CL Financial bailout – Testing the terms

On Sunday 6th June the Trinidad Express’ Investigative Desk published yet another series of exclusive reports from Camini Marajh and those are once again, raising more questions than answers.

The reports revolved around some of the recent dealings of Home Construction Limited and their financing via First Citizens’ bank.  The Home Construction group of companies is an important part of the CL Financial empire – that CLF empire is being bailed out by the State.

The key issues arising from the reported information would seem to be –

  • Interest rate – It was reported that First Citizens’ bank extended a credit facility to Home Construction Limited in excess of $1.0Bn as a 5-year demand loan.  The interest rate was reported to have been at 7.5% and that seems very low when one considers that commercial demand loan facilities are being offered now by the banks in the 10-11% plus range.  But that interest rate could also be explained by other factors.
  • Markdown of Security – For example, there may have been measures taken by the lender to obtain beneficial markdown on the various securities held against the funds advanced.  In this case, it is being claimed that the property valuations obtained from a Miami-based firm were on the conservative side and that may be grounds to consider that HCL offered a greater measure of security for the funds advanced. The point here is that asset values are indeed lower than they have been in recent years and those are the current values, however uncomfortable that might make the borrowers.
  • State guarantee – The other aspect of the matter is that the terms of the bailout are tantamount to a State guarantee for the debts of the CL Financial group and that would have to include the HCL group of companies.  In the circumstances, the importance of the underlying, written guarantee is such as to almost eclipse the properties held as security.
  • Timing – An interesting point is that the deal is reported to have been signed on Thursday 20th May, virtually on the brink of the recent general election.
  • Over-concentration of risk – One of the fundamental guidelines to prudent financial behaviour is that one should avoid putting all ones eggs in one basket.  When one examines the CL Financial fiasco, over and over, this basic principle has been violated.  In ‘Taking in Front‘, published in the Sunday Guardian on 25th April – see also http://guardian.co.tt/business/business/2010/04/25/taking-front – I analysed how the NGC’s prudent rules for placement of deposits appeared to have been compromised by the attractively high interest rates offered by the CLICO Investment Bank.  As another example of this, there are people, who had put virtually all their savings into the CL Financial group.  In this case, we have yet another sobering example.  This demand loan was stated to have been for $1.073Bn to HCL for a period of 5 years at an interest rate of 7.5%.  According to the audited accounts which form part First Citizen’s 2009 Annual Report – see https://www.firstcitizenstt.com/dms/AnnualReports09/FC-Annual-Rpt2009-3/FC-Annual-Rpt2009-3.pdf – its total loan portfolio as at 30th September 2009 was $11.87Bn.  This single facility therefore comprises over 9% of its loan portfolio, to a single borrower, known to be in financial difficulties.  That seems to be an over-concentration of risk.  A related question would have to be whether the CL Financial group has further borrowings from First Citizen’s, apart from the load assumed from CLICO Investment Bank.
  • Crisis measures – We should not be surprised that the present financial crisis is being used to justify the unorthodox crisis measures being deployed to handle various situations.  The purpose of this demand loan facility was stated to have been for the restructuring of HCL’s existing facilities. Which means that this level of indebtedness pre-existed the collapse of the CL Financial group.
  • Related Parties – According to the Governor of the Central Bank, speaking at the press conference to announce the CL Financial bailout, one of the main causes of the collapse was ‘…excessive related-party transactions…’.  In this case we have the boards of CL Financial, HCL and First Citizen’s bank, all being appointed by government, with a huge single loan to a single borrower.
  • The State’s position – The most astonishing part of the entire Sunday Express story was the question as to whether the various Directors of the Boards of companies within the CL Financial group would be resigning.  Marlon Holder, CEO of the group and Chairman of CLICO is reported to have said that

    …there was no need since CL Financial was not a statutory State company, and the shareholders’ agreement signed between Lawrence Duprey and the Government required agreement by both sides before any change could be instituted…

      If I am reading that right it would seem that the terms of the June 12th 2009 Shareholders’ Agreement were being invoked to secure the positions of the present holders of high office in the CL Financial group.  If this position as outlined by Holder is indeed correct, then there seems to be an urgent  need for those terms to be re-examined and/or renegotiated.

SIDEBAR:  The importance of Critical Thinking

Dr. Bhoendradatt Tewarie
Dr. Bhoendradatt Tewarie
Dr. Bhoendradatt Tewarie is a former UWI Principal, Director of CL Financial and Republic Bank Limited.  In ‘People’s Partnership Position’ on 23rd May – see http://wp.me/pBrZN-fG – I was critical of his continued silence on the collapse of this, the Caribbean’s largest conglomerate.

Apparently Dr. Tewarie is also the Director of the Institute of Critical Thinking at UWI.  Listen to his conclusion to the Director’s Statement –

…The present in which we now live has already been created for us or we ourselves might have knowingly or unknowingly conspired to create it. But we live and we learn. The important thing is that we learn. When we learn we grow and evolve and are better able to deal with the inevitable new challenges. And so we press on…

see http://sta.uwi.edu/ct/foundir.asp

We need a proper account from Dr. Tewarie on the last days of the CL Financial group.  The people who are responsible for this  scale of collapse must render an account.  To fail to do so would only compound their failure and we would have to banish them to obscurity.

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3 thoughts on “CL Financial bailout – Testing the terms

  1. Have you ever read the ART OF THE DEAL and THE ART OF THE COMEBACK by Donald Trump?
    CL Financial did not just put all their eggs in one basket. They bought many baskets and placed the same set of eggs in them, over and over. Failure is not an option in repairing the damage. The deals will be bold, unbelievable and risky.

    1. Hello to you, Herma,

      And no, I have never read those works, although the author’s name did come up in a heated discussion with friends earlier this week on the fact that even a connected guy like Donald Trump could do time for tax evasion in the USA, yet no one here has ever been imprisoned or lost property for that offence.

      It seems that I have to devote some more time to the Trump story.

      The main point in your note is one I keep returning to ‘Who knew what? When did they know it?’ I am convinced that the collapse was visible from a long way out, which only deepens the mystery as to how the audited accounts could have presented such an optimistic picture up to the last. The irony is that as part of the culture of instant gratification, many responsible people are taking the position that they do not see the importance of examining the terms of the bailout once they are getting back their money. Of course, that is part of the scam.

      A further element is that many of those who acted as overseers to this collapse are now being ‘re-cycled’ back into the mix as so-called responsible people.

      Thanks for blogging on this and please visit again.

      Spread the word.

      Afra

  2. Afra – Yes – it would appear the terms of the shareholders agreement is being invoked or the shareholders are being used to protect the current board from being replaced. if this is true as you say – the ppp gov needs to renegotiate the terms or get the shareholders to agree or mr duprey to agree. or threaten to pull out of the deal and not help if they dont have more authority over the matter. the gov needs to control this fiasco as winston put it and not just sit on boards and drag the matter out forever harming the society and the caribbean even more.

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