop to negotiate a deal with these investors. The loan notes fall due for repayment in May 2011, a crucial period for the Battersea project. As things stand, REO simply has no way of refinancing the debt.

Of more immediate concern, interest of £9m due on two of these loan notes is payable in August. Talks with the bond-holders start this week with a view initially to getting a moratorium on the interest repayments. The more pressing deal is long-term refinancing of the loan notes.

Sources say the company is confident that a deal can be done, but the only foreseeable option is a debt-for-equity swap. With REO’s market capitalisation slumping to £37m last week, the conversion of £371m of debt into equity will lead to a massive dilution of existing REO shareholdings, including Treasury Holdings’.

And if Treasury’s gets diluted in the bond restructuring, then its interest in Battersea could end up being very modest indeed.

At least the Irish taxpayer can take some comfort from the quality of REO’s Irish investment property portfolio.

REO’s top 10 Irish tenants include Vodafone, Merrill Lynch, KPMG and Marks & Spencer, and these account for 63% of its rent roll. Less than 4% of its rent is in arrears and its office and retail space is more than 90% let.

Despite the downturn, the company also successfully pushed through a series of rent increases. Vodafone is the anchor tenant at Central Park, REO’s landmark Sandyford office complex. The mobile phone network agreed at rent review to pay €7.2m a year, a 12% increase. Other tenants, including Tullow Oil and Bank of Ireland, also agreed to hikes.

Central Park, financed by Anglo Irish Bank, is covered by Nama but at least half of REO’s Irish investment property assets are not. Properties including the Russell Court office complex in Dublin and Stillorgan Shopping Centre have been securitised and financed through an off-balance-sheet vehicle. As a result of this securitisation, about 40% of the REO rent roll goes to servicing a €375m mortgage-backed bond.

REO itself is, of course, only part of the picture. A further €1 billion in respect of Treasury Holdings separately and Ronan’s personal investments of loans have transferred into Nama. Again, the Treasury investments include some of the best-known real estate investments in the country, but unlike the publicly quoted REO, dealings between Nama and Treasury will be kept under wraps, as will discussion between the agency and Ronan.

As Ronan stepped back from Treasury in the wake of the publicity about his private life and embarked on his period of reflection, he will have had at least one comforting thought. Sources say that, unlike Liam Carroll and Bernard McNamara, fellow builders turned developers, Ronan and Barrett gave few personal guarantees. They did not need to. Accounts for 2008 for Lanaree, a company owned personally by Ronan, show that most of its bank loans were secured on Ronan’s investments alone. Only a single personal guarantee on borrowings, for an unspecified amount, seems to have been granted to Bank of Ireland Private Banking.

The REO restructuring has given a unique insight into the dilemmas facing Nama. But the real action, with players such as Ronan, will happen behind closed doors.