Oct 2014 Financial News

TCL requires drastic restructuring

Oct 02, 2014

TCL chairman Wilfred Espinet says the regional cement producer headquartered in Claxton Bay is at a “critical stage of its existence,” and its survival depends on “its stakeholders and their willingness to protect the company” and participate in the “drastic restructuring that is required.”

Espinet said some of the restructuring elements under consideration by the new board are the disposal of non-core assets, a reduction in the group’s cost of production, lowering its average cost of borrowing and raising capital from its shareholders.

For the restructuring to work, he said, both lenders and workers would be treated equitably, hinting at the possibility that both may be required to make sacrifices to ensure the survival of the company in a way that secures everyone’s longterm interests.

Espinet, who led a 14-month legal campaign to change the TCL board, was elected as chairman of the financially troubled company at an August 19 special (compulsory) meeting of shareholders that elected seven new directors to replace the six directors who resigned hours before the meeting.

Asked about a plan by TCL’s former chief executive Rollin Bertrand—who was terminated by a September 23 letter following a review of his performance—to float new, mostly US$ bonds to replace TCL’s US$300 million in debt, Espinet said: “We had real difficulty understanding how, in 2011, TCL could not pay its debt, and what evolved out of the debt restructuring, as they called it, was the company came out with a higher principal and a higher rate of interest and no other attempt to do anything else to the company.”

He pointed out that no attempt was made in the original debt restructuring to change the way TCL did business. “They were doing the same thing but expected different results. It certainly did not make sense to us,” said Espinet.

“My point to the lenders was that in doing this (debt restructuring), you made no demands for the change of management, which we thought was what got the company here in the first place.

“They made no demands for a restructuring of the company’s operations: that TCL should jettison some of those things that were dragging them down and focus on those things that were sensible.

“They made no attempt to ensure that there was new equity introduced into the company—all of these elements are requirements in a restructuring exercise.

“All the creditors did was add more debt to a company that could not pay its debts.”

He said everybody—referring to the company’s creditors, its former management and its employees—participated in the state the company has found itself in, with the only stakeholder to have suffered being the shareholders “whose share values have diminished to a pittance from where it was and who have had no dividends since 2006.”

At a meeting on Monday, PricewaterhouseCoopers (PwC), which was engaged by TCL to do a financial assessment of the company, presented its initial findings to TCL’s lenders, which include some of the country’s major financial institutions such as Republic Bank, First Citizens, the Unit Trust Corporation, Sagicor, ANSA Merchant Bank and Citibank.

PwC’s initial findings, according to Espinet, were that TCL had about US$20 million (about TT$130 million) in cash as of the end of the third quarter on Tuesday and commitments to make a payment of (US or TT?)$90 million to its lenders, which was due on Tuesday. The company has also been mandated by an Industrial Court ruling to make a payment of about (US or TT?)$100 million in back pay to its workers pertaining to the 2009 to 2011 period.

He said TCL’s immediate financial obligations could balloon from (US or TT?)$190 million now to (US or TT?)$213 million as “there is another (US or TT?)$23 million that people are arguing about.”

After Monday’s meeting, the notice said the TCL board took a decision to place a hold on all payments due under the existing Restructured Loan Agreements and proposed a "standstill" in interest payments. Asked on Wednesday morning whether the standstill request applies to the back pay owed to workers, Espinet said: “All stakeholders will be treated equitably in an effort to arrive at a comprehensive restructuring that secures everyone’s long term interest.”

The new TCL board gave its lenders a commitment that it would present a comprehensive restructuring plan by October 31 and hopes to get agreement from its stakeholders—including the company’s lenders, its workers and their representative trade union, the Oilfields Workers' Trade Union (OWTU), and its shareholders—by the end of 2014.

Asset disposal

Espinet said the board has identified that TCL has a number of operational assets “that cannot be sustained. They are not viable. In the future, they would not be viable.”

Among those operational assets that are not viable is the Arawak Cement Company in Barbados.

“I think that Arawak is a very evident example as it is the biggest rock that is sticking out of the water,” said the TCL chairman.

He said in Barbados, TCL is unable to meet its statutory commitments to its employees and has negotiated a term of payment with the Barbados government, but since Arawak is losing money the payment will have to come from other sources within the group.

He said there are a number of operational assets “that are just below the level of the water, so you think it’s looking like clear sailing, but you are so shallow that you are going to hit it.”

He said the questions these barely visible “rocks” must answer are do they form part of TCL’s core business and are they viable in terms of the structure that TCL is looking to in the future.

Espinet identified TCL’s core business as cement production and said the company “is unfortunately involved in businesses that are not necessarily cement.”

