There were several articles about this in the press recently, mentioning banks taking an ‘interest’ or ‘equity stake’ in certain developments. Something that the articles failed to talk about was the underlying cause? When property was booming banks were not taking an equity stake, they would finance the deals but they didn’t tend to get in on the action, so why is it that during the downturn they would start to do this?
There are two ways of looking at this, one is the way that a lender would have you believe, the others is to aim for fair comment on what is an objective view.
First of all though, it is important to look at how debt affects liquidity, if a bank is seen to have any problems people start to withdraw money, that’s not speculation, that’s fact, it happened to Northern Rock, IndyMac and several other banks since. So there is no part of the market that is fully convinced when banks say that ‘we are doing just fine’, in fact, that was the public statement Bear Stearns made only days before the Fed [along with JP Morgan] had to bail them out!
There is a part of the financial community that would say ‘taking equity stakes is simply a way of not facing up to your losses’, something even Nick Leeson would likely now warn against! By ‘working with’ developers in this way what is essentially happening is that issues are being kept off of the balance sheet, if a builder is going bust (and I do agree banks,builders, and developers need to all work together), it is one thing to help them, but a whole different matter to take a stake in a sinking ship in order to keep that ship afloat for a while longer.
This isn’t the first example we have heard of this either, there are several other developments where we have been told that the bank actually bought some of the properties for sale from the developer! That is astounding, actually purchasing the units, now it can be shown as an asset rather than as part of a bad debt! The same can be said of ‘taking an equity stake’, if you ‘own’ part of a development, even if a single unit is not likely to sell it doesn’t mean that the valuation of the development is nil. There is still some ‘value’ in it, at least to the degree that it is better than a ‘bad debt’ which is the other way to handle things if the banks chose to go that route.
The concern for the industry is that this may be an Irish example of banks doing what they did in the USA which is basically try to keep certain information from reaching the market when it should. If Ulsterbank were (hypothetically) to say ‘we have made X in losses’ how would that affect the greater RBS group who only last week announced the second biggest loss in UK Banking history! (€883 million to be exact). It’s just as well that they (RBS) raised €15.3 billion in a rights issue in June to help them through this period
Ulsterbank told the Irish Times ‘The capital we raised means we are one of the best capitalised banks in Europe’, which sounds like a boast – but remember they are doing it on borrowed money, that’s like me boasting about having a million Euro if I had borrowed it all. When looked at for what it is that claim doesn’t seem so brilliant.
Lenders are correctly saying that it doesn’t make sense to force builders or developers to sell in the current ‘illiquid’ market, but does that imply that it makes better sense to move those same ‘illiquid’ assets onto their own balance sheet even further by taking physical product in? They are already exposed on the finance, now it seems they want to ‘double down’.
Only time will tell if this move pays off, suffice to say, one one hand ‘Mothership’ RBS might be a port in a storm, but they could equally turn out to be a ‘wicked stepmother’.