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Financial News

Feb 2009 Financial News

Will C L Financial hold on to Lascelles?

Feb 18, 2009

Having lost a "major source of cash" for its operations, C L Financial may have to turn to Lascelles de Mercado to finance the US$340-million ($30 billion) loan balance it has from the purchase of the Jamaican conglomerate.

While speaking at Lascelles' annual general meeting at the company's New Kingston offices, C L Financial group financial director Michael Carballo said it was a possibility that cash from the rum distiller would be used to service the debt "as long as it doesn't impact the ability of Lascelles to maintain profitability".

One way or the other, having collaterised the debt - of which Jamaican investors currently hold 30 per cent - with Lascelles shares the firm will have to act quickly to shore up the cash it will need to avoid default, lest it sees those shares - equating to over 25 per cent of Lascelles - going back into the hands of Jamaican shareholders.

Subsidiaries of C L Financial are now facing a liquidity problem for which the Government of Trinidad and Tobago is trying to provide support.

However, the extent of the problems might not yet be determined.

Last Friday, Trinidad Central Bank governor Ewart Williams said that based on information received by his team, which was approached by C L Financial in early January for assistance, CLICO, a major insurance company headquartered in Trinidad, "was a major source of cash, much of which was used to finance investments held in the name of other entities in the Group".

For the takeover of the operations of CLICO and British American Insurance Company, one of the main insurance companies in the Eastern Caribbean, and the provision of liquidity support by the Government, C L Financial has agreed to divest additional assets to help fund a deficit now believed to be as high as TT$10 billion ($140 billion; US$1.6 billion).

Thus far, Caribbean Money Market Brokers and Clico Investment Bank (CIB) along with C L Financial's 55 per cent stake in Republic Bank Limited have been handed over to First Citizens Bank.

C L Financial will also give up its holdings in Methanol Holdings Limited, a methanol and ammonia producer, to the Government.

The Government has demanded that C L Financial make "all possible arrangements to place satisfactory levels of cash and other assets into the Statutory Fund in order to ensure the short- as well as medium- and long-term liquidity and stability of CLICO".

It is not yet clear whether the exchange of assets will be considered to be sufficient for the Government to continue with its liquidity support.

But what has further muddied the waters is the C L Financial model that involves intertwining assets.

"In this model, Clico has ended up as guarantor for many of the Group's assets, most of which are heavily pledged," Williams said. "Of course, pledging limits the potential proceeds from asset sales."

KPMG has now been brought in to "disentangle, inter alia, a whole range of complicated financial transactions, to review Clico's non-policyholders' liabilities and the extent to which Clico's assets are pledged."

Clico, but more so CIB, has been facing liquidity problems since early January, having sustained high levels of withdrawals by shaky depositors who expressed concern over a sharp decline in methanol and real estate prices, two areas in which the C L Financial subsidiary has a high level of exposure.

The Trinidadian central bank governor believes, however, that the current financial difficulties being faced by CIB and Clico have more to do with:

. "excessive related-party transactions which carry significant contagion risks. I shoulld note that the high level of concentration is not specifically prohibited by the present legislation;

. an aggressive high interest rate resource mobilisation strategy to finance equally high-risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad); and

. a very high leveraging of the Group's assets, which constrains the potential amount of cash that could be raised from asset sales."

Indeed, Lawrence Duprey, the Trinidadian conglomerate's chairman, is "not a fan of equity", according to Carballo, and has used debt to grow his business.

"That model works well in an inflationary environment," said Carballo.

Over the years, C L Financial has undertaken increasing levels of borrowing.

For instance, in 2006 long-term borrowings totalled TT$5.1 billion with TT$2.8 billion in long-term debt retired that year, and then for 2007, TT$14.3 billion long-term debt was acquired with TT$9.1 billion being retired.

Most of the additional borrowing in 2007 was done to finance the start-up of a US$1.5-billion Ammonia-Urea Nitrate-Melamine (AUM) Complex which was expected to be completed in the second half of 2009.

Perhaps more importantly, the conglomerate has been aggressively acquiring companies over the last three years, with 2008 being the biggest spend on snatching up assets.

In 2006, the company spent TT$195 million to acquire a number of construction companies and a small bank, while in 2007, C L Financial spent TT$549 million for purchase consideration of Caribbean Petrochemical Manufacturing, Lawrenceburg Distillers Indiana and Eurotecnica Melamine SA.

Last year that figure jumped even higher.

Last January, to acquire 100 per cent of the share capital of Green Island Venture LLC, a real estate development in southern Florida in the US, the group paid a cash consideration of TT$1.9 billion of which TT$1.6 billion was borrowed.

In 2008, C L Financial also paid US$41.37 million to acquire 45 per cent of Caribbean Money Market Brokers Limited (CMMB) from Jamaica Money Market Brokers Limited.

To purchase the 86.87 per cent in Lascelles, C L Financial spent US$676 million on the total investment cost, including professional fees and other expenses and financed it by external debt financing in the amount of US$450 million at rates varying between 9.5 per cent and 10.5 per cent per annum.

Carballo said yesterday that the debt on the Lascelles purchase currently stands at US$342 million and is held by consortiums of investors - US$100 million in Jamaica and US$240 million in Trinidad.

Using the shares in Lascelles to secure that debt, as with the case of a US$40-million note issued through NCB Capital Markets Limited at an interest of 9.25 per cent, has negative implications for C L Financial meeting its debt obligations in that, among other things, the share price of Lascelles needs to stay above a certain price to maintain collateral value.

Typically, 50 per cent of the value of a security is used as collateral for a loan and in the case of the NCB note, a ratio of 60 per cent or lower needs to be maintained.

Lascelles shares had been trading at $450 on the Jamaica Stock Exchange (JSE) for some time but dropped to $325 on February 11 before further declining to $300 yesterday. When the Lascelles deal was finalised on July 28 last year, the stock closed at $520 a share.

Last Friday, Williams also said his team at the central bank had made progress in clarifying the "present financial position" of CLICO, but declared that the problem appeared much worse than envisaged.

CLICO, he said, had a deficit with the statutory fund - a reserve in which insurers such as CLICO had to make deposit to cover liabilities - since 2007, totalling TT$600 million and that amount ballooned to a "notional deficit" of TT$10 billion.

"Over the last few years, Clico's statutory fund assets have included several inter-group assets, including deposits in CIB and securities issued by the parent C L Financial," said Williams. "Certainly at the present time, these instruments appear to be of little value. If we exclude these from the Statutory Fund calculation of 2008, the notional deficit rises to TT$10 billion, on a policyholder liability base of TT$16.7 billion."

Camilo Thame
Business Observer coordinator
Jamaica Observer
Wednesday, February 18, 2009