ANALYSIS:Lenders to the Quinn Group can take very little comfort from yesterday's dramatic developments, writes JOHN McMANUS
THE DECISION by the Financial Regulator to appoint administrators to Quinn Insurance will undoubtedly focus attention on the health of its parent, the Quinn Group, owned by the eponymous Fermanagh family. The nature of the events that led to the regulator’s move will mean that this attention is unlikely to be welcome.
It would appear from what was revealed in court yesterday that the group has once again played fast and loose with the rules covering how much cash and other assets the insurance arm must hold to underpin policies it has written. The reserves ensure the company can honour the policies.
Quinn Insurance has breached the “solvency ratios” governing these reserves in recent months, according to the regulator, but the icing on the cake from the regulator’s point of view was the discovery that Quinn Insurance subsidiaries had guaranteed some of the Quinn Group’s borrowings.
The effect of this, according to the regulator, was to turn a surplus of assets over liabilities of €200 million into a deficit of a similar magnitude. These guarantees had been in place since 2005, but only came to light recently when one of its creditors conducted a review of the business.
Yesterday’s revelations on their own are extremely damaging. Put in the context of other similar incidents at the company, the combined effect is disastrous.
The company and its founder, Seán Quinn, were fined almost €3.5 million for similar behaviour in 2008. On that occasion, the insurance company’s reserves were used to help the group absorb the losses on Mr Quinn’s calamitous foray into Anglo Irish Bank shares.
The problem that confronts Quinn Group now is twofold. First, it has to prevent the problems at the insurance company spilling over directly into the other businesses, which it claims are profitable to the tune of €20 million a month. There may be all sorts of guarantees and bank covenants affected by yesterday’s moves.
Assuming they can do that, the company must then confront the fundamental issue of credibility and the consequences for its efforts to manage its €4 billion in debts. The group currently owes €2.8 billion to the nationalised Anglo Irish Bank and another €1.3 billion to a consortium of other banks and bondholders.
Its lenders will have two main causes of concern. The first is what all of this says about the general standards of corporate governance and honesty at the group. Taken in the round, there is very little about what emerged yesterday – or the previous Anglo Irish-related revelations – to give any bank comfort about lending to the Quinn Group.
Over and above that, they will be concerned about the underlying cause of the breaches of solvency and the need for the insurance group subsidiaries to give guarantees to the parent group.
All of this will weigh in particular on the holders of the €1.3 billion in debt that must be refinanced later this year. That is before they consider the risks involved in lending to a business as heavily exposed to the Irish economy as the Quinn Group.
The good news – if that is the word – for the Quinn Group is that the bulk of its borrowings are with the nationalised Anglo Irish Bank. Indeed, when and if the post-Nama restructuring of Anglo is completed, they will dominate its loan book.
Given Seán Quinn’s political clout, as evidenced in his missive to Government Ministers yesterday, the Quinn Group will be hoping for a sympathetic approach from Anglo. The new management of the bank, however, is playing hardball at present and pressuring Quinn Group to reduce its borrowings, possibly pushing it to give the bank a stake in the business in return for some debt forgiveness.
The group, however, seems to believe it can trade itself out from under its mountain of debt and, if necessary, the Quinn family will pony up cash through the sale of other assets outside the business.
These assets are believed to be considerable, but the opaque nature of the family’s finances make it hard for outsiders to assess them.
One thing is clear after the events of yesterday: if Quinn and his family are to preserve what is left of their business and retain control of it, they will have a lot of explaining to do to their banks.
John McManus is Business Editor