Tag: CL Financial

The Meaning of Things

Many friends tried to correct me on the title of this article by saying that CLICO was being bailed out, along with British-American Insurance, CLICO Investment Bank (CIB) and Caribbean Money Market Brokers (CMMB).  They went on to assure me that CL Financial (CLF) is fine now that the bailout of those four subsidiaries has taken place.

At the post-Cabinet press briefing on Thursday 12th, PNM Chairman and Minister of Energy, Conrad Enill called for a focus on the ‘Bigger Picture’ and a reduced emphasis on the Minister of Finance.  I could not agree more.  As shocking as the story of the Minister’s shareholding etc. might be, it is easily outweighed by ‘The Bigger Picture’.

CLF wrote to the Central Bank on 13th January to seek urgent financial support from the State and we need to ask why.  In the absence of the CLF letter, the stage is set for speculation.  Given that we are contemplating a bail-out in excess of $10Bn, according to the last statement from the Central Bank Governor, the publication of that letter should not be delayed.

CLF’s 2007 Annual report is available online at http://www.clico.com/pdf/AR07/CL%20Financial%20Annual%20Report%202009.pdf and it tells of a group comprising over 65 companies in 40 countries worldwide.  Even after a decline, profit (after tax) for the year ending 31st December 2007 was stated at $1.74Billion.  Why would a healthy and thriving group like CLF need to seek State intervention to provide urgent financial support for 4 of its subsidiaries?  Was it a case of the looming liabilities being of a scale to eclipse the entire group’s assets?  If there was still equity available within the group’s portfolio, why could they not cover the liabilities by borrowing in the private market?  Was it merely a case of temporary illiquidity – a sort of technical insolvency – needing to be relieved by State intervention?  Even if the answer to this last is positive, we still do not know why they could not borrow on the open market.  It cannot have been easy to decide to go to seek State support and my interpretation is that the group had no other choice.

When we consider the recent revelations that the Minister of Finance holds substantial shares in CLF, which paid its shareholders dividends in January 2009, things become turbid.  Bear with me here, but we are looking at the period between CLF’s auditors publishing their 2007 accounts –18th November 2008 – and CLF’s Executive Chairman writing to the Central Bank on 13th January 2009.  By my count, that is only 55 days.

In that period the CLF Board of Directors did 2 critical and fundamentally opposed things-

  1. Declaring and paying a Dividend – At page 20 of CLF’s Annual Report 2007, we are told, in respect of Dividends, that “…In 2008, a dividend of $3.00 was declared by the Board in respect of the Financial year ended 31 December 2007…”.  The CLF Board could only have declared a dividend when the accounts were completed.  This newspaper published an uncontested report on Tuesday 10th March that those CLF dividend cheques were mailed out on 16th January, in advance of the AGM at Trinidad Hilton on 23rd January.
  2. Writing to the Central Bank to seek urgent financial support – CLF wrote on 13th January and that letter must have been the subject of some serious and prolonged board discussion.  Please consider that the same Directors who declared a dividend in the last forty-three days of 2008 also decided to write to the Central Bank in the first twelve days of 2009.  Imagine that.

Can we ever reconcile those two acts?  How does one write to say that one does not have enough money, then, only three days later, prepare dividend cheques which would have totaled over $20M?  What manner of man behaves in this fashion?  Was the Central Bank ever told that the declared dividend had been paid on January 16th?  We all know that the Minister of Finance knew.  Her statements to the Parliament to ‘clear the air’ were anything but.  Mamaguy for so.  Thursday’s headline in this paper made me smile ‘Duprey backs Karen’.  One can only wonder how long would a trusted executive at CLF last if that level of divided loyalties had been unearthed.  Mr. Duprey, for one, would know how expensive divided loyalties can be.

Is it legal to write cheques for dividends from a group which is unable to meet its liabilities?  Are these CLF Directors fit and proper people to sit as company Directors in our Republic?  Is theirs prudent and responsible behaviour?  Do we as taxpayers want to fund and endorse that kind of double-standard?  I, for one, do not.

