ANALYSIS: New documents show how Anglo's handling of the 2008 share sale left Seán Quinn very angry, writes SIMON CARSWELL
IT TOOK Anglo Irish Bank six months to reach an agreement with Seán Quinn so that he would reduce his large stake in the bank, and a further three months to sell it down as the financial crisis grew.
Anglo believed that Quinn’s massive investment in the bank, amounting to 28 per cent at its peak, left the bank’s share price and, in turn, the bank itself vulnerable as the financial crisis grew during 2008, and that it needed Quinn to sell down his position.
Months of planning and backroom work by Anglo – in close consultation with the Financial Regulator – eventually led to the bank placing a 10 per cent stake held by Quinn with 10 customers of the bank using loans from the bank.
However, the controversial July 2008 transaction – which is now the subject of investigations by the Garda and the Office of the Director of Corporate Enforcement – left Quinn deeply unhappy.
New documents show how Anglo’s relationship with Quinn, its biggest borrower, grew more strained as the bank took matters into its own hands in July 2008 and pressed Quinn into unwinding his investment.
His stake in Anglo was held in contracts for difference (CFDs) – a form of investment which allows investors to build up stakes without having to disclose them.
The eventual forced and rapidly-executed sale of the 10 per cent stake around mid-July 2008 drew an angry response from Quinn.
He fired off a strongly-worded letter to Anglo’s then chief executive David Drumm on July 26th 2008, shortly after the transaction was completed, complaining that the bank had failed to take account of the dramatic fall in the share price and its effect on him.
Drumm was the architect of the transaction which was known in the bank as the Maple project, assembling the 10 investors – customers he had worked closely with – to buy the 10 per cent stake.
Quinn told Drumm in his letter that the transaction would have “a considerable impact” on his wider group for many years.
His anger was understandable. The transaction crystallised a massive loss on Anglo shares which he had hoped would recover in time, allowing him to recoup his deficit. At this stage the share price had fallen from a peak of about €17.50 to around €4 in just over a year.
Anglo later estimated in internal records that the transaction crystallised a loss of €955 million for Quinn, given that he had amassed his stake at an average price of €14 and was forced to unwind a 10 per cent stake in the transaction at €4.36 a share.
At this stage, after months of negotiations and a rapidly declining share price, Drumm felt compelled to act to protect Anglo’s floundering share price.
The placement of the 10 per cent stake with the 10 Anglo customers avoided the dumping of such a large shareholding into the open market. Such a move would have driven down the share price and further destabilised Anglo, potentially causing a “run” on deposits at a time of unprecedented nervousness within financial markets.
Anglo management told Quinn on Thursday, July 10th that it believed it could place the 10 per cent stake with investors. This was just over three months after he had agreed with the bank to sell down his investment in Anglo, with Quinn offloading the 10 per cent and his family taking a direct stake of almost 15 per cent.
The crisis which engulfed the bank can be traced back to the previous autumn when Anglo first confirmed that Quinn was a major shareholder in September 2007. In early 2008, Anglo believed that hedge funds were aware of Quinn’s massive position in Ireland’s third largest bank and were trying to make profits by “shorting” (betting on the stock falling) and “trying to knock Seán Quinn over”.
The bank thought that, if the hedge funds could manipulate the price downwards and if Quinn could not maintain his CFD positions, he would be a forced seller. This would in turn drive down the share price and allow the hedge funds with short positions in the bank to make huge profits.
Anglo’s board and management grew concerned that the declining share price would raise concerns in the market and force a run on deposits, threatening the bank – again benefiting the short sellers as this would push shares lower.
Following the collapse in the share price in the wake of the failure of US bank Bear Stearns in the so-called St Patrick’s Day massacre, Anglo and Quinn agreed to place the 10 per cent stake. The agreement was reached towards the end of March and the Financial Regulator notified. At the time, Anglo’s share price was trading at about €8.50. By July that price had more than halved.
By this stage, Anglo had exhausted opportunities to place the 10 per cent in one chunk with an international institutional investor or financial institution. Drumm was forced to turn to 10 loyal customers to support him.
Internal Anglo records, dating from around the time of the bank’s nationalisation in January 2009, show that the bank informed Quinn on July 10th that it was going to place the 10 per cent stake. He was very unhappy that Anglo was “forcing” him to sell at this time, the bank said.
The bank noted that this was despite the fact that he had agreed to the transaction the previous March, though Quinn pointed out that the stock was trading at about €8.50 a share at that time.
Anglo believed that once Quinn publicly confirmed a holding of about 15 per cent and went “long” on this amount, the hedge funds would back off and the share price would recover.
Drumm declined a request from Quinn to meet the Anglo board to explain his position. Anglo spoke to Quinn again after the weekend, on Monday, July 14th. He was extremely unhappy that the bank was proceeding with the placement of the 10 per cent stake, according to the bank’s records.
He threatened to back out of the March agreement. The telephone call ended badly with Drumm and Quinn walking out, but the transaction was eventually approved by a senior Quinn Group executive.
