Nov 2014 Financial News

State expects to get $18.3 bn from sale of CL Financial assets

Nov 20, 2014

Finance Minister Larry Howai says the sale of 56.53 per cent of Methanol Holdings (Trinidad) Ltd (MHTL) to its minority shareholder, Consolidated Energy Ltd, for US$1.175 billion (TT$7.4 billion) allows the Government to be “a little bit clearer how things should proceed from here” with regard to the final resolution of Government’s bailout of the CL Financial (CLF) empire.

In an interview with the Business Guardian last week, Howai said the last set of numbers he received from Ernst &Young, the advisers to the Ministry of Finance on the CLF issue, indicate that the Government should be able to recover $18.33 billion from the sale of other CLF assets “give or take $100 million or so.”

The January 30, 2009 Memorandum of Understanding and the shareholders’ agreement between the Government and CLF, signed in June 2009, stipulate that the State’s $20 billion bailout of the group should be repaid by the sale of CLF assets.

In the interview, the minister appeared to suggest that the Government had agreed that its claim on CLF should be “just over $18 billion.”

In its July 4, 2013, letter of intent, written by its managing director, Marlon Holder, CLF said while Government had made a claim against the group for $23.29 billion, CLF “acknowledges and accepts $18.33 billion of the claim.”

Howai explained that the Government had actually disbursed about $19.7 billion to bailout the CLF empire, but $300 million of the additional amount may or may not be recoverable as it went “to stave off the British American Insurance liquidators”. Another $1 billion was disbursed to assist with “payments up the islands,” again for the account of British American, which is “probably not” recoverable by the Government.

With $7.4 billion recovered from the sale of MHTL, Howai’s approach means that the Government expects the sale of CLF’s other assets to generate around $11 billion.

Of that amount, a significant portion is expected to come from the sale of Republic Bank shares.

Howai said Republic Bank “is a public institution, the value of which must be preserved or enhanced, if possible, at all costs.”

He said: “We are looking at different options regarding Republic. I have had some discussions with the bank because I want to make sure that, in the whole process, they are comfortable with whatever is being done and they have a say in the process.”

He said the Republic Bank officials suggested that the 40 million Republic Bank shares, equal to 24.87 per cent of the bank, in the Clico Investment Fund (CIF) should be left alone and that the balance of the shares owned by CL Financial should be sold to local institutional investors.

On his discussions with the Republic Bank officials, Howai said: “They suggested to me that we should leave the CIF where it is. Then the difference can be absorbed by the local market: the pension plans, mutual funds, insurance companies and so on…including Republic Bank’s employee stock ownership plan, Trintrust. That’s a possibility that we are looking at.

“I have listened to what they have said. Cabinet has not made any decision. They have suggested to me that they think that it could be absorbed locally.

“I also had discussions on the talk about the control premium. Their view is that right now Republic is trading at a level that already has the control premium built in, so that you are not really losing anything.

“So that the issue of a single buyer to get the control premium is not as much an issue as some people may think it is.”

At the current price of $120 a share, the 41 million Republic Bank shares that the bank’s officials suggest can be “absorbed locally” would be worth about $4.9 billion.

When that sum is added to the $7.4 billion that Clico/Government earned from the sale of MHTL, that brings the subtotal to $12.4 billion—which is still about $6 billion short of the $18.4 billion owed to the Government.

Angostura, HCL likely to be sold

Asked how the Government proposed to recover the balance, Howai said: “There are other assets that have to be brought into play to ensure that we are fully liquidated. The HCLs (Home Construction Ltd), Angostura and some other assets they have,” such as CL Marina and Methanol Holdings (International) Ltd (MHIL), the Oman-based methanol producer that is 56.53 per cent owned by Clico.

Clico’s stake in MHIL was valued at $693 million in the insurer’s 2012 financial statement, the same accounts that placed a value of $4.88 billion on MHTL, which was sold for $7.4 billion.

Howai said that there are some regulatory issues that the Government has to deal with with regard to the sale of MHIL, including that the company must be offered first to Consolidated Energy Ltd, the company that now owns 100 per cent of MHTL. He said there was a potential purchaser in Oman "who we would probably want to consider."

Howai added: “There would potentially be value for Clico’s traditional portfolio and they also have some cash on their balance sheet from the sale of Burn Stewart and other assets.”

Burn Stewart, a Scotland-based whiskey producer, was sold to South African spirits giant Distell in April 2013 for US$244 million. Burn Stewart was jointly owned by CL World Brands, with 71.1 per cent, and Angostura Holdings, with 28.9 per cent. That means that CL World Brands would have generated US$173 million ($1 billion) from the sale of Burn Stewart. CL World Brands also sold the cognac producer Thomas Hine and Co to French company EDV SAS for about US$60 million ($372 million) in September 2013.

Clico would also have received cash from dividends generated by Republic Bank and MHTL.

Asked if the Government proposed to take control of or sell Angostura, Home Construction and other assets, Howai said: “There are three options for the Government: one is taking control of the assets; another is selling the assets and the third is to take a debenture over the fixed and floating assets that CL Financial remains with.

“But based on the asset prices that Ernst & Young are seeing, they think we can actually sell and come out and still have some residual left for the existing CL Financial shareholders. So that is the approach we will probably take, subject to finalising the numbers.”

He said some of the assets owned by Clico—such as One Caribbean Media and WITCO—may be retained by Clico and sold along with the disposal of the insurance company’s traditional portfolio.

The minister said once everything has been finalised he will take a proposal to Cabinet and once that has been approved, he will have another discussion with the bank’s official.

About the Towers Watson valuation of Clico’s traditional portfolio, Howai said he has asked his staff to conduct an assessment of the report.

Although he expected the shareholders’ agreement to be completed by the end of the year, as scheduled, Howai said the disposal of assets would take many months to be completed.

“I’m expecting that things should speed up in the early part of next year. I don’t think you are going to be able to dispose of Clico’s traditional portfolio before that,” he said, as the process involves issuing a Request for Proposals for an investment bank to arrange the sale, choosing the bank and then allowing it to do its work.

Disclosure: The author owns Angostura shares

Asked about the 900 or so Clico and British American policyholders and mutual fund investors, including some related parties, who have not accepted, or have not been offered, the Government's offer of zero-coupon bonds and units in the CIF, Howai said: "For now, we are not dealing with the related parties. We continue to maintain that position. We are not dealing with the related parties at this time.

"Our computations are always based on liabilities owed to arms-length third parties."

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Before October 31, 2012, the CL Financial group held through its various subsidiaries, 51.4 per cent of Republic Bank’s shares.

Clico, the insurance subsidiary of CL Financial, owned 51.85 million shares (32.19 per cent) and Clico Investment Bank Limited (CIB) owned 29.38 million shares (18.24 per cent).

On November 1, 2012, the Government purchased 40.07 million shares from Clico, then worth $4.3 billion, which were placed into the $5 billion Clico Investment Fund (CIF). The balance of the funds in the CIF came from Government bonds.

The creation of the CIF—a vehicle to transfer units to holders of Clico EFPAs and mutual funds—means that, at this point, it owns 24.87 per cent of Republic Bank, while Clico owns 7.32 per cent with 18.24 per cent being retained by Clico Investment Bank, which was ordered by a high court judge to be wound up in October 2011 and the Deposit Insurance Company appointed liquidator.

 

Source:
Anthony Wilson
anthony.wilson@guardian.co.tt
Trinidad Guardian, BG4
Thursday November 20, 2014