Entrepreneurial lessons for our future from a bag of crisps

20 December 2009
By Kathleen Barrington

In the late 1980s a bunch of friends rented a flat in the London suburb of Kingsbury in an area where many Indians had long been settled.
The first time we visited our corner shop, we were surprised to find that, in between the okra and poppadums, the Indian owners had thoughtfully stacked their shelves with Kimberley, Mikado and Fig Roll biscuits, Tayto crisps and Galtee rashers.
The Indians reckoned that many Irish immigrants would be happy to pay a little extra for Irish brands which reminded them of home. And they were right.
It has been a happy hallmark of the Celtic tiger years that a number of Irish business people have risked their capital trying to inject new life into Irish brands which might otherwise have died a slow death due to competition from foreign-owned brands with greater financial muscle.
Michael Carey, executive chairman of the Jacob Fruitfield Group, has sought to revive consumer interest in traditional Irish brands such as Fruitfield jams, Chef sauces, Silvermint sweets, Kimberley, Mikado, Fig Rolls and Club Milk biscuits.
The sixth generation of the Flahavan family, led by chairman John Flahavan, has also sought to reposition the famous porridge oats food brand against tough competition from giant multinational brands such as Nestlé, Weetabix and Kelloggs.
And Ray Coyle has sought to raise the profile of Tayto crisps in the teeth of fierce competition from global brands including the giant Walker crisps.
The recession will have done little to help these entrepreneurs amid fears that increasingly price-sensitive consumers may jettison brands in favour of getting the cheapest products they can.
The credit crunch also impacts negatively on attempts to expand the market for Irish brands because branding requires big investment.
But that hasn’t stopped Ray Coyle’s Largo Foods investing about €1 million to promote the Tayto brand, centred around the launch of Mr Tayto: The Man Inside the Jacket. The tongue-in cheek book was written by Podge and Rodge creators Ciaran Morrison and Mick O’Hara, with help from the Tayto marketing department.
At a time when many publishers have been heavily promoting books about the roles of the bankers, the builders and the politicians in causing the recession, the public are turning in even larger numbers to Mr Tayto for a comfort read - putting his ‘autobiography’ at the top of the bestseller lists this Christmas.
When I interviewed Ray Coyle at his Ashbourne headquarters in Meath three years ago, I left with the impression that he was the very model of a risk-taking entrepreneur.
One of the stories he told at the time, which will resonate with a current generation of troubled borrowers, was how back in the late 1970s, he was a farmer supplying potatoes to the Perri and Tayto crisp factories, then owned by others.
He got into serious financial difficulties when potato prices and land prices fell sharply leaving him with Ir£1.4 million in bank borrowings he could not service. Then when he put up land for sale in order to pay off the banks, he found it was worth only Ir£270,000. Undaunted, he decided to raffle his farm by selling 5,000 tickets at £300 a ticket, raising the amount required to meet his obligations.
