ANALYSIS:The State agency's priority is not REO's survival, but repayment to the taxpayer, writes BARRY O'HALLORAN

THE TAXPAYER has taken on almost €1 billion worth of loans owed to Irish banks by Real Estate Opportunities (REO), the Jersey-registered property investment vehicle backed by John Ronan and Richard Barrett’s company Treasury Holdings.

Last March and April, State agency Nama bought €997 million worth of property loans that REO owes to AIB, Anglo, Bank of Ireland and Irish Nationwide. The company owes a total of €2 billion to its banks, while its properties are worth €1.3 billion.

The Nama properties include a €100 million loan from Bank of Ireland that contributed to the cost of buying Battersea power station in London. REO says that Nama and the other lender, Bank of Scotland, have agreed to waive a covenant in the loan requiring the company to maintain its value above a certain level, which REO has breached, meaning the debt is automatically due, and extended the due date to August 2011.

It’s possible that not too much should be read into that, as the agency’s concern is less with historic terms and more with how REO intends to repay its loans.

Whether or not it should be regarded as a concession, the question for Nama is how far it is willing to go to support REO. The company’s business plan depends partly on getting working capital from the agency. Nama has said that it will provide working capital in circumstances where this will aid it in recovering money owed to it, so it is possible that REO will get at least some of the support it is seeking.

Two events over the next year are likely to have a bearing on the relationship between the two. Over the next six to eight months, REO plans to float off the Battersea project to a separate company to bring in new investors, who will shoulder part of the burden of redeveloping the €470 million site as a commercial and residential centre.

Following that, €450 million of various debt instruments must be repaid in May 2011. REO is not now in a position to repay these loans. It has hired troubleshooters Talbot Hughes McKillop, the same firm brought in by Quinn Group, to come up with a restructuring plan, which Nama will have to approve.

Nama has a number of choices. In a worst-case scenario, it can decide to wind up the company or to appoint a receiver. Alternatively, and more likely, it can tell it it to sell properties and use the cash to pay off some of the money it owes the State.

REO recently sold its stake in China Real Estate Opportunities (now Treasury China Trust) for €28 million. Spinning off Battersea could also bring in some cash. Even in this market, some of its Irish assets could be attractive. Vodafone is paying €7 million a year to rent Central Park in Sandyford, Dublin, from the company.

Nama has stepped into the banks’ shoes, but while a bank is likely to work with the company with a view to ensuring its commercial survival over the medium to long term, the State agency’s priority is getting developers to repay the money they owe it, and by extension the taxpayer, over the short term. REO is going to be one of the first tests of how well it will do that job.