On July 26th, 2008, Quinn wrote to Drumm complaining that the transaction had been “forced through” without consideration to the share price and driven by “a degree of panic”. (At around this time the bank’s stock had rallied to close to €7 a share – a gain benefiting the 10 customers, allowing a number of them to sell some of their shares.)
Quinn acknowledged the support the bank had given him and his group. (Anglo had provided loans totalling €2.1 billion to Quinn at this stage, a large part of which went on covering the CFD losses on the Anglo shares.) “However, I am not sure that we were treated fairly during this period which represented a five-year low in the Anglo share price,” he said.
“We were in effect forced to sell the shares regardless of market price on the downside whilst the purchasers were given a maximum price. In other words the placing was to proceed regardless of the price, the shares could have been sold for €1, whilst the purchasers were protected against the increase which would accrue from a market rally.”
Following Quinn’s letter, it was agreed by the Anglo board that chairman Sean FitzPatrick would meet Quinn to resolve matters. The board felt the bank could not have an adversarial relationship with its largest shareholder and the bank’s biggest borrower.
As the banking sector imploded in September 2008, Anglo’s share price collapsed and continued to fall after the Government’s bank guarantee was introduced.
By January 2009 and the bank’s nationalisation, Anglo’s shares were worthless and Quinn’s indebtedness to the bank stood at close to the current level of €2.8 billion. Anglo later wrote off €300 million on loans of €451 million to the customers to buy the 10 per cent.
Quinn was partly right – the July 2008 transaction is having “a considerable impact” on his wider business. Anglo is seeking to take control of Quinn Insurance, the cash cow of the group, from joint administrators to ensure repayment of the €2.8 billion in debts.
However, the greater impact is being felt by Quinn’s decision to have secretly amassed such a large stake in Anglo Irish Bank.
SeÁn Quinn and Anglo: How the bank reduced his stake
2007 SEPTEMBER
Anglo Irish Bank board directs chairman Seán FitzPatrick and chief executive David Drumm to meet Seán Quinn to confirm the size of his stake in the bank, amassed privately, through contracts for difference (CFDs)
SEPTEMBER 11TH
FitzPatrick and Drumm meet Quinn, who confirms he has a substantial stake in Anglo. Board and Financial Regulator are told. Anglo embarks on plan to reduce Quinn’s interest, in a move it believes will prevent short-sellers betting against the bank and destabilising the share price.
2008 MARCH 17TH
Anglo’s share price collapses following the failure of US bank Bear Stearns. CFD providers start seeking large sums from Quinn to maintain margins on his investments.
MARCH 27TH
Quinn reaches agreement with the bank to unwind his indirect CFD interest. He agrees to convert 15 per cent to a direct stake and Anglo plans to place 10 per cent.
MARCH 31ST
Regulator is sent a copy of the bank’s agreement with Quinn.
APRIL-MAY
Anglo sets out to place the 10 per cent with institutional investors with the help of investment bank Morgan Stanley in a project named “Maple”. Trips are taken to the Middle East. Quinn’s borrowings from Anglo rise to €1.56 billion by the end of May as the bank provides “working capital facilities” to cover the cost of margin calls on CFDs as a result of the falling share price.
JUNE
Drumm travels to the US seeking investors for the 10 per cent stake. Quinn meets Anglo management on June 3rd and asks for €200 million cash to allow him to meet financial covenants on loans with his other banks. His debts at Anglo rise to €2.1 billion by the end of month as the bank provides €200 million and other loans.
JULY 8TH
Drumm tells colleagues it is “time for action” and plans to approach 10 Anglo customers to take up the 10 per cent stake, about 102 million shares.
JULY 9TH
Anglo starts calling customers for meetings over the weekend.
JULY 10TH
Anglo contacts Quinn to tell him it believes it can place his shares. Conversation was “very tense” as he was facing a substantial loss with share price at about €6.
WEEKEND OF JULY 11TH- 13TH
Anglo outlines proposal to 10 customers in one-on-one meetings. Two investors are met in the US and a number in Europe.
Each agree to take 1 per cent stake with Anglo loan of about €45 million, 25 per cent of which is recourse; the rest is secured solely on the bank’s shares.
JULY 14TH
Anglo tells Quinn it is placing the shares. Telephone call is difficult, with Drumm and Quinn “walking out”. Quinn executive Liam McCaffrey e-mails Quinn’s approval of the plan to offload 10 per cent of the shares held through CFDs, and for the family to take 15 per cent of Anglo’s ordinary shares.
JULY 15TH
Quinn family issues press release saying it has taken a stake of almost 15 per cent. Quinn says stakes are “long-term holdings with significant opportunity for capital growth”.
JULY 25TH
The Regulator tells Anglo to set aside €169 million in capital to cover a loan to Quinn for the same amount to fund his purchase of the shares until the loan is refinanced.
JULY 26TH
Quinn writes to Drumm expressing concern about the events of July 9th-14th, saying Anglo’s actions were “ill-advised” and “will have considerable impact” on the group.
SEPTEMBER
Anglo share price collapses as the financial crisis intensifies.
2009 JANUARY
Anglo nationalised; share price becomes virtually worthless. Prior to nationalisation, the bank estimates that Quinn’s losses on Anglo shares top €2.5 billion.