It was an example of lateral thinking to get round an apparently insurmountable problem and, because he had been able to settle his debts in difficult times, it meant that he was able to return to his bankers for more big loans in the future. He would later set up his own factory making crisps.
Three years ago, Coyle had net debt of €22 million on his balance sheet when drinks group Cantrell & Cochrane decided to put the iconic Tayto crisps brand on the market for €62 million. Largo Foods had to borrow another €50 million from Bank of Scotland to part-fund the Tayto purchase. The company also raised €15 million in new equity, of which €7.5 million came from a trade investor, while Coyle personally put up €7.5million borrowed from Ulster Bank.
At the time, Coyle admitted it would have suited him far better if Tayto hadn’t come on the market until the following year, as he had just invested €15 million in upgrading his Co Meath factory, after securing the contract to manufacture Tayto crisps under licence.
But Coyle seized the opportunity to buy Tayto when it presented itself even if he had to borrow up the hilt to do so.
In fact, his big fear was that if he didn’t get his hands on Tayto, he might have lost the Tayto manufacturing contract which he already had.
He faced a considerable challenge with Tayto, which had been losing market share. The Tayto brand, which only 15 years previously, had market share of 80 per cent in Ireland, had by 2006 only 40 per cent of the crisps market due to stiff competition from the likes of Walkers which in turn is owned by Pepsico, a company with effectively unlimited resources.
Last week, Coyle said Tayto and his other brands, which include Hunky Dory crisps, now had about 55 per cent of the Irish crisps market. He has also succeeded in reducing his borrowings to about €72 million, but still jokes that the banks own the business.
It hasn’t been plain sailing by any standards. Sales rose by 4.4 per cent to €94 million last year, but the company recorded an after-tax loss of €3.6 million after incurring €1.8 million in redundancy costs. Coyle also cut wages by 5 per cent for staff and 10 per cent for management, but hopes to reinstate pay level if the company returns to profits in the current year.
Against that background, Coyle’s decision to invest €1million in branding is a major statement of his ambitions for the Tayto brand.
Damien McLoughlin, Professor of Marketing at the Smurfit Business School, described Coyle’s Tayto story as ‘‘absolutely extraordinary’’.
An expert in branding, McLoughlin said he thought that the Mr Tayto autobiography was one of the best branding ideas he had ever heard. He admired Coyle for taking a well-known Irish brand and building a contemporary history around it.
The Coyle story made two important points: ‘‘There is marketing and brand building expertise in Ireland and a willingness to invest and that is very important,” McLoughlin said.
The payoff for Ireland is that entrepreneurs like Coyle, Carey and Flahavan provide local jobs for local people and keep money in Ireland that might otherwise have gone abroad. We need a lot more like them.