Asked to provide examples, Espinet referred to TCL’s bagmaking subsidiary, “which is making bags at twice the price that they can buy it at because they have created a fictitious arrangement in terms of the way they price their bags.” This means, Espinet said, that TCL is making a “profit” on something they are overpaying for.

Another example of a part of the TCL group that may not be core is its concrete-making subsidiary. Espinet said: “We need to take a strong look as to whether we are cost effective in concrete making because our competitors are end users of cement, so we are competing with our customers. Also, our cost structure is inconsistent with the marketplace we are operating in.” TCL’s competitors in concrete production include Junior Sammy, Alescon and Coosal’s.

Lowering cost of production

The TCL chairman said the company had inherited labour costs and practices from the oilfields—from its location in between the Petrotrin oil refinery in Pointe-a-Pierre and Point Lisas and its union representation by the OWTU.

Espinet said: “If we are going to have to live with that, then we are going to have to develop some efficiencies. We cannot use those numbers and have a labour force that is not consistent with the standards of the industry. So we have to find a way to rationalise that.”

Asked whether the cement-producing part of TCL in Trinidad was overstaffed, he said: “If one benchmarks TCL to world standards, TCL carries a higher labour cost of production. The benchmark is not necessarily only about labour rates—and we do not intend to cut people’s salaries—it includes the number of workers per tonne of cement.”

Addressing the high cost of production requires TCL to make some capital investments in technology to ensure that the company has the level of productivity it needs to be able to better benchmark its production.

He said the history of confrontation between workers and management has brought TCL to where it is now.

“Maybe we are naive, but we are hoping that we will be able to get to a situation where labour understands that a company cannot be feed off of unless it is robust. You can’t eat a company like it is meat. You can nurse off of it like you are getting milk. But if you eat the meat off of it, you are not going to have anything.”

Part of lowering its cost of production would mean a lower monthly outlay on its debt repayments. Espinet said its average interest-rate cost on its existing debt is now about ten per cent. “The board is trying to reorganise its balance sheet at the end of this entire exercise so that our US-dollar interest rate—as most of our borrowings are in US dollars—would be in the range of six to 6.5 per cent.”

He said that means the TCL balance sheet would need to be restructured so that lenders feel that it qualifies for that rate of interest—which TCL is hoping to achieve by the end of this year.

New equity capital

Espinet said he envisages that the company’s long-term capital and working capital requirements will come not from new borrowing to take out the current bondholders, but from the company’s shareholders.

He explained that there are some covenants in the loan agreements that stipulate the debt ratios that the company must not breach.

Espinet said: “We need sufficient working capital, a longterm capital injection in the plant and cost of production that is brought in line, which we need to work out with our union…as we need to work out with our bankers the financing we need to bring this about.

“If we can get those two elements done, then we can go to our shareholders and say to them: ‘In order to get this done, we need to get an injection of capital.’ This would mean that the three main stakeholders would have participated in this restructuring exercise.”

Any future money that TCL needs would have to come from shareholders, said Espinet, agreeing that a rights issue would be the “most appropriate way to go.”

Stressing that the possibility of a rights issue was not a decision of the board, he said: “A rights issue would be the likely scenario, if you were to ask me my personal vision of what could happen.”

Questioned on whether he thought that TCL shareholders would agree with a rights issue, given that shareholders' returns have taken a beating over the last eight years, Espinet said: “To anyone of the existing shareholders that have the wherewithal, it could give rise to an opportunity for them to secure their existing shares in terms of its value and they will be putting money into something that will translate—if everybody did what they are supposed to do—to a great gain for them, in terms of…re-establishing shareholder value."

Is sale to Cemex an option?

The TCL chairman says Mexican cement giant Cemex, which owns a 20 per cent stake in TCL and has three directors on the ten-member board, has committed to helping the local cement producer with the technological and market requirements of the restructuring.

Espinet said he would like to see a cross-fertilisation of employees between Cemex and TCL, whereby local workers visit Cemex plants around the world so that they are exposed to different practices and Cemex workers visit Claxton Bay to pass on best practices.

Asked whether a sale of TCL to Cemex was on the cards, Espinet spoke about the importance of cement to the economy.

“We have a cement factory here. We don’t want to control who owns it. But certainly if Trinidadians want to participate in the ownership of the company, they should be allowed to.”

He said the board has no intention of supporting the sale of TCL to Cemex or of being a catalyst for such a sale, he said.

“But if one of the large institutions wants to sell and Cemex buys it, that’s up to them. It’s not for the board to interfere with that process…The board will not initiate a bid by anybody, as the board feels that it is going to conduct an exercise that can solve this problem.”

 

Source:
Anthony Wilson
anthony.wilson@guardian.co.tt
Trinidad Guardian, BG4 and BG5
Thursday October 2, 2014