On April 24 2008, Brian Cowen sat down for a private dinner at Heritage House, Anglo Irish Bank’s elegant Georgian headquarters on St Stephen’s Green.
Seated around the table was the bank’s board including the chairman Sean FitzPatrick and the chief executive David Drumm.
Cowen, then minister for finance, chatted easily with the bankers. The credit crunch was in full swing. Bear Stearns had collapsed. The Irish property market
had started to turn south. There was plenty to talk about.
But the ghost at this bankers’ banquet was Sean Quinn. By that time, Ireland’s richest man had built up a €2.7 billion exposure over two years building a near
28% stake in Anglo. The stake had been built privately through financial instruments known as contracts-for-difference.
At the start of 2008, Quinn, whose business interests employed 5,500 people in Ireland, was sitting on losses of €630m on his personal investment in Anglo.
In the first four months of that year, Anglo’s share price was so battered, that by the time Cowen sat down to dinner with the Anglo board, Sean Quinn’s
losses were close to 1 billion Apart from being the bank’s biggest shareholder, Quinn was one of Anglo’s biggest customers and, through his insurance
business Quinn Direct and Quinn Healthcare, the underwriter of almost 1m policyholders in the state. This was a headache of the most delicate kind.
It may not have been dinner party material.
The Sunday Times has learnt of the extraordinary lengths to which the Financial Regulator and Anglo went to help Quinn dodge the bullet on his outrageous
investment in the bank.
Long before Anglo assembled a group of 10 investors to bring down Quinn’s exposure to the bank’s shares — the Anglo 10 transaction — a pattern emerged
of bank and regulator smoothing the knock-on effects of Quinn’s outrageous punt on the rest of his business empire behind the scenes.
The revelations give an unprecedented view into how business and regulation in this country works.
THE implications of Quinn’s punting on Anglo — he invested €1.8 billion in 2007 alone — came to light in early 2008. Price Waterhouse Coopers (PWC),
the Quinn Group auditors, began preparing the group’s 2007 accounts. It became concerned about two transactions.
It discovered that Quinn Insurance had advanced ¤400m to Sean Quinn and his family through the Quinn Group to fund his Anglo stock purchases.
This loan was registered as a treasury arrangement and recorded in the insurance company’s books as a cash deposit. This rang alarm bells.
PWC said the advance must be treated as a loan and said the matter should be flagged immediately to the Financial Regulator.
For Quinn Insurance, the distinction was huge and its implications for the company’s solvency ratios was significant. Under insurance rules, such an inter
company loan should be valued at “close to zero”.
he auditors also found that Quinn Insurance had bought property from the Quinn family for €300m without an independent valuation having been carried out.
Later, a valuation of €211m was put on the assets. Quinn repaid the €89m difference.
These matters were serious. The Sunday Times has learnt PWC refused to sign off the annual accounts without receiving “comfort” from the regulator that it
would not take any action against Quinn that “would affect its ability to continue as a going concern”.
The comfort was given. The Financial Regulator also agreed that Quinn Group be allowed to repay the loans from its insurance firm in instalments over nine
The regulator offered Quinn Insurance a derogation on insurance solvency rules, too, allowing it to boost its reserves with a higher proportion of property
assets than was normal. This derogation, at a time when property values were falling, seemed curious. It is believed the offer was never taken up.
The Financial Regulator also became aware that the cash deposit arrangement was never put to the Quinn Insurance investment committee.
The committee had not sat since mid-2007 after its chairman, Paddy Mullarkey, a former secretary-general of the Department of Finance,
resigned as a Quinn director. As the arrangement had not been put to this committee, it was not referred to the Quinn Insurance board.
The Financial Regulator has refused to say why it offered so many concessions to the Quinn Group at this time. But as the Sunday Times has discovered,
it was not the end of the regulator’s involvement in the Quinn Group’s affairs.
DOCUMENTS obtained by The Sunday Times reveal how Anglo bailed out Quinn with the full knowledge of the Financial Regulator.
In June 2008, Quinn Group told Anglo its debt covenant levels were “stretched,” due to “intercompany loans” at its insurance businesses,
the same loans that were used to fund Quinn’s enormous Anglo punt.
Under its agreement with its US bondholders, Quinn Group said it would ensure the ratio of its senior debt to earnings before interest tax,
depreciation and amortisation (Ebitda) should not fall below 2.25 times. In a note to the bank, the firm said that “post June . . . we will not be in compliance”.
Quinn Group’s syndicated lenders agreed to a loosening of the loan terms but only if there were “no further intercompany loans or distributions”.
The Quinn Group bondholders — mainly private American investors, wealthy individuals and investment funds — took a harder line.