Bloxham in spotlight over Saturns bonds

13 December 2009

By Kathleen Barrington

It is less than three years since Pramit Ghose, one of Ireland’s best known fund managers, took over as managing partner of Bloxham Stockbrokers.
Ghose took over at the helm of one of the oldest stockbroking firms in the country, just as the firm was facing into a period of unprecedented market turmoil.
The scale of the difficulties he faces can be judged by the fact that the ISEQ index of leading shares is down almost 80 per cent from its peak at the time Ghose took over from former managing partner Angus McDonnell.
As though the economic climate wasn’t bad enough, Ghose is now separately in the spotlight after the Solicitors Mutual Defence Fund (SMDF) took legal action against his firm.
The SMDF claimed in the Commercial Court last week that its ability to indemnify 3,500 solicitor members effectively had been affected by losses of more than €8 million, after what it alleges was negligent advice by Bloxham Stockbrokers about investing in a totally unsuitable bond. Bloxham contests this and is defending the action.
The fund made the losses after investing in controversial Saturns Investments Europe bonds which plunged in value by 97 per cent.
Fund chairman Laurence Shields said in an affidavit that news of the losses had come as a ‘‘profound shock’’ to the fund, which had one-third of its investment portfolio in the bond.
The court has yet to year Bloxham’s side of the story. But Ghose told The Sunday Business Post this weekend that the firm was ‘‘going to vigorously defend the allegations’’.
He is otherwise precluded from speaking about the case as it is currently before the courts. The fact that the solicitors’ fund had one third of its investments in one product has raised eyebrows in investment circles.
But some observers believe that Bloxham could argue that the solicitors’ fund is a professional investor capable of making its own investment decisions and that, in any case, the stockbroker did not advise on asset allocation.
The Saturns bonds were manufactured by investment bank Morgan Stanley and distributed in Ireland by Bloxham Stockbrokers to its clients and to other investment intermediaries who in turn sold the bonds to their clients.
It is believed that Bloxham sold about €28 million of the bonds to its clients. Bloxham is believed to be in discussions with Morgan Stanley about resolving the dispute.
Sources suggested that as many as 60 Bloxham clients have agreed to take this course of action and not to go to court or to the Financial Services Ombudsman. However, this newspaper has learned that Bloxham faces complaints from a smaller number of unhappy clients who have sought separate advice.
Robert Moynihan, the investment adviser, says he is representing six retail consumers who claim they were mis-sold securities issued by Saturns Investments Europe and sold to them by Bloxhams and other investment intermediaries.
He says some of them are planning to take their cases to the Financial Services Ombudsman.
Moynihan previously represented some of the credit unions which won a €35 million collective settlement from Davy stockbrokers after alleging they had been mis-sold certain perpetual bonds which also collapsed in value.
Moynihan says that in the Saturn case, none of his clients was provided with a prospectus. He alleges that they were mis-sold the bond.
The 70-page prospectus, seen by this newspaper, warned that the notes were offered on the basis that they were normally bought by investors who are particularly knowledgeable in investment matters and that they were only suitable for financially sophisticated investors.
It warned that the investors must be capable of bearing the economic risk of an investment in the notes for an indefinite period of time, as the bond had a 26-year term.
‘‘One of my clients was advised by Bloxham to invest €169,000 in this 26-year investment at the tender age of 75, so even if it had not collapsed, this pensioner would have had to wait until the age of 101 to recover the money invested.
‘‘The pensioner had no other assets other than a private residence and no income other than a modest pension.
‘‘This money had been earmarked for nursing home fees in the twilight of life and now ... it has been entirely lost," Moynihan said in a letter to Michael Moynihan TD, chairman of the Joint Committee on Economic and Regulatory Affairs.
Moynihan has written to the committee because he is unhappy that each client must make a separate complaint to the Ombudsman and that the broker can then appeal the Ombudsman’s decision to the High Court. He says his clients should not have their stress compounded by waiting years for the appeals to work their way through the courts.
The Sunday Business Post reported last August that Financial Services Ombudsman Joe Meade had already ordered an unnamed investment intermediary to return €100,000 to Abbeyleix Credit Union, which had invested in the bonds.
Meade ruled that the bonds breached the Trustee Authorised Investment Order.
The order governs the kind of products in which credit unions may invest. It has since emerged that Hooper Dolan, the investment intermediary that sold the product to the credit union, has appealed that decision to the High Court.
Moynihan says that when a cluster of alleged mis-selling occurs, the Stock Exchange should investigate and arrange for compensation, where appropriate, to be paid promptly and without each alleged victim having to complain individually to the Ombudsman or join the queue in an already crowded court system.
Moynihan says the Financial Regulator has advised him that it does not have the power to investigate such complaints and referred him to the Exchange.
Deirdre Somers, the chief executive of the Exchange, wrote telling him she had no legal ability to investigate such complaints as regulatory oversight had transferred to the Financial Regulator in 2007 when the Market in Financial Instruments Directive was adopted.
That leaves disgruntled investors in a regulatory limbo. Moynihan is urging the committee to summon the Stock Exchange to explain which agency should investigate allegations of past misconduct by stockbrokers.
If the committee accedes to his request, the manner in which the Stock Exchange operates could come under closer scrutiny.
Meanwhile, Ghose, the other partners in Bloxham and FBD, the insurance company which is a shareholder in Bloxham, must be hoping that the stockbroker can reach a satisfactory agreement with Morgan Stanley in order to bring this sorry saga to a conclusion at the earliest possible opportunity and get back to the business of making money for their hard pressed clients.