On Carnival Tuesday, I saw in a notice that the High Court had granted an injunction to prevent CLF from diluting or disposing of its assets and also an order that they should produce a sworn affidavit detailing their assets.  That injunction has since been challenged by CLF’s attorneys and we recently learned that the parties are now discussing the matter privately before returning to Court.  Cool so.  On one side we have CLF and its advisers, who would obviously be trying to minimize the impact these events would have on their group.  On the other side we have the Central Bank, which is an organ of the Ministry of Finance, seeking compliance with the Court Orders they obtained on Carnival Sunday (February 22nd).  It seems that CLF has moved, rapidly, from seeking urgent financial assistance to being coy over the details of its assets.  It is almost beyond belief, but beat that.

It also seems that no lenders were willing to advance funds to CLF, since the State is the lender of last resort.  Given that CLF controls Republic Bank, CLICO Investment Bank and Barbados National Bank, this is a sobering insight into just how serious the cash flow crunch must have been.

To summarise – keeping our focus on the Big Picture – is CLF just suffering from a momentary bout of illiquidity or is the group actually insolvent?  If the former, why not just borrow the required monies from a private source?  If the latter, then just who is the State conducting private negotiations with?  Why?  Who are we, the taxpayers, bailing out?

The more I think about it, the more it seems that this title is just right.  The CL Financial bailout.

Sagacity and Veracity

The sheer rash of recent events, many of them contradictory, make it necessary to draw the connections between the emerging fiascos at both CL Financial and UDeCOTT.

The CL Financial crisis concerns every citizen, whether or not you had any funds invested there.  Indeed, given the scale of the fall-out, it seems that every Caribbean citizen ought to be concerned as well.  CL Financial was a trail-blazer in too many ways for this column to encompass and their problems are, in every way, also ours.  Just to show two ways, think firstly of the thousands of employees and other stakeholders who are affected by the unfolding crisis, then think of the way this episode is affecting the already poor levels of investor confidence.

The challenge at these times is to see what lessons we can usefully draw from the revelations thus far.  Yes, I am going to make a link between CL Financial and UDeCOTT and no, I am not going to make any comment on HCU.

About half of the nation’s insurances reside with the CLICO group.  CLICO’s agents were all trained to speak about the range of impressive assets which were owned by the CL Financial group – the Methanol plant, US and local real estate, Republic Bank Limited, the Home Mortgage Bank, lucrative Liquor brands and so on.  We all knew CLICO agents and have heard the lyrics.  But, as we have now found out, the decisive thing was the extent to which those various impressive assets were used for collateral and the way in which the parts worked together.  It seems that the actual returns on these investments were less than those originally anticipated.  So much so, that the liabilities eventually eclipsed the assets.

Point being that ownership of assets is necessary, but not sufficient, to add value to a portfolio.  The decisive aspect is the way in which those assets and liabilities are matched.  The related question being how much latitude to manoeuvre would the group have if times changed.

It seems to me that there are 3 aspects of the CL Financial fiasco to be highlighted in order to see the picture.

  1. The large-scale ‘Act of God’ events such as the fall in methanol prices, the stock/finance collapse and the declines in the real estate markets which no one corporate group could avoid.
  2. The viability of the business model and the emerging issues on the Statutory Fund.
  3. The struggle to retain selected assets for the CL Financial group by the corporate leadership.

UDeCOTT is the subject of the Uff Commission and we have learned that they have carried out a feasibility study on only one of the many office buildings they are responsible for erecting.  That feasibility study is itself discredited by the fact that the land was omitted.  It is true that our capital city is being greatly altered by the many commercial projects done by UDeCOTT, but the fact is that none of the projects are feasible and all of them are financed by US$ borrowings.  There is no doubt that this represents a great tranche of investment, but what is the rate of return?  Can anyone say?  Is the interest rate greater than the rate of return?

