Elan debt deal averts collapse, but fresh questions emerge

Elan, the disaster-stricken Irish drug firm, set up a secretive company to which it sold $148m of its assets in a controversial refinancing deal a year ago, it emerged yesterday.

Elan, the disaster-stricken Irish drug firm, set up a secretive company to which it sold $148m of its assets in a controversial refinancing deal a year ago, it emerged yesterday.

The disclosure disturbed investors, who had previously been told that the company was "an unaffiliated third party", and reawakened fears over the outcome of a regulatory investigation into whether the company misled the market.

The revelations came as Elan said it had been granted a waiver by holders of around £500m of debt on which the company technically defaulted yesterday. It now looks likely that Elan will publish its disputed accounts in the next 10 days, staving off the threat of collapse.

The asset sale was the last in a string of fiendishly complicated off-balance sheet financing arrangements which eventually unravelled last summer. The purchaser was named for the first time yesterday as Shelly Bay Holdings, and investors were surprised to see it described as "an entity established by Elan and owned by an unaffiliated third party".

One analyst said: "Elan are always wheeling frightening skeletons out of the closet to put the willies up you, and this was a new one being wheeled out."

The assets, mainly investments in biotechnology companies, belonged to an off-balance sheet vehicle backing loans due for repayment in June 2002. Their sale allowed Elan to repay its debt without fully liquidating the assets, which it seems likely would have realised significantly less than $148m.

By last September, new management at Elan - now led by chairman, Garo Armen - had written down the assets to just $6m and paid Shelly Bay $142m to cover the difference.

The transaction is one focus of a wide-ranging investigation into Elan's accounts by the US Securities & Exchange Commission. The downturn in the fortunes of Elan has also triggered a raft of US class-action lawsuits claiming investors were misled.

A spokeswoman for the company said yesterday's revelations were prompted because Shelly Bay and three special purpose vehicles are to be consolidated on the balance sheet when Elan restates the last two years' accounts. She said: "We are looking to disclose all the information that is appropriate to explain the basis of the consolidation. We hope it will be easier for people to make more sense of us than it was before."

Elan shares rose 6 per cent to 291p yesterday after debt holders agreed to waive their right to call in loans. The waiver runs until 8 August, and the company is understood to be confident it will publish by then.

If accounts are not published by 14 September, holders of its most senior debt will be able to call in another £500m of loans, collapsing the company.