The European Commission has approved, under the EC Merger Regulation, the move by Anglo Irish Bank and Ulster Bank to take joint control of Arnotts, the iconic Dublin department store. Media reports suggest that Arnotts is indebted to Anglo Irish Bank and Ulster Bank for in excess of €250 million. The Commission noted that Anglo Irish Bank and Ulster Bank intend to restructure Arnotts’ existing debt in return for the acquisition of joint control over Arnotts and found that the proposed transaction would not significantly impede effective competition in the European Economic Area.
The action taken by the banks is an unusual choice of remedy. It is believed to be a debt for equity swap where Anglo Irish Bank and Ulster Bank each took control of 49.5% of the business, leaving 1% with the existing shareholders, in return for writing off their debts. The banks are taking control which falls short of full, immediate ownership, although they have an option to take ownership at a date in the future.
This form of debt for equity swap is, until now, a relatively uncommon move by Anglo Irish Bank and Ulster Bank, where the appointment of a receiver over the assets of defaulting creditors has been a more common remedy in Ireland. A debt for equity swap involves a secured creditor taking a medium to long term approach with defaulting businesses. Because the economic environment is likely to give lower loan recoveries from asset sales by receivers, taking an equity stake in a business can be a viable alternative where the value or trade of the business’ underlying assets provides enough of an incentive to the lender. A consequence of this, however, is a significant dilution of the original shareholders’ stake.
In the medium to longer term, as markets recover it is likely that the banks will seek to recover as much of their loans as possible through a sale of the business as a going concern once the debt pile has been restructured.
There are indications that such debt for equity swaps may become more common in the Irish market with reports that Anglo are considering similar moves in respect of a number of other debtors with suitable trading assets. There has been opposition to this potential strategy by Anglo from some economic commentators who have queried the long-term economic value to the State of such actions and from industry sectors affected due to State aid concerns.
If you seek advice on innovative insolvency solutions and remedies, or have queries arising in this area, please contact Barry Cahir or Craig Sowman of our Insolvency & Corporate Recovery Practice.