These are object lessons in hubris and the social costs of empire-building.  There are benefits to be sure, but we are witness in both cases to agendas to privatize the benefits and nationalize the losses.  It is particularly important at this point to guard against attempts to confuse us by blaming the respective fiascos on the large-scale events mentioned above.  In both cases we need to separate the ‘Acts of God’ from the imprudent and improper acts for which the public now has to pay.  Those events did indeed take place but it does seem that their impact would have been reduced, had proper prudent procedure been followed.

Commission of Enquiry

There have been calls for a Commission of Enquiry from Mary King, Dennis Pantin and Ramesh Lawrence Maharaj.  I support those calls.

It is not ‘every Monday morning’ that one can have a Commission of Enquiry, but we need to know what happened if we are to prevent a repetition of this fiasco.  This is a ‘bail-out’ in excess of $10Bn, which is a colossal sum at any time.  This is historic and we need to enquire vigorously into the causes of the collapse.  We constantly hear of our aspirations towards regional leadership, particularly in the finance arena.  We cannot learn from this fiasco unless we know what went wrong.

Just two questions could illustrate the issues –

  1. In light of the obvious insolvency, when exactly did CIB and CLICO stop soliciting investments?  This one is almost personal because I spoke, along with two other panelists, at CIB’s inaugural Investment Seminar at the CL Duprey Box at the Oval on Thursday January 22nd.  Yes, that’s right, the official version is that  “…on January 13 2009, Clico’s Chairman formally raised the issue of possible financial assistance from the Central Bank…”
  2. Did CL Financial pay dividends to its shareholders in January 2009?  CIB is wholly-owned by CL Financial (CLF) and CLICO is about 98% owned by CLF.  If CLF had to write on 13th January seeking urgent assistance from the State it is obvious that the parent company was unable to meet the looming obligations.  That is a situation tantamount to insolvency and one can only wonder if it is true that a dividend was paid in these circumstances.  As is my practice, I am sticking to the facts and not indulging in innuendo or ole talk.  I have myself seen the Minister of Finance’s name on the register of shareholders for CL Financial Limited as filed on 17th February 2009.  What a thing.

The CL Financial Fiasco contains lessons at all levels and these would include –

  • the type of regulatory framework
  • the independence, degree of discretion and diligence of the regulators
  • the culpability of Directors and Executives.

There are many solid and troubling accounts of the last days which would emerge during a Commission of Enquiry.

SIDEBAR: An easy guide to the CL Financial and UDeCOTT Fiascos

Six quick pointers for our readers –

  1. Ambitious Empire-building – Huge and dazzling development is envisaged and implemented.
  2. Other peoples’ money – Use of either taxpayers’ or investors’ monies as ‘seed capital’.
  3. Excessive borrowings – Make sure to borrow for the majority of the costs.  As we are discovering in the CL Financial case, assets have been heavily pledged – i.e. borrowed against.  In the case of UDeCOTT, most of the massive borrowings are in $USD with the situation tantamount to the taxpayer having given a blanket guarantee.
  4. No cogent planning or feasibility checks – Independent professionals of integrity are marginalized or erased from the script.  Witness the long-overdue audits of both CLICO and UDeCOTT, usually a sign of some adverse news.  CLICO’s 2007 audited accounts were only issued in November 2008.  On 28th January 2009, UDeCOTT’s Executive Chairman told the Uff Commission under oath that “…my understanding is that probably before the end of next week we shall have our 2007 accounts…”.  The plain meaning of that statement is that those accounts would have been ready a month ago.  No accounts yet.  The silence and its implications are equally concerning.
  5. Real Profits? – Is it possible for CL Financial to pay dividends at the same time as writing to seek the State’s urgent financial assistance?  How could UDeCOTT be employing commercial strategies and declaring improving profits as a property-development company, if every one of their projects is not feasible?  As usual, the figures will reveal a lot to careful readers.
  6. Strategic Agenda – The common agenda is to privatize the benefits and profits while being careful to nationalize the losses.  We reject that agenda.  Moral hazard has to be upheld as a reality if we are to develop a progressive nation.