Mortgage arrears numbers climbing

13 December 2009
By Kathleen Barrington
As all eyes were on the budget last week, the fact that international credit rating agency Moody’s is pointing to mounting arrears in the €40 billion Irish residential mortgage-backed securities market (RMBS) got relatively little attention.
Moody’s noted that ‘‘delinquencies’’ in the RMBS market experienced another increase in October.
The numbers who failed to pay their mortgage for more than 90 days rose to 2.9 per cent in October - or more than double the level observed last year. The numbers who failed to pay their mortgages for more than 360 days stood at 0.7 per cent in October or more than triple the level observed one year previously.
Some banks fared far worse than others. The number of delinquencies over 360 days on the Ulster Bank-owned First Active securitisations was almost 1.6 per cent - more than double the average. The number of delinquencies over 90 days was also far higher on the First Active loans at 4.50 per cent.
The number of people who paid back their mortgage remained low at 6.4 per cent, half the level that was observed one year previously and substantially below the all-time high of 25.3 per cent observed five years ago, when mortgage redemptions were high, presumably due to the volumes of people trading up, switching, refinancing or paying back their mortgages for other reasons.
It is true that Moodys says that Irish prime RMBS transactions have not reported any significant losses to date.
But the agency also warns that Ireland has been particularly hit by the recession and that the economy is not expected to start growing until the middle of 2010. House prices have fallen 24 per cent from their 2007 peak and are likely to fall again in the second half of the year.
Unemployment is continuing to increase, reaching 12.8 per cent in October 2009. ‘‘The expectation of a prolonged recession, rising unemployment and continuous house price declines may have a material impact on the Irish economic model and the performance of RMBS.”
Worse still, Moody’s said ‘‘economic indicators do not show any signs of recovery in Ireland and mortgage performance may not yet fully reflect the depth of the current recession.” In other words, more pain may be on the way both for householders in Ireland and the investors who invested in the securities backed by their mortgages.
None of this will come as much of a surprise to anyone who has been speaking to mortgage brokers, financial advisers and debt experts, most of whom have horrendous stories to tell about borrowers struggling with jumbo mortgages they cannot afford to repay either because of falling incomes or rising unemployment.
There has long been plenty of anecdotal evidence that hard pressed mortgage holders are negotiating with their banks about interest-only deals, repayment holidays or rescheduling of debts as they cope with the consequences of falling incomes and rising unemployment.
Many distressed borrowers want the government to lean on the banks to be more lenient with troubled borrowers, especially ones who have got into difficulties through no fault of their own, for example because they lost their jobs.
Already, the government has made much play of its code of conduct on mortgage arrears which prevents lenders initiating legal action against borrowers for six months. The code also encourages banks to consider changing the terms of the mortgage where appropriate.
However, many debt advisers fear the measures do not go far enough to protect distressed borrowers.
Increasingly, the view on the ground is that the government has set up the National Asset Management Agency(Nama) to bail out the banks at the expense of the taxpayer, but has done nothing to help the ordinary person. One adviser told the Insider last week that the government ‘‘doesn’t seem to realise that the spirit of the people has been broken, they are financially broke and totally agitated that they had little or no part in causing this mess’’.
But the government is caught between a rock and a hard place on this issue. Investors worry that what the government has already done for the ordinary borrower will ultimately only store up worse trouble for the banks in the future.
Moody’s notes, for instance, that ‘‘banks in Ireland are under pressure and are not taking loans in arrears through foreclosure as the legal framework supports borrowers even if they can only make a limited contribution per period. As house prices continue falling, more borrowers will face negative equity. There is a risk that the delayed foreclosure process will lead to higher losses in Irish RMBS transactions in the mid term.”
The Moody’s note was prepared before Finance Minister Brian Lenihan indicated in last week’s budget that he was slashing the public service pay bill by €1 billion, which is likely to put more pressure on public sector mortgage holders, especially ones who bought on modest incomes when house prices were high.
Lenihan indicated in his budget speech that he was asking the Financial Regulator to examine the extension of the six month moratorium on repossession proceedings to 12 months, a move which would further worry investors if approved.
About €40.4 billion worth of Irish mortgages have been securitised compared with a total mortgage book of about €148 billion.
The securities are held by investors and are therefore generally not on the balance sheets of the Irish banks. However, in some cases there are provisions that investors who hold the securities can require the bank to remove bad mortgages from the securitised mortgage pool and replace them with good mortgages if delinquency rates reach certain levels. This means that some bad mortgages could end up back on the banks’ balance sheets, while good mortgages could be lost.
But the state of the RMBS securitisations is probably most important for what it tells us about the state of the mortgages that remain on the banks’ balance sheets - assuming the mortgages on the banks’ balance sheets are similar to the ones that are sold to investors as securities.
As revealed elsewhere in today’s newspaper, Ulster Bank has transferred stg4.7 billion worth of mortgages - 94 per cent of them generated in the Republic - to the British Asset Protection Scheme (APS), the British government’s bank bailout vehicle which is roughly equivalent to our own National Asset Management Agency (Nama).
It remains to be seen whether our own government will need to remove troubled mortgages from the domestic banks’ balance sheets by transferring them to Nama, what price the government would pay for those mortgages and what additional capital then banks would require as a result.

