The great Icelandic collapse

It’s unlikely that wealthy entrepreneurs Ervin and Charlotte Vidor, owners of the hospitality empire Toga Group, would usually spend much time following Icelandic current affairs.

But in the last week the Sydney-based hotel tycoons have had a minor role in the latest scandal to hit the Icelandic capital Reykjavik, the epicentre of one of the most dramatic collapses of the global financial crisis.

The big story in Iceland in the last seven days involved the leak of an amazing loan document from the collapsed Icelandic bank Kaupthing, which fell over in October last year, along with the rest of the tiny nation’s economy.

The document in question is a 200 page presentation that was reportedly made to Kaupthing’s board in September last year. It details the loan arrangements with more than 200 individuals and companies, spelling out the size of their loans, the collateral and guarantees against the loans, the financial performance of the companies involved and the risk factors attached to each loan.

Kaupthing attempted to block the release of the documents through the Icelandic courts, but eventually gave up under huge pressure from the Icelandic public.

The document raises some big questions about Kaupthing’s lending practices, as it shows that Kaupthing’s biggest loans, totalling more than €6.4 billion, were given to companies connected to just six clients, four of whom were major shareholders in the company. There is no suggestion any of the borrowers did anything other than get good finance deals.

While most of the companies in the loan documents are from Iceland and Scandinavia, buried away in the presentation are the details of a loan made to Toga Group.

The Vidor family, which is valued at $445 million on BRW’s Rich 200 list, founded the Toga Group in 1982 and now manage almost 50 hotels under the Medina, Vibe and Travelodge brands.

According to the leaked documents, Kaupthing had a total exposure of €103.7 million to the Toga Group, which is described as “one of Australia’s largest privately owned groups”.

The bank loans were used to finance the construction of three hotels (one in the Danish capital of Copenhagen and two in Germany). These hotels were owned by Toga’s investment fund, The Toga Accommodation Fund, which the Vidors set up in 2005 in a partnership with Investec Bank. The loan agreement has an overall loan-to-value ratio of 65%, with the properties in Denmark and Germany used as collateral.

According to the Kaupthing documents, Toga’s had net turnover of €212 million, total assets of €331 million and total equity of €175 million.

Risk factors noted include falls in occupation ratios and higher construction costs associated with three properties under construction.

The managing director of Toga Hospitality, Ervin and Charlotte’s son Allan Vidor, says he isn’t too worried about the leaked documents. He says Toga’s loan is actually with a Danish bank that was subsequently acquired by Kaupthing. Vidor says he has never had anything to do with the Icelandic organsiation.

“We’ve had a relationship with the Danish bank for many, many years,” he says.

He says that while the banks involved wouldn’t be happy to see the details of their clients flashing around the world, there is no affect on Toga. “Frankly, it’s neither here nor there.”

Indeed, the fact that an Australian company was included in the loan documents (via its involvement with a Danish bank) says a lot more about the incredible mess that Iceland finds itself in than it does about Toga Group.

As American journalist Michael Lewis explains in his wonderful piece on Iceland’s economic woes, the country’s 300,000 residents are still trying to understand how it accumulated a national debt of $US140 billion, and how their banks managed to lose $US100 billion.

Between 2003 and 2008, a nation whose economy was traditionally based on fishing, built one of the world’s most aggressive banking sectors. Despite their lack of experience in high finance, these Icelandic banks and entrepreneurs took advantage of five years of ridiculously cheap debt and threw themselves into high-risk lending, hedge funds, currency trading and every other risky financial product they could find.

As Toga’s tale shows, the Icelandic banks also used vast sums of borrowed money to acquire banks, financial services companies, airlines and property companies throughout Europe.

But when the music stopped in October last year with the collapse of Lehman Brothers, Iceland was on its knees in weeks. Its currency collapsed, the Government was forced to resign and the International Monetary Fund was forced to prop up the country.

Iceland is now undergoing the painful process of recovery. The Government is recapitalising three of the country’s banks – including a bank which will be called New Kaupthing – by issuing $US2.1 billion in new government bonds to the banks. Rules preventing investors taking the long-term holdings out of the country will also soon be lifted.

But the leak of the Kaupthing documents – and the amazing revelations they contain about the debt-fuelled expansion of the Icelandic economy – serve as a reminder to the Icelandic people of the deep hole they are in.