Credit where it’s due

The newspapers these days must put the toughest of Wall Street traders off their morning cereal.

But even as the news just seems to get worse and worse, some outfits are seemingly sticking up two fingers right back up at the markets.

Ireland has become renowned for being a soft regulatory touch for the listing of debt instrument issuances, and it shows. There are over 90 firms registered in the country with ‘CDO’ (Collaterised Debt Obligation) in the title. Firms from Lehman Brothers– with its Saphir vehicle, to Deutsche Bank with its upbeat-named Jazz CDO, have settled 3,000 miles from the US financial hub, and called Dublin home.

But there have been major structural cracks appearing, the first seen in Dublin-registered SIVs (Structured Investment Vehicles) Cheyne Finance, and subsequently Rhinebridge.

A $2bn SIV, Rhinebridge was sponsored by German bank IKB.

In mid-October it defaulted on its debts to the owners of Rhinebridge’s commercial paper. A receiver, Deloitte, was appointed to Rhinebridge to try and sort out the mess.

“Rhinebridge ran into difficulty due to the recent events in the credit markets resulting in it being unable to fund its short term debt repayments while at the same time the market value of the assets have deteriorated,” said Deloitte a few weeks ago.

It was the second time an Ireland-based SIV had got into trouble. During the summer, Cheyne Finance also stopped paying its short-term debt and Deloitte was also appointed receiver. Royal Bank of Scotland then secured exclusive talks to refinance the $6.6bn fund, but the period of exclusivity expired last week. A deal is still expected to be concluded, however.

But CDOs – an Irish favourite - are even riskier than SIVs, because they’re more expensive to finance. SIVs are open-ended investment structures that can be continually refinanced (even if it isn’t that easy these days), while CDOs are closed-end, with set maturity dates. Merge the two, and you get SIV-lites.

Confused? Good, that’s the way for the banks like to have everyone.

The Saphir vehicles established here by Lehman have already drawn fire from Australia.

Sydney-headquartered Grange Securities, which was acquired by Lehman Brothers in January this year, began selling CDOs called Mahogany Notes through a company called Mahogany Capital, to Australian local councils and other investors in 2004, and again in 2006, according to the Sydney Morning Herald.

The Mahogany Notes were invested in Saphir Notes, which are in turn products from Lehman Brothers, manufactured by its Dublin-based Saphir Public Finance company.

Both the Mahogany issuances are now well underwater and that’s caused some upset.

And as if banks were not getting into enough trouble with the residential mortgages in the US, there’s the prospect of what might happen with so-called commercial-backed mortgage securities (CBMS), with musings over recent weeks that this could be the next of level of subsidence to hit markets.

Just recently though, despite all the turmoil, a new CBMS vehicle was registered in Dublin. Pan European Hotels CBMS, the formation of which was administered through the Channel Island’s office of Allied Irish Banks, is bent on issuing CDOs despite the current turmoil.

It could be someone thinking big, or someone thinking small and one swallow, as they say, doesn’t make a summer – the fact they’re thinking about it at all is a bold move.

Seems like there may be some life left in the debt markets after all.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2726873.ece

http://www.risk.net/public/showPage.html?page=328506

http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2833%2526cid%253D176787,00.html

http://www.ft.com/cms/s/0/6e6e2f26-7ceb-11dc-aee2-0000779fd2ac.html

http://www.arandomwalk.com/2007/08/30/aib-cheyne/

http://ftalphaville.ft.com/blog/2007/08/29/6895/the-cheyne-finance-wind-up-letter/

http://www.iht.com/articles/2007/11/05/business/hedge.php?WT.mc_id=rssbusiness

http://ragingbull.quote.com/mboard/boards.cgi?board=CLB01194&read=114340

http://www.grangesecurities.com.au/dynamicpages.aspx?cid=1&navid=1

http://www.smh.com.au/news/business/asic-protects-cdo-investors-names/2007/11/04/1194117879435.html

Babcock & Brown stock may soar if Eircom splits

Last month Australian investment firm Babcock & Brown said it wants to split up its Irish telecoms operation Eircom, hiving off the retail and network arms into separate entities.

It’s a move that would pave the way for a sale of the retail arm, and one that has caught the eye of other carriers around the world, who perceive it be a useful way of extracting value from existing operations.

In the case of Babcock & Brown, the company wants to be in a position to generate a decent return from Eircom’s assets, having fully acquired the company in 2006. It had paid about €250m for a 12.5% stake in 2005. The following year it tabled a successful bid for the entire company, that valued Eircom at over €2.4bn.

It was still the days of cheap money, and Babcock & Brown borrowed heavily to pay for the deal – 20% of its offer was funded from equity, 80% through debt. At the time, Eircom had debt totalling €1.8bn – not something to take on likely in such a relatively small operation on an international scale.

