It is said that no publicity is bad publicity but for much of 2010 Ireland suffered from excess international media commentary arising from its position on the fault line of the Euro currency debate. The collapse of the Irish property market caused a tsunami of financial distress which submerged the Irish Banking sector and strained Government finances to the limit. This led to a lack of confidence, high bond yields and a €67.5bn financing offer late last year from the IMF and the European Financial Stability Fund.
There is no hiding the fact that the Irish economy has encountered considerable strain and will likely lag any international recovery as it continues a painful restructuring process.
However, unlike many Euro members viewed as “distressed”, Ireland has some unique characteristics and advantages that will support the country’s “transition” to financial health within the short to medium term.
The economy is highly diversified with strengths in Agriculture and Food, Financial Services, Pharmaceuticals, Life Sciences, Technology and Tourism. Ireland is the second largest exporter of medical technologies in Europe, the largest provider of cross border insurance and the home to eight of the ten largest pharmaceutical companies. The taxation framework is business friendly underpinned by a 12.5% corporation tax rate and it has an English speaking, highly educated workforce.
Much of the economic restructuring has already taken place with over two thirds of the proposed €30bn deficit reduction package already undertaken over the past three years. A further €9bn reduction in the State deficit is required and this will be undertaken in a somewhat more sedate manner over the next four years through the introduction of property taxes, water rates, expenditure cuts and further streamlining of the taxation system.
The “crisis” in the public finances required the Government to overcome the objections of many vested interests and address some long standing problems that undermined the efficiency of the economy. The size and cost of the public sector is being shrunk to a level more commensurate with a country with 4.5m citizens, the regulation of the Financial Services sector has been restructured, the banks are in the process of being shrunk and recapitalised, a framework to address pensions underfunding has been introduced and the economy has become far more competitive with significant reductions in wages, rents, energy and food costs.
The need to restructure the economy is broadly accepted by the main participants in the political system who are adopting a “centrist” approach to economic management. This consensus is accepted by most of the population and social cohesion has been upheld in Ireland, despite a painful restructuring, unlike in other Euro zone members where far less aggressive restructuring has been greeted with strikes and street protests.
The strength of the Export sector leaves the country well placed to take advantage of the ongoing recovery in the world economy and this was evidenced last year by a 6.7% increase in exports on 2009 to €161bn.
This combination of short term financial distress, solid economic fundamentals and aggressive restructuring have caused many to perceive Ireland as an attractive place for asset acquisition opportunities with significant potential for asset price appreciation. Opportunities to acquire assets are likely from the following sources:
- The State has formed an organisation called the National Asset Management Agency (NAMA”) which has acquired approximately US$98bn of broadly property based distressed loans from 5 Irish owned financial institutions. These assets comprise a diverse mixture of property assets based predominantly in Ireland, the UK and the US which will be sold at a considerable discount to their original purchase price over the coming five to six years. The non Irish assets comprise approximately 34% of the total. Approximately one third of the NAMA loans are comprised within property portfolios owned by thirty Developers who are likely to manage and develop these assets towards disposal over this timeframe;
- Anglo Irish Bank has an attractive portfolio of US loan and real estate assets worth in the region of US$12bn which are broadly based in the New York and Boston regions;
- The Irish Banks are in the process of offering subordinated debt holders discounted debt swap arrangements which might be of interest to those investors interested in debt arbitrage;
- The Irish Banking Sector is compelled by the IMF-led deal to shrink their asset bases to a level that is more consistent with the size of the Irish economy, all leading to the creation of what many perceive as low risk credit utilities. This is likely to lead to the disposal of loan and asset portfolios by many of the Irish Banks;
- Those international banks that did not participate in the NAMA acquisition process still retain significant exposure to the Irish real estate market and it is likely they will dispose of these assets in due course; and
- To provide a stimulus for the regeneration of the Irish economy, it is likely that the State will privatise certain non-essential State owned assets in the Health Insurance, Energy, Gaming, Forestry, Air Transport and Bio-diversity sectors. This is likely to lead to some interesting acquisition opportunities.
While preliminary international interest in asset acquisition opportunities is predominately focused on those UK and US assets that are owned by NAMA, Irish developers and the banks, it is likely, as the economic regeneration of the economy begins to take hold, that investors will begin to focus more on the value to be obtained in the acquisition of high quality Irish based assets which are predominately located in the wider Dublin region. With NAMA having acquired loans at a discount of between 55% to 60% of their initial acquisition cost, there is likely to be scope for significant asset appreciation for those investors who time their acquisition appropriately relying on a likely bounce back in the Irish economy in future years.
Interest in the acquisition of Irish owned assets is considerable, underlining the view that the current economic distress is temporary with regeneration being underpinned by the economic fundamentals and the impact of aggressive restructuring. However, while there are likely to be many asset acquisition opportunities it is unlikely that they will be acquired through “firesales” in the short to medium term. Interested purchasers will need to be patient, grow relationships and wait for the opportune moment to acquire.
Contributed by Brendan Cahill.
*This article featured in the March 2011 edition of The American Lawyer