Property Matters – HDC Housing Bonds Part Three

The first article in this series set out the background to these proposed bonds and the implications of the HDC’s perennial problem with bad property titles.  The second drew parallels between these proposals and the roots of the 2008 Wall Street crash, with some references to Jamaica’s National Housing Trust and its contribution system as an alternative for financing affordable housing.  This week I conclude by delving into the heart of the matter, the HDC’s finances and its performance in terms of its existing bond portfolio.

One of my persistent complaints against many of our State Agencies, including the HDC, is the long-term failure or refusal to publish proper audited accounts as required by laws and regulations.  I am pleased to report that my requests for NHA/HDC financial statements from 2003 to 2018 were satisfied in April this year.  Once again, I thank the exemplary officers at the HDC for their assistance.  Even if this time I had to engage my attorney to send HDC a pre-action protocol letter before the financial statements were released and what is more, they have not refunded my legal fees.

Those financial statements are for the NHA from 2003 to 2005 and the HDC after 2005.  This article is focused on these proposed bonds so the first point to raise is the status of those financial statements.

HDC stated that the financial statements for 2003 to 2009 were audited to which I took an immediate objection.  Those financial statements were accompanied by Independent Auditors Reports, issued by KPMG Chartered Accountants, every one of which was subject to a Disclaimer of Opinion.

When there is limited area of inadequate or doubtful information, an auditor has the duty to issue a qualified opinion.  That is called a qualified audit and it warns  those who might place reliance upon it such as regulators, investors and lenders.  In the financial world, a qualified audit is seen as a grave matter, since it speaks to the poor quality of elementary record-keeping and accountability in an industry which is based on confidence.

The Disclaimer of Opinion is many times worse than a mere qualified audit since it means that the auditor has so little confidence in the records that it is impossible to form a responsible professional opinion.

This is KPMG’s final paragraph in each of its seven Independent Auditors Reports for the period 2003 to 2009 –

“…Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements…”

When I challenged the HDC on this issue, the firm position was taken that the financial statements had been audited.  It seems that KPMG’s signed Reports were being conveniently interpreted.  In no way can audits which result in Disclaimers of Opinion be regarded as proper or satisfactory.  I would like to see what our financial analysts make of this issue.

T&T Securities and Exchange Commission

The HDC has raised substantial capital via bond issues in which investors lend their money for a set period of time in return for a fixed interest rate (see below). Those bonds are investment instruments under the regulation of the T&T Securities and Exchange Commission (TTSEC).

HDC’s bonds in issue

Source – T&T Securities and Exchange Commission (15th April 2016)

The HDC has had four TTSEC Orders against it in respect of Contraventions of the Securities Industry Act 1995 and the Securities Industry Byelaws 1997 in relation to its failure to publish its accounts.

The TTSEC informed me that each continuing Contravention of its rules attracts daily fines of $1,000. It is clear, from the Financial Statements provided, that HDC remains in breach, so how much does it owe in TTSEC fines?

HDC’s fines paid & due to TTSEC for its failure or refusal to file Financial Statements

Source – TTSEC website

My estimate, based on TTSEC’s information, is that HDC owes a further $7.933M in fines due to its failure or refusal to publish proper audited accounts as required by law.  It is very important, given the proposed HDC bond issue, that the public be informed as to whether and when those huge fines are both levied and paid as required by law. The TTSEC must now issue a statement at this critical stage for the guidance of both prospective investors and taxpayers.

I am interested to see how our financial analysts deal with this important aspect of these proposed bonds.

A final overview is useful as the fresh funds to be raised via the proposed 4.5% tax-free bonds could be used in two ways, either to retire some of the existing, higher-interest bond obligations or to fund sales of those previously unsaleable homes.  A proper decision matrix would consider both possibilities to determine the best use of those funds.