Once again there is a buzz about a possible solution to the Clico issue, which as far as I see it, has weighed down the economy since September 8, 2010-that is two weeks short of a year. Last Friday, Guardian associate editor, Asha Javeed, got word that the Government's exit strategy for the holders of the Executive Flexible Premium Annuity with investments of over $75,000 included offering them shares in an investment holding company which would be structured in a manner similar to National Enterprises Ltd.
On Saturday, I got a call from someone who told me that the proposal was for the Government to offer EFPA policyholders the following:
• The first $75,000 of the investment in cash;
• The balance of the investment would then be divided into two and the first half would be in zero-coupon bonds with a discount of 20 per cent;
• The second half would be shares in the NEL-type investment holding company, for which the policyholders would receive 100 per cent of the value of the second half.
In other words, if the policyholder's total EFPA (or other short-term investment, such as the CORE mutual fund) was $1,075,000 they would receive:
• $75,000 in cash;
• 20 zero-coupon bonds for the first $500,000 of the balance, which would be discounted by 20 per cent, leaving the policyholder with $400,000;
• Shares in the NEL-type company worth $500,000;
I was also told that the asset backing the NEL-type company would be the 32.3 per cent stake in Republic Bank held by Clico.
Those 51.7 million Republic Bank shares were worth $4.75 billion on Tuesday.
Clearly there are many, many questions surrounding this issue-first of which is when is the Government going to make a formal announcement of the proposal and the second is will there be consultation between the Government and the Clico policyholders.
• At the end of the day, the Clico policyholder would receive $975,000 out of an investment of $1,075,000, which is 90.7 per cent. Because the investment holding company's primary asset would be Republic Bank, the policyholder would also receive dividends four times a year and would benefit from increases in the trading price of Republic Bank.
For my part, I obviously favour the proposal of a debt/share hybrid as an exit strategy for the Government and as a means of ensuring that the Clico EFPA policyholder receive as close to full value as possible.
There are ways to ensure that the policyholders receive full value but those arguments will have to wait until the full proposal is published and can be debated. In the meantime, I want to revisit an unedited excerpt of a commentary, published in this space on May 19, and headlined, "Is Clico's best bet a NEL-type solution?" "In my view, because of its unique combination of growth and income, NEL is the perfect investment for all classes of investors.
I spent some time going into detail about Tringen, NEL and the global ammonia market because I am now convinced that the best solution for problems presented by the Clico policyholders would be to bundle all the good assets-Angostura, Lascelles deMercado, Home Construction, Republic Bank and Methanol Holdings (Trinidad) Ltd-into an investment holding company similar to NEL, which could then be divested on to the local stock market for all T&T individuals and financial institutions to participate in-first among whom, of course, would be the Clico policyholders who would be given shares in the investment holding company in return for their Executive Flexible Premium Annuities and their Core mutual funds. This solution would allow the ownership of what can be called Clico Enterprises Ltd (CEL) to remain in the hands of the Government and people of T&T, while the management and operation of the various companies, just as with NEL, could remain with those who now manage and operate them. This would allow T&T individuals, credit unions, mutual funds, pension plans and insurance companies to continue reaping the profits while the Germans continue to manage MHTL, Harford and Dulal-Whiteway continue to manage Republic Bank, Yetming and Yip Choy continue to manage Angostura, etcetera. A NEL solution to the Clico problem would allow everybody to win in the end.
On May 26, in this space, I wrote, under the headline "Can the Govt sell CEL?": "Last week, in this space, I outlined a formula for what the resolution of the Clico policyholders issue. The idea is to bundle all the good assets-Angostura, Lascelles deMercado, Home Construction, Republic Bank and Methanol Holdings (Trinidad) Ltd-into an investment holding company similar to NEL, which could then be divested on to the local stock market. If the Government needed to raise $22 billion from the CL Financial assets in order to pay off all of the liabilities, it would be quicker and easier to roll all of the attractive assets into one vehicle and sell them to the public. Here's how: It is well known that the Clico's Executive Flexible Premium Annuity policyholders with investments of above $75,000 have $12 billion tied up in the insurance company among them. It is also well known that the Government ploughed $7.3 billion into Clico and Clico Investment Bank with Clico receiving $5 billion and CIB receiving $2.3 billion. The non-policyholder creditors of Clico are owed about $2 billion.If it will take $21.3 billion to pay off all of Clico's creditors, the plan is for the Government to facilitate an Initial Public Offering (IPO) for Clico Enterprises Ltd (CEL) which raises $22 billion.
CEL would be backed by assets including:
• 56.4 per cent of Methanol Holdings Trinidad Ltd, which is conservatively worth $8 billion;
• 52 per cent of Republic Bank, which is worth $7 billion;
• 86 per cent of Lascelles, which is worth $4 billion
• 76 per cent of Angostura, which is worth $1.2 billion
• And 100 per cent of Home Construction, which is worth $800 million.
The plan would be for the Government to facilitate the issuance of 1 billion CEL shares at $22 per share in an IPO with NIB and UTC as the underwriters:
• Government gets 33 per cent of the issued shares of CEL ($7.3 billion divided by $22 billion);
• The EFPA policyholders with investments greater than $75,000 get 55 per cent of the shares issued by CEL ($12 billion divided by $22 billion);
• Other creditors get 9 per cent-($2 billion divided by $22 billion)
• And the public-including individuals, companies, mutual funds, pension plans, insurance companies, but not the UTC or NIB-gets the opportunity to buy shares in CEL worth $800 million in the IPO.