The bondholders insisted that an independent financial report be drawn up of all family assets outside the group before giving a waiver
on the terms of the loan. Such an investigation would have revealed the full extent of Quinn’s below-the-radar Anglo investment.
“This point has significant disclosure issues for the Quinn family and its financiers outside the group,” the company said to the bank.
Quinn Group put forward an alternative proposal. Anglo would advance the group a further ¤200m to boost its reserves and reduce its net debt.
“In now seeking additional cash from outside of the group, we will not need the waiver and will, in effect, protect the confidentiality of our
dealings outside the group,” it wrote. “Of the €200m, €150m can be retained on deposit with Anglo but cannot be subject to a lien. . .”
David Drumm, the then chief executive of Anglo, was far from happy. The bank was under pressure from the financial regulator to reduce
its exposure to the group. It was clear Dame Street had become aware of the loan proposal.
A letter on June 25 from Patrick Neary, the then regulator, sought a written report on the bank’s exposure to the Quinn Group.
“You will recall from previous discussions we had when this exposure \ was in the region of €1.3 billion to €1.5 billion that Anglo
did not wish to see any increase above this level and, in fact, had a desire to reduce the exposure,” Neary wrote.
Neary added he understood Anglo’s exposure to Quinn had risen to ¤1.8 billion before Quinn got €200m more, and asked the bank why it
considered “such a large facility appropriate”.
On July 4, Drumm gave a detailed written response. “As you know,” Anglo was working “closely” with Quinn
to allow it to meet its working capital requirements, he wrote. “We have, as you are aware, released circa €250m of security
which was held by way of a group guarantee,” Drumm wrote. “This release was facilitated to ensure the group could meet its liquidity
and solvency ratios, and to allow the auditors to sign off the accounts.”
Anglo, in return, had taken a “full personal guarantee” from the Quinn family and a “first legal charge” over their shares in the group,
according to Drumm. This gave the bank “security on ¤1.7 billion of equity,” he added.
Drumm took the regulator through how Anglo would advance €200m to the Quinn Group which was to be held on deposit with the bank
but “not subject to a formal lien”. Drumm said the bank’s credit committee and board had approved the €200m loan.
The Drumm letter states Anglo believed Quinn owed its other banks and bondholders €1.3 billion.
Anglo, he said, was prepared to allow the group to borrow up to 2.3 billion, taking its total debt to €3.6 billion. Anglo valued the Quinn Group at 3 billion.
Drumm said Anglo was prepared to lend the Quinn Group €2.3 billion based on it having €2.8 billion of collateral.
This was made up of property assets worth €900m; Anglo’s hold on shares in the group valued at €1.7 billion and the return of the temporary loan of €200m.
Anglo said Quinn had made an “irrevocable” commitment to sell €500m of property by the end of 2008 and “sell shares” \ for €500m.
This would leave Anglo with a €1.1 billion exposure to the Quinn Group.
Drumm said he felt confident Quinn had “sufficient headroom” on its syndicate debt and “strong cash flow” to service all of its debts,
including those to Anglo. “Depending on the outcome of the share placement project, which you are aware of, we should be in a position to restructure
the overall debt early in 2009,” Drumm wrote.
The share placement project that Drumm referred to and which Neary “was aware of” was the Anglo 10 transaction. The bank lent 10 investors,
all clients of the bank, €472m to buy Quinn’s shares and reduce the bank’s exposure to Quinn. The salvation of Sean Quinn was complete.
Although Sean Quinn and the Quinn Group were fined €3.25m by the financial regulator for breaches of insurance regulations in October 2008,
the empire survived intact.
WITHIN nine months of the Anglo 10 deal, both Neary and Drumm had been drawn into the vortex of the banking crisis and were out of their jobs.
Anglo Irish Bank was nationalised, crystallising losses for its shareholders including Quinn and at least nine of the Anglo 10.
Quinn Group, meanwhile, has sought repeatedly to put clear water behind it and the incidents of early 2008. It says it has paid its dues
and made appropriate disclosures in its accounts.
The group remains in close contact with its banks, Barclays, which organised its bondholders syndicate and Anglo.
Tom Hunersen, Anglo’s American head of corporate development, is overseeing the Quinn relationship, sources say.
In an interview last November, Liam McCaffrey, Quinn Group’s chief executive, gave a rare insight into Sean Quinn’s thinking.
“Sean is an entrepreneur. Entrepreneurs take risks. We need to keep the focus on running this group, not on this constant looking backwards,” he said.
The proposed government bank inquiry, headed by Klaus Regling, who has been a banking adviser to the German government,
may or may not investigate Quinn and his Anglo dealings.
If it does, then the details of conversations of that April 2008 dinner in Heritage House would make most interesting reading.
In this case, the past may not be another country.