BUSINESS OPINION:Some 60 per cent of the mortgage book is made up of trackers that may never make a return

SHAREHOLDERS IN Irish Life & Permanent meet on Wednesday for what is more than likely the last ever annual general meeting of the company in its current form.

Under the Government’s plans for the banking sector, IL&P will have disposed of or floated its life assurance business by this time next year.

The remaining banking business, Permanent TSB, will have received a dollop of taxpayers’ money – about €4 billion – and will in effect be nationalised if it has not been merged or sold.

One suspects Wednesday will not be a very jolly affair, not least because IL&P shareholders thought until recently they had dodged a bullet thanks to the Permanent TSB’s decision to avoid commercial property lending.

That all came to an end with the fresh round of stress tests carried out by the Central Bank earlier this year, which concluded that losses on Permanent TSB’s mortgage book had blown the group’s balance sheet to smithereens and some €4 billion of extra capital was needed.

Among those that seem to have been caught off guard is Malta-based Scotchstone Capital, which has been trying to rally IL&P shareholders to salvage what they can from the wreckage.

They are currently seeking proxies from shareholders ahead of Wednesday’s meeting.

Scotchstone, according to its website, is a private collective investment scheme recognised and supervised by the Malta Financial Services Authority.

The Central Bank of Ireland says it does not need any authorisation from them to try to contact shareholders here because it is not offering any service.

Scotchstone’s argument seems to have two main planks.

The first is that the capital requirements set by the Central Bank – with the endorsement, if not outright insistence, of the EU and IMF – are just plain daft.

The economic scenarios that have been used are way beyond what is contemplated by most forecasters, they argue.

Their second point is that if the Government does go ahead with this unneeded overcapitalisation, it should devise a mechanism that reflects the fact that much of its €4 billion will be recouped from ILP’s disposal of Irish Life.

What concerns them is that under the terms of the programme agreed with the EU and IMF, the bank recapitalisations must be done and dusted by the end of July.

The sale or flotation of Irish Life is not mandated until October.

It would appear then that the State will put in pretty much the entire €4 billion in July and end up with 99 per cent of the group, which currently has a market capitalisation of €37 million.

The proceeds of the Irish Life disposal later in the year will be returned to the shareholders pro rata to their holdings at that stage – assuming they are available for distribution.

This is unfair to existing shareholders, Scotchstone argues. They want the fact that Irish Life is being sold to be reflected in the dilution of shareholders that will take place as a result of the recapitalisation in July.

The State’s stake should reflect that it is only really putting in €2.3 billion, ie €4 billion up front, less the proceeds of the sale of Irish Life and some other disposals and dividend payments.

By its calculations, the State should own around 56 per cent of what is left of the group post the sale of Irish Life, and current shareholders – including Scotchstone – would have the balance.

They propose a number of ways – preference shares, etc – by which the deal could be structured to get around the problem created by the need to recapitalise IL&P before the disposal.

What they don’t do is accept that once again the Irish taxpayer is taking on all the risk associated with bailing out a broken bank.

The rules of capitalism – not that anyone pays them much heed – would hold that if Scotchstone is so sure that by investing ahead of the Irish Life disposal the State is going to make out like a bandit, then they should follow their own money and participate in any share issue to the State, as is their right.

The truth is that there is absolutely no guarantee that Permanent TSB will emerge from the planned restructuring as a viable bank or that the taxpayers’ exposure will be limited to €2.3 billion.

The bank is far more dependent on wholesale funding than any of the other banks, and some 60 per cent of its mortgage book is made up of trackers that under some far from implausible scenarios will never make money.

It will be interesting to hear the views of the board of IL&P on this issue, and in particular those of the public interest directors Ray MacSharry and Margaret Hayes.