Irish
Examiner appointed to Irish financial firm ISTC; Global credit market turmoil has made highly profitable operation insolvent
By Finfacts Team
Nov 30, 2007, 01:18

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Tiarnan O'Mahoney
The High Court on Thursday appointed an interim examiner to International Securities Trading Corporation (ISTC), a company which facilitates lending in the wholesale banking market, after being advised that ISTC is insolvent due to the global credit market turmoil that began on August 9th last.

Earlier in November, ISTC announced that it had been impacted by the freeze-up in the structured investment vehicle (SIV) market, delaying its results and suspending the "grey market" trade in

its shares. SIVs are off-balance sheet vehicles, which have been used by banks such as HSBC, which this week announced that it was taking on $45 billion in assets to forestall big losses from a feared collapse of two SIVs. They are designed to get cheaper financing by borrowing in the short-term commercial paper market. They invest the money in higher-yielding assets and paying the returns to holders of their longer-dated capital notes, which rank after commercial paper for repayment and are first in line for losses.

ISTC had also cancelled a convertible bond issue in November and had said that it expected to take a one-off charge of at least €70 million as it revalued $305 million worth of SIV capital notes it holds.

Mr Justice Peter Kelly said on Thursday that the alternative to examinership would involve liquidation and a "fire sale" of ISTC's assets resulting in a shortfall of some €871m. ISTC's creditors were "a veritable who's who of the banking world on an international scale", he added.

The judge said the application for court protection resulted from ISTC becoming a victim of the recent volatility in the financial markets.

The downgrading of Structured Investment Vehicles (SIVs) and consequent demands for repayment of those SIV assets which ISTC had procured on the basis that it had had "to borrow short and invest long," had triggered the crisis.

 
ISTC was founded in May 2005 by Tiarnan O'Mahoney, former Chief Operating Officer of Anglo Irish Bank, and employs 18 people.

High net worth investors had to put up a minimum of €2m each. O'Mahoney invested €5m to take a stake in the business.

ISTC raised €165m compared with an initial target of €100m.

“The real attraction of this business is that you are lending to the highest quality borrower that there is. Banks are highly regulated, with the regulator ensuring they are in a position to meet their obligations. That's why I think it's such a safe form of business. You can't say that banks don't fail, but everybody agrees banks are a fairly safe bet,” O' Mahoney told the Sunday Business Post..

In May 2007, ISTC reported a very strong financial performance for the six month period to 15 March 2007, with profit before tax up 300% on comparative figures for 2006 to €6.8 million.

Announcing the results, ISTC Chairman, Raymond J.R. French, said: “The very strong financial performance for the first six months to 15 March 2007 clearly evidences the robustness of ISTC’s business model. The Board and management look forward with great confidence to the second half of the 2007 financial year and beyond. We have revised our profit before tax target for the 2007 financial year upwards to a minimum of €15 million, from the €13.5 million which we had indicated at the publication of our 2006 accounts.  Achievement of the revised PBT forecast will represent more than a doubling of profits in comparison with 2006, underpinning our confidence in the growth prospects of the business.”

A grey market in ISTC shares managed by Goodbody Stockbrokers had seen approximately 15% of the company’s equity traded, with the then current share price of €325 showing a strong premium to the July 2005 issue price of €100 per share.

“There is only one objective of International Securities Trading, and that is to make money. This is unashamed capitalism,” O'Mahoney had said before the launch.

SIV repayment demands had been made and ISTC was unable to meet those demands, the judge said. The structuring of its other assets and a default mechanism had led to further demands in other areas and it was unable to pay its debts.

The judge said that an independent accountant had prepared a report suggesting that if certain conditions were met, the company or part of it had a reasonable prospect of survival as a going concern.

These included agreement with sufficient secured creditors to continue trading with ISTC, the company being able to cap its exposure to collateral calls by secured lenders, and the approval of an appropriate scheme of arrangement.

On the evidence, the judge said he was satisfied to appoint John McStay as interim examiner to the company. He noted that McStay had had 400 shares in ISTC, described as "valueless", but had disposed of those.

Mr Justice Kelly listed the hearing of the petition for examinership on December 17th and directed that the petition be advertised in newspapers here and in the Financial Times and Wall Street Journal.

Earlier, in applying for interim examinership, Michael Collins SC, with Mr Rossa Fanning Bl, for ISTC, said the directors believe, provided certain conditions are met, the company or part of it has a reasonable prospect of survival.

Some creditors were prepared to explore restructuring, he said. The company's assets were illiquid in even the best market conditions and, given the current market crisis, there was a "commercial imperative" to deal with ISTC to avoid having a "fire sale" with bonds either not being sold at all or being sold in a very depressed market.

The application for examinership came after an ISTC board meeting on Thursday afternoon and was prompted by a warning issued last Friday by a German bank creditor that it would file a petition to wind up ISTC within three weeks unless its debt of some €176,000 was paid.

In documents presented to the court, ISTC said it had invested some $305m in SIV capital notes. The SIVs were sponsored by leading international banks.

However, on November 8th, most of ISTC's SIV assets were either placed on review for possible downgrade or were downgraded by Moody's Investor Services.

Downgrading meant SIV capital note facilities became immediately repayable and, because of the credit turmoil in the financial markets, demands for repayment were made by several banks and financial institutions. ISTC was unable to meet those demands.

The inability to repay the SIV funding created a default under those facilities which caused a cross default in ISTC's facilities with all except one of its senior lenders, the company said.

ISTC said it had been trading profitably until this situation arose. In September last, it had cash on hand of some €160m but market volatility had reduced that sum to about €30m.

The board had previously been satisfied it was appropriate to value SIV assets in its financial statements at cost but it now had to adopt a market value approach to SIV valuation. That meant it had to a make at least a €70m provision in its September 2007 financial statements.

As a result of this and other events, the company had decided to enter into negotiations with its banking creditors earlier this month. It also decided not to meet margin calls and other demands for payments from creditors pending the outcome of the negotiations.

On November 12th last, it had issued a statement to the Irish Stock Exchange and its stockbrokers were instructed to cease making trades in the grey market in its shares.

In March 2007, ISTC had made loans of some €1.9 billion through investing in various instruments and its loan portfolio was made up of some 140 debtors across 22 countries.



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