Fairfax Financial Corp. is keen on Ireland's long-term prospects despite Europe's debt troubles, so much so that it's pumping capital into the country's oldest, though beleaguered, bank.
The injection of about €1.1-billion ($1.5-billion Canadian) will allow the Bank of Ireland to stand alone as the only bank in the country to avoid nationalization, though the government holds a minority stake.
While Fairfax chief executive officer Prem Watsa believes both Europe and the United States have more pain ahead, he's bullish on Ireland with a longer view. So while other big names in private equity looked at Bank of Ireland and walked away, Fairfax decided to recruit more investors to share the risk and take a combined 35-per-cent stake in the institution.
Before Fairfax came on board, it appeared possible the Irish government could wind up owning more than two-thirds of the bank. Now, thanks to the consortium as well as a better-than-expected rights offering this week, the government's stake will instead fall, to about 15 per cent from about 35 per cent.
The deal will see Fairfax and U.S. billionaire Wilbur Ross each contribute about €300-million. Boston-based Fidelity Investments will contribute slightly less, The Capital Group will invest €200-million, and Kennedy Wilson roughly €25-million.
While Ireland's banks have come under fire for spurring on a property bubble that subsequently burst – doing serious damage to the country's economy, real estate market and financial institutions – Mr. Watsa said he believes Bank of Ireland has been a prudent lender.
"This bank has an excellent, disciplined credit culture, but of course when you have a property and construction tsunami like Ireland went through, no bank is spared," he said in an interview.
It was Kennedy Wilson, a Beverly Hills, Calif.-based real estate firm with a penchant for buying apartment buildings in depressed property markets, that first spotted the opportunity earlier this year. Its people were combing through properties that the Irish banks were selling when they heard that Bank of Ireland was looking to do a rights offering. The lender had been told by the country's central bank in March that it needed to raise capital in order to deal with the damage that the bubble had inflicted on its balance sheet.
As like-minded distressed-asset investors, the teams at Fairfax and Kennedy Wilson knew each other well, and the Beverly Hills company reached out to the Toronto-based insurer to ask if it knew about the rights offering. Fairfax has an office in Ireland with roughly 30 people, and knows the country well.
A number of major investors, largely from the U.S. private equity world, had already been weighing the possibility of infusing equity into the bank. But most wanted the Irish government to backstop their investment, reducing the risk. With its experience in distressed investments, Fairfax was willing to take on more risk and make a pure equity investment, though not for the full amount.
Fairfax sent a team to Dublin about two weeks ago to comb through the bank's loan books and question its credit people. Mr. Watsa met with the bank's management, and came away believing that, with a recapitalization, Bank of Ireland chief executive officer Richie Boucher would be able to turn the bank around.
Fairfax's team was left with the impression that the bank has taken larger writedowns in its portfolio of troubled real estate assets than even a worst case scenario would likely suggest, while the recapitalization plan should boost the bank's Tier 1 capital level to a strong 15 per cent. The bank had been running its property portfolio through scenarios based on what happened in Nevada, the state hit hardest by the U.S. real estate crisis.
Fairfax's team reached out to Mr. Ross, the New York-based billionaire known for turning around troubled companies. The two had teamed up a number of times before, including Fairfax's profitable investment in International Coal Group Inc., which Mr. Ross formed in 2004 and which was sold this year.
Mr. Ross's team knows Ireland well, having recently teamed up with Cardinal Capital Group to make a play for another Irish lender, EBS Building Society, which had already been seized by the government. (The government decided not to accept the offer). Like Fairfax, Mr. Ross has been keen on investing in troubled banks in the wake of the crisis, and led a consortium that beat out Toronto-Dominion Bank in the battle for Florida's BankUnited Financial Corp.
Together Fairfax and Mr. Ross's group sought out Fidelity and Capital Research, which is part of the Capital Group, to round out the group, and then began negotiations with the Irish government.
"I think it's just a question of time before Ireland comes back," Mr. Watsa said. "They'll have to digest the property boom that they've gone through, but they will. Long term, we're very bullish on Ireland."
Mr. Watsa remains more of a bear about the U.S. and other parts of Europe. "We continue to be nervous about the economies in Europe and the United States," he said. "We have very little ammo left – interest rates are at zero – and deficits are high and coming down, meaning government spending is coming down. We have to digest the booms of the past and it may take many years for that to happen."