Having closely followed the break up of the CL Financial empire since the news conference at the Central Bank on January 30, 2009–and having written on the matter more than anyone else–my view is that the fairest, cleanest, quickest and most transparent way to resolve this issue is to sell ALL of the group's assets, pay off the creditors and distribute any money remaining to the group's shareholders.
The sale of all of the CL Financial group's assets is in conformance with the Memorandum of Understanding of January 30, 2009, the Shareholders' Agreement of June 12,2009, but not the July 4, 2013 Letter of Intent from CL Financial CEO Marlon Holder to Vishnu Dhanpaul, the permanent secretary in the Ministry of Finance.
The Letter of Intent says that the 56.53 per cent stake of Clico/CL Financial in Methanol Holdings (Trinidad) Ltd and its Oman-based sister company MHIL, should be disposed of entirely as should the 51 per cent stake in Republic Bank.
Well, last week Thursday, the tribunal that sat on this matter for more than three years came back with an award that valued MHTL at $7.4 billion.
The Letter of Intent, as it was drafted last year, envisaged that CL Financial would keep at least a 51 per cent ownership stake in Angostura Holdings Ltd, CL World Brands and Home Construction.
If methanol company and the bank were enough to ensure that taxpayers were made whole, then it seems to me the July 2013 Letter of Intent may still have some validity.
If the Government is owed $20 billion by CL Financial and $7.4 billion has already been decided by final and binding arbitration, then it seems to me that the Government has to recover $12.6 billion from the balance of the CL Financial assets.
My understanding is that the order of ranking for a financially troubled company would be as follows: secured creditors; unsecured creditors; preference shareholders and then ordinary shareholders.
It can be argued, I believe, that the Government is a secured creditor of Clico to the tune of about $11 billion because the State is "standing in the shoes" of the holders of Executive Flexible Premium Annuities (EFPAs) and mutual funds issued by the insurance company.
It is generally understood that the policyholders of Clico have a claim on the assets of the company's statutory fund. It can be argued that the Government is the insurance company's largest policyholder by virtue of spending about $11 billion to purchase the EFPAs and mutual funds from their original policyholders.
If someone bought an EFPA from Clico that was defined by the company and approved by the Board of Inland Revenue as an insurance product, which was under the protection of the statutory fund of the company, is it legal for someone to decide that these annuities are in fact investment products?
Can CL Financial's stake in Republic Bank generate $12.6 billion?
According to Republic's 2013 annual report: "Until October 31, 2012, the CL Financial Group held through its various subsidiaries, 51.4 per cent of the shares of Republic Bank Limited, of which Colonial Life Insurance Company (Trinidad) Limited (CLICO) and CLICO Investment Bank Limited (CIB) combined, held 51.1 per cent.
"CLICO Investment Bank Limited (CIB) which owned together with its subsidiary First Company Limited 18.3 per cent of the shareholding of Republic Bank Limited was on October 17, 2011 ordered by the High Court to be wound up and the Deposit Insurance Company (DIC) appointed liquidator. Accordingly, this 18.3 per cent shareholding is under the control of the DIC.
"On November 1, 2012, 24.8 per cent of Republic Bank formerly owned by Colonial Life Insurance Company (Trinidad) Limited (Clico) was transferred into an investment fund launched by the Government of the Republic of Trinidad and Tobago and called the Clico Investment Fund (the Fund). The Trustee of the Fund is the Clico Trust Corporation Limited which holds the 24.8 per cent shareholding in Republic Bank Limited in trust solely for the benefit of subscribing Unit holders of the Fund. The Fund is as a consequence, the largest shareholder in Republic Bank Limited."
In order to derive a control premium for the 51.1 per cent of Republic Bank held by Clico and CIB, it seems to me that the 24.8 per cent stake that is now held by the Clico Investment Fund, the 18.3 per cent held by CIB and the 7.3 per cent held by Clico itself will have to be freed up.
New arrangements will have to be made for the unitholders of the CIF, a discussion would have to be held with the DIC for the CIB shares and if the Republic Bank shares form part of Clico's statutory fund, arrangements would have to be made to replace the shares with something.
If the full 51.1 per cent of Republic Bank is available, that would be about 82 million shares. At $130 a share, the CL Financial stake would be worth $10.66 billion. Add that to the MHTL award and you get $18 billion, which is still short of the $20 billion owed.
But what if the Government were to monetize its shareholding in Clico.
The Guardian reported on February 8, 2014 that Clico recorded a 2012 an after-tax profit of close to $3.8 billion by generating profits of $6.2 billion from its investing activities for the financial year, which eclipsed the $2.2 billion loss from its insurance activities.
The most significant contributor to Clico's investment profits was the $3.8 billion gain the company booked on the disposal of some 40 million Republic Bank shares in November 2012, which means that this was a paper profit.
But Clico would have received a full dividend from Republic Bank for 2012 and dividends based on 11.8 million shares after November 2012. Clico would also have received dividends from MHTL for 2013 and for the first half of 2014.
In other words, Clico is sitting on a large pile of cash that needs to be quantified and disclosed to the T&T public as soon as possible.
As far as I am aware, by virtue of its 49 per cent stake in Clico, the Government is entitled to half of whatever cash remains on the insurer's balance sheet. And, truth be told, if $2 billion is needed to make up the shortfall created from the sales of MHTL and Republic Bank, a good argument can be made that all of Clico's cash should go to Government.
Part of this is because of the $5 billion in preference shares that the Government invested in Clico back in 2009, which rank ahead of the insurer's ordinary shares and are entitled to a 4.5 per cent dividend as and when Clico decides to distribute profits once again.
Government owns 49 per cent of the insurance company, while the CL Financial shareholders own 51 per cent of the company. Clico's 2012 financial report also indicated that while the insurance company, which was once T&T's largest and most powerful, generated profits in 2012, the KPMG-conducted audit indicated that Clico had a negative net worth of $6.6 billion. That meant that the company's liabilities, which were recorded at $29 billion, dwarfed its assets, which were valued at $22.4 billion at the end of 2012.
Those bank shares, which were then worth about $4.3 billion, constituted 84 per cent of the underlying investment in the Clico Investment Fund–which converted the 11 to 20-year zero-coupon bonds into units in the CIF.