Late last month, a newspaper published an article in which the CLICO Policyholders Group (CPG) welcomed the news that Consolidated Energy Ltd (CEL) is expected to put about 40 per cent of its shareholding in Methanol Holdings Trinidad Ltd (MHTL) on the local market just after it concluded the purchase of Clico's 56.53 per cent shareholding of MHTL.
CEL groups together with several German companies that are due to consummate the acquisition of Clico's 56.53 per cent stake in MHTL today. CEL will do this by transferring to an escrow account the US$1.175 billion that the arbitration tribunal, sitting in London, directed should be the selling price for Clico's stake in the methanol company.
Back in November 2013, the tribunal had concluded that the sale of Clico's stake in MHTL was a suitable remedy for what it determined was the oppression of the minority shareholders (CEL) by the then majority shareholders, Clico and CL Financial.
The arbitrators also instructed both sides in the conflict to negotiate and agree the terms of sale of the 56.53 per cent by January 31, 2014, with the understanding that if no agreement was reached within the timeframe, the tribunal would set the price. No agreement was reached and, therefore, the tribunal set the price of US$1.175 billion.
In the newspaper report of September 26, Peter Permell, the chairman of the CPG, said: "Now if the Germans are talking about an IPO (Initial Public Offering) this makes perfectly good sense because it would not only provide an ideal vehicle for nationals of T&T and local institutions to participate directly in the very lucrative energy sector but it gives the country a second chance to recover a significant portion of a lost 'national treasure'."
Permell, of course, is articulating a position that I have held and argued in this space for more than a decade now: that the Government should do everything in its power to increase the number of high-quality companies that are publicly listed on the local stock exchange to increase the long-term investment opportunities for local institutions and individuals.
The operative question is this: Is the 100 per cent shareholder of MHTL (as of today) considering an IPO of shares in MHTL, which would include the sale of shares to individuals, or is it contemplating a selective divestment of up to a 40 per cent stake in the methanol company?
My understanding, which was articulated in this space in the February 20 edition of this publication, is that CEL is interested in divesting up to a 40 per cent stake in MHTL to the National Insurance Board, the Unit Trust Corporation (UTC) and National Enterprises Ltd (NEL), the investment holding company that is majority owned by Corporation Sole.
So, the question is should NIB, UTC and NEL–all of which invest money on behalf of mostly T&T citizens and nationals–participate in the partial divestment of up to 40 per cent of MHTL, presumably at the same price that CEL paid for the shares?
Put another way, would it be in the long-term, financial interest of NIB pensioners, UTC unitholders and NEL shareholders for those local financial institutions–all of which the Government has a stake in–to invest in MHTL, in accordance with the expressed intent of CEL?
Before answering that question, here is the response of the UTC when I put questions of whether it would be interested in acquiring shares in MHTL held by CEL and if there was concern about CEL's lack of transparency.
The UTC responded: "We are interested in investing in any assets that will bring value to our unitholders and where our comprehensive due diligence supports an informed decision."
As responses go, this is an outline of the UTC's investment principles and not a statement of intent, but it demonstrates two things: UTC's decision with regard to MHTL will be driven by its perception of whether such an investment brings value to its unitholders and the decision of whether or not to invest will be taken after a comprehensive due diligence process.
To answer the second point, the rating agency Moody's did a rating of Consolidated Energy Finance, a subsidiary of CEL, for its US$1.25 billion in 5-year notes that were issued to pay the Government US$1.175 billion for the MHTL shares.
Moody's assigned a B2 rating to senior unsecured notes and at the same time, assigned a B1 corporate family rating to CEL. According to Moody's, credit ratings of B1, B2 and B3 are "judged as being speculative and a high credit risk" for long-term ratings and "do not fall within any of the prime categories," for short-term ratings. CEL and its finance subsidiary, therefore, are considered to be sub-prime credit risks by the international capital market.
Here is what Moody's–which, one assumes, did a comprehensive due diligence on MHTL–says in its ratings rationale: "The B1 corporate family rating reflects the company's relatively high leverage and business profile characterized by limited product diversity and little operational or geographic diversification. All of the wholly-owned production assets (assuming MHTL is wholly owned by CEL) are located in T&T in close proximity to each other. CEF relies on dividends from entities in which CEL it is a minority shareholder for a significant portion of its cash flow. Two of the three minority–owned entities are also located in T&T, with the third located in Oman.
"The ratings are tempered by the commodity nature of the product portfolio (methanol accounts for 75 per cent of MHTL's revenues and ammonia, fertilizer and melamine account for the balance), cyclical nature of pricing and demand in the methanol and fertilizer markets, new low-cost methanol and ammonia capacity being built in North America, periodic feedstock curtailments (natural gas) in Trinidad and Tobago during 2011-2013, combined with a sustained reduction in Trinidad and Tobago's proved gas reserves over the last five years."
In other words, since 75 per cent of MHTL's revenues come from methanol, the company's fortunes are very much tied to the international market. According to a September 2014 Methanex presentation, "Methanol prices have been closely correlated to crude oil," with Reuters reporting on Tuesday that "oil prices have fallen as much as 20 percent since June, despite a host of rising supply risks, leading more investors and traders to consider whether 2015 is the year in which the US shale oil boom finally tips the world into surplus."
It seems to me that any local financial institution making an investment in methanol at this point risks the bottom falling out of the methanol market in a way that would, inevitably, lead to a sharp decline in profit distributions from MHTL.
This brings us to another point: from today, CEL will have control of 100 per cent of MHTL; it also controls the company that does MHTL's marketing and IPSL, the company that operates the MHTL complex of five methanol plants and seven AUM facilities.
Assuming it sells 40 per cent to the local institutions, given this control over MHTL, its marketing and its operations, will directors representing the minority interests determine what level of dividends are paid by MHTL as opposed to profits to IPSL and the marketer?
Is our ability to track transfer pricing where it ought to be now or is this something that the Government has been talking about putting in place for years?
And who would control the procurement process when the plants have to be shut down for periodic maintenance?
Will the public–the beneficiaries of investment decisions taken by NIB, UTC and NEL–be provided with quarterly financial reports from MHTL or will the new owners argue that their responsibility is only to provide that information to the institutions?
Will there be a new shareholders' agreement governing issues of profit distributions and procurement BEFORE the local financial institutions hand over money held in trust for pensioners, unitholders and shareholders to CEL?
Finally, should these local financial institutions trust a company that arranged the secret purchase of Clico Energy Ltd, three or four days after the signing of the Memorandum of Understanding on January 30, 2009, for much less than the company was worth–a matter that is languishing in before our courts?