ANALYSIS: McInerney needs investor cash and forbearance from its banks to keep going, writes BARRY O'HALLORAN

IT IS nine months since house builder McInerney Holdings began talks with banks on both sides of the Irish Sea designed to hammer out new terms for the €236 million worth of loans that it owes them.

In the second half of last year, the company broke two covenants of its loan agreements that should have triggered automatic repayment of the debts.

The first was that it would meet certain sales targets, which it has failed to do as demand for new houses in its two main territories, Ireland and Britain, has collapsed.

The second was that it would maintain a certain net worth relative to its liabilities. It has been unable to fulfil this as it has been forced to write down the value of land banks in both countries.

Given that McInerney’s business is building houses, mainly for first-time buyers, and that its main assets are its sites in Ireland and Britain, market conditions made it virtually impossible for it to keep either guarantee.

Through 2008 and 2009, it cut the value of the land it owns. At the end of June last year, it had written €156 million off the value of these assets. Its Irish sites are now worth half of what they were at the beginning of 2008 while its British properties have had their values shorn by 40 per cent.

While these were non-cash losses, as the company simply had to reduce the value of the assets on its books, it meant that the security that the banks originally thought they had for their loans no longer existed.

As a result, in November, it announced that it was effectively in breach of its loan covenants and would have to talk to its banks to find a solution to the problem.

The group originally hoped it would have new loan agreements by the time it announced its 2009 results earlier this year. However, as that date loomed, it appointed merchant bank Goldman Sachs to advise on a restructuring process that it said could include some form of rights issue.

This was the first hint that it was looking for a new investor or investors.

Presumably that search led it to Oaktree Capital, a California-based private equity group with $76 billion under management.

The reason it needs a new investor is it needs new capital.

Its business lost €25 million last year, excluding its €156 million write off. This was an improvement on 2008, when it lost €47 million.

It has seen some signs of stability in the market. The group has re-opened a number of mothballed sites and is selling houses, between 60 and 70 in Ireland so far this year, according to some estimates.

But there is no question that it is in a serious situation. It needs cash from a new investor and a fair amount of forbearance from its banks to keep going. If it does not get these, it will have very few options left.