Our banks keep going back for more

Sunday, December 06, 2009
By Kathleen Barrington

Oliver Wyman is a prestigious international risk management consultancy and a division of the giant Marsh & McLennan Group, and boasts special expertise in financial services.
It is also the firm which named Anglo Irish Bank as the best bank in the world at the 2007 World Economic Forum in the upmarket ski resort of Davos in Switzerland.
Anglo Irish Bank emerged as the star performer when measured by Oliver Wyman’s proprietary shareholder performance index. The index was described as a measure of risk-adjusted performance designed for use by both investors and senior managers of the world’s most successful financial services firms.
In another report published in 2006, Oliver Wyman said that Anglo Irish Bank was one of four ‘‘supermodels’’ which had consistently achieved 30 per cent year on year growth.
It had done this by focusing on property development finance and building on the professional reputation of its underwriters, who had established themselves as leaders in this field.
But it wasn’t long after the Davos endorsement that Anglo’s share price began to slip, as some of the world’s more savvy investors took the view that the supermodel was skating on thin ice.
Just two years later, Anglo Irish Bank had been nationalised after effectively going bust due to a combination of its reckless lending to the Irish commercial property sector and the seizing up of credit markets, triggered by the international credit crunch.
Of course, the ultimate responsibility for adopting a particular banking model rests with the board of the bank which adopted it, rather than the consultants which endorsed it - irrespective of what advice the consultants may have given. And when it came to the banking crisis, so many got it wrong. Very few saw it coming.
Even so, it is interesting to reflect on some remarks which show the kind of advice Oliver Wyman was giving to banks back in 2006.
For instance, speaking following the publication of Oliver Wyman’s annual assessment of the state of the financial services industry in 2006, John Drzik, chief executive officer of the firm, said:
‘‘The gap between the best-performing firms and those achieving market growth rates has widened considerably. A few consistent performers have broken away from the pack over the last five years and overturned the conventional wisdom that firms need to trade off short-term performance against longer-term strategic gains.
‘‘These top tier performers have achieved both. To attain this level of performance, firms must take calculated strategic risks, enforce execution discipline and make the right strategic selective acquisitions.”
Unfortunately - and, admittedly, with the benefit of hindsight - it now appears that the old-fashioned conventional wisdom was right: banks would have been far better off trading off short-term performance in favour of sustainable long-term gains.
You might think that Irish bankers, regulators and the government would hesitate to take advice from Oliver Wyman in the current crisis - given its erstwhile praise for the Anglo Irish Bank model, which is now seen as totally toxic. But you would be wrong.
The consultancy has already picked up work from Bank of Ireland and Irish Life & Permanent (IL&P) in the aftermath of the banking implosion, while the Financial Regulator has appointed the firm to a panel on whose expertise it may draw in the future.
In late December 2008, for instance, Bank of Ireland hired Oliver Wyman to perform a detailed review of its loan book, and provide an independent assessment of the likely levels of impairment charge - that’s the bad debts - over the three years to March 31, 2011.
In a statement published in February this year, Bank of Ireland said that its likely loan impairment charge for the three years to March 2011 was about €4.5 billion, with a downside risk of up to an additional €1.5 billion.
In other words, the worst-case scenario envisaged by the bank was bad debts of about €6 billion over three years.
At the time, Oliver Wyman said that its estimate of loan losses was broadly consistent with Bank of Ireland’s estimate.
‘‘This is despite the fact many different approaches and assumptions were used by us, including analysis of loan books using extensive databases, review of individual major exposures and the benchmarking of portfolios against previous cycles and across the industry internationally.
‘‘Any differences between Oliver Wyman and Bank of Ireland are within a reasonable confidence level and so support the Bank of Ireland estimate,” it said. But last month, it emerged that the impairment charge was worse than Bank of Ireland’s estimate.
The bank has revealed that its impairment charge for the three year period has now risen to €6.9 billion - almost €1 billion worse than the worst-case scenario outlined in February.
This didn’t come as a major surprise to some analysts, including Ciaran Callaghan at NCB Stockbrokers who, as far back as March this year, estimated the impairment charge at €7.3 billion.
Merrion Capital analyst Sebastian Orsi, meanwhile, has said that the impairment charge for the three-year period could be €9 billion - €3 billion more than the figure the risk experts at Oliver Wyman had endorsed.
IL&P also hired Oliver Wyman to review its corporate governance framework following the controversy over transactions between itself and Anglo, which had the effect of artificially boosting Anglo’s balance sheet.
Oliver Wyman recommended to the board of IL&P that it improve its risk management practices.
The Financial Regulator has also confirmed that Oliver Wyman is on a panel of risk experts who may be used to provide it with advice over the next four years, subject to a ‘‘mini-competition’’ among others on the panel.
Meanwhile, a spokesman for the Department of Finance said that the department had no recollection of Oliver Wyman pitching the government for advisory business.
When reminded that it was already in the public domain that Minister for Finance Brian Lenihan had sought the advice of Andrew Large, a former deputy governor of the Bank of England (who also happens to be an adviser to Oliver Wyman), the department’s spokesman said Large had been hired in a personal capacity, not as a representative of Oliver Wyman.