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 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.

FOR YOUR INFORMATION: A copy of the official agreement between C.L. Financial Limited and the Government of Trinidad and Tobago has finally been delivered to me per my request under the Freedom of Information Act. This CL Financial Shareholders’ Agreement (SA) of 12th June 2009 which I requested on 16th November 2009 under the Freedom of Information Act was sent to me by the Ministry of Finance on 11th March 2010 and my emailed response to the Minister of Finance is on the home page of this blog.

My preliminary comments are –

1. Quantum – The SA is silent as to quantum, which would seem to mean that the group will enjoy unlimited access to taxpayers’ funds. The 2010 budget statement on 7th September states an estimated allocation to the CL Financial bailout of $5.4Bn – but subsequent events have only added to the confusion. To wit, the $50M USD for the British-American Insurance recovery (as per 2nd November ECCU press release) and the ‘up to $510M’ announced to be available to meet the pensions due to ex-Caroni workers. Question being whether the $5.4Bn includes the subsequently-announced amounts or are those to be added-on?
2. Security–At the preamble to the SA – on page 5 – we are told that “…valuable consideration…” is being offered by CLF as per the original MoU. Of course, given the Governor’s revelations on 7th April 2009 – see http://guardian.co.tt/business/business/2009/04/08/govt-left-empty-handed-cl-financial-bailout – that is simply not so. Indeed, it seems clear that the cupboard is bare and that this CLF group has no unpledged assets of any value.
3. Interest–No mention of interest at all. We are therefore now advancing an unlimited quantum of taxpayers’ funds, for which no security has been provided and those funds are being advanced at ZERO interest. Given the well-established rule that late payment of taxes makes a taxpayer liable to 20% interest and the interest rate the Federal government charged AIG for their bailout funds – it was 8.5% above the benchmark LIBOR, which was at 3.0% – it is clear that this represents a massive concession to the CL Financial group. Quite apart from the bailout itself, the 325 shareholders of this group are also benefiting from this unprecedented and unexplained facility of ZERO percent interest rate.
4. Accounting–Section 4 of the SA sets out the procedure for a proper system of accounts, culminating at 4.4.5 – “…shall ensure that an annual report of CLF is prepared and dispatched…in manner consistent with standard corporate practice…”  The accepted interpretation of this language informs us that the word ‘shall’ denotes an obligatory, non-voluntary duty.  If that is the case, when can we expect publication of the 2008 annual report, accompanied by audited accounts, as per ‘standard corporate practice’?
5. The role of the Shareholders–The MoU of 30th January, at Para (c) of its preamble, spells out its aims as “…to protect the interests of depositors, policyholders and creditors of these institutions…”  According to the second sentence of the Ministry of Finance press release of 12th June 2009 – this is the penultimate document in the ‘Quick-Guide’ in the CL Financial bailout section of this website – “This new agreement is designed to give substance to the Memorandum of Understanding (MOU) of January 30^th 2009.” The SA of 12th June 2009 was the subject of that press release.  The SA, at Para A. of its preamble, states the intentions of the parties as having been set out in the MoU of 30th January 2009 and ends by “…their stated understanding, inter alia, that certain steps be taken to correct the financial condition of CLICO, CIB and BA in order to protect the interest of depositors, policy holders, creditors and shareholders of these institutions…” (These two words are put in bold as my own emphasis).  I questioned that official version in ‘Fit and proper?’, ‘Party of parties’ and ‘Figuring it out’ – all available on this blog.  Now that we have the actual SA to work with, it is clear that the statement in 12th June press release is extremely misleading.  The SA does not just ‘…give substance to…’ the original MoU, it in fact is an entirely different species of agreement.  The SA constitutes a written guarantee to protect the 325 shareholders of this CLF group.
6. Assisting the incoming Management–Clauses 2.3.3 and 2.3.4. of the SA, require the outgoing CL Financial chiefs to render all assistance to the incoming Board and Management in terms of all records and accounts etc.  The question here is ‘Have the new Board and management been receiving the full assistance of the previous CLF chiefs?’  If not, what is being done about it?  If yes, where is the $5.0Bn missing from the CLICO Statutory Fund?
7. Analysing the lacunae–The events in the interregnum and their consequence are extremely important aspects of this matter.  I say so because the intervening period – i.e. between 30th January and 12 June 2009 – was one in which several important and shocking facts came to light. Some of these were –
   • Payment of Dividends – $3.00 per share paid on 16th January – i.e. three days after Duprey wrote to the Central Bank Governor for urgent financial assistance.
   • Over-pledging of assets – As cited above, the Central Bank Governor revealed that CL Financial’s assets were all fully pledged.
   • $5.0Bn is missing from CLICO’s Statutory Fund – According to the newly-appointed CEO of CLICO, Claude Musaib-Ali (he has since resigned, effective 14th February 2010) the CLICO Statutory Fund had $5.0Bn missing – see http://guardian.co.tt/news/general/2009/03/01/where-money-gone.
   • Attempted sale of assets as per CLICO Energy – Also, CL Financial attempted to sell its shares in CLICO Energy, which was in breach of the terms of the MoU. At clause H. and 6.1, the outgoing CL Financial Directors agree to use their best endeavours to reverse the sale of those shares.

   With the exception of the last item, none of these other three serious matters are addressed at all in the SA.  Silence on the payment of dividends.  Over-pledged assets are described as being ‘valuable consideration‘.  Silence on the missing $5.0Bn from CLICO’s Statutory Fund.

   Those four events, having been revealed in the gap between the MoU and the SA, should have informed the stances taken by the parties.  To my mind, these actions by CL Financial are indicative of insincere behaviour intended to outwit and cheat the taxpayer.  The Ministry of Finance press release describes the SA as ‘…giving substance to…‘.  Nothing could be further from the truth, since the SA in fact creates new levels of entitlements and protections for the CL Financial shareholders.

   As taxpayers, we ought to have been able to rely on the State negotiators to propose terms which would have extinguished the equity of the CL Financial owners and taken other steps to restore the correct position.  Instead, the SA has not sought to address their assaults on good faith and ‘fit and proper’ behaviour.  We have now been bound into a long-term arrangement to restore the fortunes of one of the Caribbean’s riskiest adventurers.

Readers, please take note. In terms of its size, timing and terms, this CL Financial bailout is a grievous attack on the very integrity of our Treasury.