The lender is hoping an interim examiner will steer it through choppy waters, but an investor lifeline is needed soon, writes Simon Carswell, Finance Correspondent
The woes befalling International Securities Trading Corporation (ISTC), the troubled Dublin lender to financial institutions, have been described by one senior Irish banker as "the perfect storm".
The company has been buffeted by the heavy gales in the financial markets, where fear over the exposure to US subprime mortgage losses has taken hold and liquidity has frozen up.
ISTC has fallen victim to the credit crunch because the value of assets it has bought as part of the process by which it raises money to lend on to financial institutions has plummeted, leaving ISTC facing massive losses.
ISTC founder Tiarnan O'Mahoney, a former Anglo Irish Bank executive, said on Monday, November 12th, when the firm suspended grey market trading in its shares and postponed its annual results, that the company could "weather this storm", but that it would need "a lot of work and agreement from our banks".
Yesterday, a day after his former Anglo colleagues announced record profits of €1.2 billion, O'Mahoney's ISTC succeeded in petitioning the High Court to appoint an interim examiner to avoid a doomsday scenario where the firm would be wound up and left with an estimated deficit of €871 million.
The company successfully argued in court that if its lenders - a group of about 25 bluechip international bankers - try to sell ISTC's assets, which they hold as collateral against loans provided to O'Mahoney's company, then the company would be facing massive losses.
This is because ISTC's assets, which include financial derivative products, are worth considerably less now due to the extraordinary illiquidity in the financial markets and the lack of even opportunistic buyers. Any shortfall from the sale of an asset would have to be met by ISTC and end up as a debt on its books.
In other words, ISTC wants everyone to sit tight and wait for the storm to pass, when its creditors might get more for the assets.
O'Mahoney has had a tough time steering his ship to this temporary haven. On November 12th, ISTC revealed it was writing down investments totalling €210 million in financial units called structured investment vehicles (SIVs) by at least €70 million after a ratings agency downgraded them. This left ISTC facing losses of at least €55 million for the year to September 15th, compared to a forecast of €15 million profit.
O'Mahoney then had to act quickly to stop ISTC's creditors engaging in a firesale of its assets, which they hold as collateral.
A call on the collateral would leave ISTC facing huge losses and would sink the ship. If one creditor sought repayment, then under company law this would create a domino effect and the company would default on other loans, due to "cross defaults", bringing down ISTC.
On Friday, November 16th, ISTC met its creditor lenders and sent them "a standstill letter" that evening to see what they intended to do. By the following Monday a small number of creditors said they would not be prepared to "stand still" and would explore selling ISTC's assets.
The company has since learned that less than 40 per cent of the company's assets have been offered for sale or sold by creditors; the remaining 60 per cent is unsold. ISTC believes secured creditors have been unable to sell assets in the current market conditions without incurring substantial losses.
"Indeed, many of the assets in question are illiquid in the best market conditions, let alone in a market where there is no appetite to purchase them," ISTC said in its petition to the court.
German bank Dresdner Kleinwort fired a torpedo on Friday, November 23rd, when it demanded repayment of €176,250 from ISTC within 21 days.
Yesterday, the board of ISTC met and decided to seek the appointment of an interim examiner to protect itself against further demands.
Within hours, ISTC was petitioning the judge.The company was ready for the move: an independent accountant's report, on which the court made its decision to appoint the examiner, had already been drafted.
Cashflow is tight. ISTC has about €30 million, down from €160 million in September due to "substitution requests" and margin calls by creditors and the posting of collateral with creditors.
Now the interim examiner, Dublin accountant John McStay, must find an investor. He has a few options. Investment bank Goldman Sachs contacted ISTC's UK financial advisers, Hawkpoint, on Thursday, November 22nd, expressing an interest in investing and Hawkpoint has forwarded information. Hedge funds Silverpoint and Avenue Capital are also interested.
About 200 shareholders invested €165 million when ISTC was set up in 2005. Their stakes are likely to be diluted if a new investor steps in.
ISTC will need an investor lifeline soon, though, as the financial storm shows no signs of abating.