Those debt levels continued to soar as Babcock & Brown refinanced existing borrowings and took on more. Within weeks of the acquisition, debt levels had risen to over €4bn. That’s a far cry from the position the telco was in prior to 2001, when its debt levels were negligible. When it was acquired by the Valentia consortium that included Independent News & Media’s Tony O’Reilly, debt climbed to €2.5bn – a figure that had fallen marginally to €2.1bn by the time it was sold again.

Chopping Eircom to pieces is how Babcock & Brown now obviously envisages making a return. During the summer it emerged that the company had also put its phone transmission masts up for sale, with a price tag in the region of €150m.

If Babcock & Brown was to sell Eircom’s retail arm, it could fetch as much as €1bn, while the mobile operator Meteor could be worth €800m.

Analysts are beginning to see much merit in the move.

This week Credit Suisse analyst Andrew Butterell substantially raised his 12-month price target for Babcock & Brown by more than 50% above its current trading price, to A$7.59. But he thinks the best could be yet to come.

Butterell says that if Eircom is successfully split, Babcock & Brown shares could be worth A$11.50 – almost two-and-a-half times their A$4.75 closing price on Friday 2 November.

Eircom chief executive Rex Comb thinks the chances of regulator Comreg and the government allowing Babcock & Brown to split the company is “50-50”, but he may be overly conservative in his odds.

The government’s Department of Communications, Energy & Natural Resources has said that Eircom is a private company and “how it organises itself on a corporate basis is primarily a matter for the company itself”. However, there may be regulatory issues that could prevent the proposal going through as smoothly as Babcock & Brown would hope for.

The question now is, who’ll come out of the woodwork to buy the retail units if Babcock & Brown puts them on the block? The fallout from the credit squeeze continues to hammer the markets. Anything that comes with the baggage of a big debt pile may find itself short of suitors. It will all come down to pricing, but Babcock & Brown will be forced to drive a hard bargain if it’s to get the sort of return it will need to please shareholders.

http://www.independent.ie/business/irish/eircom-seeks-approval-to-split-company-in-two-1116112.html

http://www.irelandoffline.org/2002/04/02/ibec-calls-for-eircom-split/

http://home.eircom.net/content/irelandcom/topstories/10865887?view=Eircomnet

http://archives.tcm.ie/businesspost/2006/03/19/story12661.asp

http://business.timesonline.co.uk/tol/business/industry_sectors/telecoms/article717032.ece

http://www.smh.com.au/news/Business/Irish-eyes-smile-on-Babcock-amp-Brown/2006/05/23/1148150250589.html

http://www.asx.com.au/asx/research/chartsSearchResult.jsp?asxCode=BCM&TimeFrame=D6&compare=index&indices=XJO

http://www.babcockbrown.com/

http://www.eircom.ie/cgi-bin/bvsm/bveircom/mainPage.jsp

Do you want fries with that?

As with running any new business, operating a franchise is never straightforward.

You don’t have to tell that to dozens of O’Briens Irish Sandwich Bar franchisees. A number of years ago they felt, well, disenfranchised, by their parent firm, which was established by the gregarious Brody Sweeney (who ran at the last election as a Fine Gael TD in Dublin North East, but failed to get elected).

About 40 of the franchisees were irate that O’Briens intended to link rents to store turnover – paying more rent, the better their businesses performed. They were also miffed at what they perceived was a lack of brand marketing. So incensed were they, that legal action was threatened. They were ultimately placated, as Sweeney and his crew worked hard to win back their trust.

While a perception that enough money isn’t being directed towards marketing your franchise may be bad, even worse the scenario in Australia.

The Sydney Morning Herald reports that a number of franchisees with different firms are alleging that those companies have sometimes been selling franchises knowing that the businesses will probably fail due to poor locations.

“Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees,” says Kristen Le Mesurier in the SMH.

The franchisor sits back and watches the business fold, alleges Le Mesurier, then reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track. The business failures are blamed on a lack of ability on the franchisee’s part, rather than on a poor location.

The alleged practice has finally perked up the ears of the Australian Competition and Consumer Commission, which is apparently investigating the claims, which are being firmly denied by franchisors.

Among the businesses at whom the finger is being pointed is Howards Storage World, a chain that sells everything from fridges to bookshelves, although there's no proof the company has engaged in anything untoward.

Earlier this year, it emerged that a former business development manager at Bank of Ireland Private Banking, Olive Donovan, had secured the master franchise for Howards Storage in Ireland and that eventually 25 of the stores could open on the island. Donovan reportedly spotted the chain while visiting a relative in Perth.

Steeled, no doubt, with enviable business acumen, Donovan will certainly have cut a sharp deal and will make an assured play to make sure the Howard’s Storage outlets here are in prime locations to serve householders whose homes are bursting at the seams. A few rattled Ozzie franchisees are surely unlikely to deflect her, are they?

http://smallbusiness.smh.com.au/growing/management/major-franchise-brands-accused-900007700.html