Bill Morrissey & the perils of Legacy Debt

Bill Morrissey of Morrissey Auctioneers has his finger on the pulse of the licensed trade property market – and like a doctor, he can tell much more about what’s going on through this pulse than most. Here, he tells Pat Nolan some home truths about the licensed trade and its relationship with the economy, liquidity and the banks.

While some might feel that we’ve come a long way since the economy collapsed in 2008, Bill Morrissey, Director with Morrissey’s Auctioneers, believes that more could and must be done to stimulate the economy and downstream from that, the licensed trade.

“The economy had already begun shrinking when it officially collapsed in 2008” remembers Bill, “and it continued to shrink through to 2012. In fact the market shrunk by nearly half while the same overheads stayed in place for businesses with obvious consequential problems for the pub trade,” he says.

 

Economy

A combination of cuts in current spending and the introduction of significant income tax increases considerably diminished the general public’s spending power. This fed directly into the hospitality sector, ultimately resulting in a falling away of trade.

Lack of custom, overbearing debt problems and banks hungry to recover their losses – an alignment of conditions often referred to as the ‘perfect storm’.

“This is evidenced by the 34.2% national decrease in on-trade consumption between 2008 and 2012,” observes Bill who can see what most of us can’t, for his position affords him an overview of the licensed trade property market, its foibles, outstanding mortgages, debts, debtors and – perceived by some – bargains (as and when they crop up).

So the economy struggled – but there’s more….

 

Liquidity

The second of the three factors that we must take into consideration is ‘liquidity’ in the financial system.

The purpose of the ‘bail-out’ was to underpin the banking system in Ireland following its near collapse and to return to a functional banking system.

“The bail-out forced the Irish economy – and more importantly, the Irish banking system – to considerably deleverage its balance sheet,” he explains, “The banks had lent out much more than they could cover on deposit.”

This banking ‘hole’ was filled by government plundering people’s pensions and raising further taxes while borrowing money at exorbitant rates from the Troika on the strength of it hastily agreeing effective nationalisation of the six troubled banks: Anglo Irish, NIB, EBS, Nationwide, Bank of Ireland and the AIB.

All got considerable financial assistance with the objective of deleveraging the Irish banking system to more ‘traditional’ exposures while trying to stabilise a shrinking economy.

“But the economy and the banking system are two entirely different collapses,” he points out, “The Irish economy was over-reliant on the construction market which collapsed overnight. What triggered it was the international financial crisis, the banks calling in their loan facilities as they came up for renewal.

“A lot has been said, good and bad, about the bank guarantee introduced by the government in the autumn of 2008, however something needed to be done to stop the flight of capital from the Irish economy,” says Bill, “Cash calls were the order of the day in the international banking system and this problem was considerably exacerbated in Ireland on the back of a collapsed economy.”

With the Irish economy officially stabilizing at the end of 2013, a lot of money returned to the economy from domestic and foreign buyers – “vulture capitalists” – following a huge drop in the value of assets.

This cash injection coupled with the domestic economy spending on the back of increased confidence has contributed to the stabilization and in turn, a growth in property values which has played a significant role in repairing the balance sheets of the Irish banks.

 

Licensed premises/hospitality market dynamic

So two things had affected the licensed trade. As the economy and banking system sought to stablise from 2008 onwards, the hospitality trade suffered a hugely diminished level of business coupled with an acute shortage of liquidity.

“Since the banks recapitalised and the economy is now growing again – and with the dissipation of the international financial crisis – normalised liquidity is coming back into the banking system” believes Bill, “so the Government’s objective of stabilising the economy and the banking system has, in simple terms, been achieved.”

So why is business not flying?

“Business and personal legacy debt,” he responds, “There’s considerable legacy debt which is not only well in excess of what current market values will carry but is simply unsustainable. And it’s this legacy debt that’s the real challenge in the marketplace for the Government, the banking system and the borrower.

“Each must play an active role in resolving the debt legacy issue. The future of the hospitality trade lies in resolving legacy debt issues – comparing the current market value of the asset against the historic market value. The difference, the shortfall in value, is the greatest challenge for the licensed trade today.”

This personal and corporate debt sees a considerable number of hospitality businesses still owing considerably more on their premises than would be their current market value.

“It’s becoming clear which licensed businesses have a future. This is emphasised by the trading performance of these businesses over the past two years.

“But if the business is unable to carry a debt dating back to the boom times, then that debt legacy issue will need to be addressed by both parties sooner or later,” believes Bill.

“When the borrower and bank engage in a meaningful and constructive fashion, resolution to legacy debt can be achieved – albeit both sides will have to share a degree of pain in this debt restructure.”

That legacy debt simply must be restructured and Bill sees the banks as having a choice of options on this going forward. While banks share the same goal in resolving debt legacy, their approach varies.

Either they call in the loan and crystalise the loss or they work with the existing borrower to mitigate the loss by a restructure (which may involve a degree of debt write-off) provided that it puts the bank – if Irish-owned – and the Irish taxpayer in a better financial position (the Irish-owned bank’s mandate, after all).

 

Two futures

So, visualise two futures depending on the banks’ attitude to legacy debt in the licensed trade: one – restructuring – will accelerate the return to a normal market. The other – calling in the loan – will postpone the recovery of the market, negatively affect market values and in turn contributing to further losses.

“Some banks – both Irish owned (IBRC and NAMA) together with foreign-owned banks (Ulster Bank, Bank of Scotland) have decided to sell-off parts or all of their books to third parties (private equity funds/venture capitalists),” he explains, “This approach typically involves selling loans at discounts which leave enough room for the loan purchaser to achieve a profit.

“For a bank, the discount is offset against the cost of holding the book over a longer period.

“Other banks work through their distressed loan books on a case-by-case basis.”

Either way, he says, the resolution to the legacy debt is an evolving process, one that varies from institution to institution.

“Some are more balanced and commercial than others regarding terms offered and accepted” he concludes, “but one thing’s for sure: the longer this process continues and the more aggressive the policy to recoup ‘every penny’, the more it will hinder recovery of the banking system and the economy as a whole.

“Apart from that, a good settlement gives the publican a reason to get out of bed in the morning”.