CL Financial bailout – the NIF matter

The National Investment Holding Fund Co Ltd (NIF) was announced (p.18) on 25th June 2018 by the Minister of Finance, Colm Imbert, as an important part of the endgame of the CL Financial bailout. That announcement, which had been prefaced in earlier statements by Minister Imbert, was stated to be part of the process to recover the public money which had been spent on the CLF bailout.

The NIF is a new State-owned and controlled enterprise into which will be transferred just under $8.0 Billion in shares. About $6.0 Billion of those shares are CLF-owned – Republic Finance; WITCO; One Caribbean Media and Angostura – with a further $2.025 Billion of the State’s shares in Trinidad Generation Unlimited making up the balance.

From the official statements, NIF intends to issue $4.0 Billion worth of bonds in three tenors, as set out in this table –

SUMMARY of NIF Bond offer

Given the chronically low levels of interest offered by the traditional savings institutions and the low risk appetite of the investing public, these offerings were especially crafted to deal with those elements. The rates of interest being offered are so high as to evoke caution, yet we are being reassured by those earnings described as guaranteed by the underlying securities.

Given that NIF is a brand-new, special-purpose company which has no trading history and no need to borrow, the entire arrangement can fairly be viewed as a financing vehicle by which the State is raising $4.0 Billion. That has been stated as the motivation by the Minister of Finance, who went on to suggest that future high-value shares could be placed in this holding company as a basis for issuing further bonds.

The NIF could therefore be satisfying two objectives –

1. firstly, it vests substantive assets in the State, via this new wholly-owned company and
2. secondly, it allows the State to borrow $4.0 Billion against that $8.0 Billion portfolio, without offering an explicit guarantee.

The NIF arrangement seems to offer the prospect of the State being able to augment its balance sheet by the addition of new assets while borrowing obligations could be confined to that new company so that those do not appear as public borrowings.

Some important additional features of this arrangement are –

• Bonds are to be offered for sale in denominations as low as $1,000;
• Tax-exemptions are to be secured for all profits accruing to NIF;
• Tax-exemptions are to be secured for all interest payable to NIF’s corporate bondholders;
• The NIF Bonds are of course themselves tradeable on the Stock Exchange.

Those prospects and the meaning of it all, is the subject of this article.

I have three main concerns –

1. Is the NIF a ‘Ponzi scheme’? – That allegation was made by the Leader of the Opposition (p. 4) and that is not a reasonable suggestion, in my view. Apart from the ‘teeming and ladling‘ method of passing money along from new investors to older ones who need to collect their interest and/or capital, the defining issue for Ponzi schemes is that there are very few, if any, realisable assets. In the case of NIF, the proposal is for the company to be vested with substantive and valuable company shares. The bondholders are intended to be paid from the dividend stream from those shares. No fresh investment is needed to pay the bondholders. Seen in that light, the suggestion as to a Ponzi scheme is reckless to my mind. Just like the careless suggestion that the CL Financial group or CLICO was a Ponzi scheme which of course was belied by the existence of substantial assets.
2. Has the State guaranteed these NIF bonds? – Anthony Wilson explored this issue in last week’s edition of this paper, highlighting the Finance Minister’s change from an explicit promise of a State guarantee to the bonds being backed by NIF’s assets with no State guarantee. Wilson speculated as to the likelihood that the proposed structure was one which could be seen as an ‘off balance sheet‘ financing arrangement which did not increase the State’s debts.

   I do not accept that this is an effective off balance sheet arrangement and I am thankful that the Office of Procurement Regulation has covered this issue in its Public Advisory #1. That connection was made in two limbs – firstly, the specifications as to what are the ‘public bodies‘ covered by the new law…the NIF is squarely within the definition and secondly, the definition of ‘public money’ includes “…raised by an instrument from which it can be reasonably inferred that the State accepts ultimate liability in the case of default…” It is obvious to me that NIF – having been incorporated by the State, which holds all its shares, issuing bonds used to close the funding deficit of the State – completely conforms to this description;

3. The Meaning of the Thing – The most striking part of this proposed arrangement is the sobering echo with the CL Financial arrangements. CL Financial eclipsed its competitors by creating a product called the Executive Flexible Premium Annuity (EFPA), which offered literally incredible rates of interest, supposedly guaranteed by the underlying assets. The EFPA was sold as insurance products and went on to dominate the market, eventually becoming ‘too big to fail‘. All kinds of bizarre attitudes emerged during the CLF collapse – I can clearly remember certain people who were strident in claiming that, because the EFPA had been approved by the Supervisor of Insurance, they were entitled to full protection via repayment from the Treasury. This is simple rejection of the notion of an investor taking a real risk, commensurate with the rewards enjoyed.

   So here we are in 2018, with an appealing offering of very handsome rates of return on the NIF bonds with those returns guaranteed to flow from the dividend streams arising from its shares. It almost seems too good to be true. Can you just imagine how that same investing public, having been bailed-out from its high-interest adventure after the 2009 CLF crash, will treat with any default or unexpected disappointment arising from NIF? Yes, once again, the taxpayer will be expected to rescue the adventurer, even as fundamental public commitments go abegging.

I will await the publication of the NIF Prospectus on 11th July 2018 before saying more.