The fact that Republic Bank shares owned by CL Financial will be sold to ensure that taxpayers recover the up to $20 billion that Government pumped into the Lawrence Duprey-founded empire has been hiding in plain sight for more than five years.
The January 30, 2009 Memorandum of Understanding through which the State intervened to save Clico, Clico Investment Bank (CIB) and British American (BA) states that the Government and CL Financial agreed that the group would "take steps to correct the financial condition of CIB, Clico and BA by: selling all of its shareholding in Republic Bank Ltd."
The sale by CL Financial of all of its shareholding in Republic is the first of four action items in the MoU and is followed by the sale of Methanol Holdings, Caribbean Money Market Brokers and "all or any of their assets as may be required to achieve the said correction."
It is clear, then, that from the very start of the process of resolving the CL Financial problem, the policymakers and representatives of the insolvent group agreed that its Republic Bank shares would be sold, to quote the MoU, "to satisfy the statutory fund requirements of Clico and BA under the Insurance Act 1980 and the balancing of the third-party assets and liabilities portfolio of CIB."
By Minute no 1457 of May 23, 2013, Cabinet agreed that the Minister of Finance would pursue the execution of a divestment strategy in order to maximize recovery of State (taxpayers) funds, with the following hallmarks:
"1) Agreement by CL Financial to sell certain key assets, the most valuable of which are the methanol assets (MHTL and MHIL) and the shares of Republic Bank Ltd."
The three other hallmarks of the divestment strategy to ensure maximum recovery of State (taxpayers) funds are the payment of CL Financial's creditors, the payment to the Government of up to $20 billion "leaving a residual balance to be repaid over an extended period" and the establishment of a debenture "along with other conditions on the governance of the residual company after the divestment has been completed."
Further, in the July 4, 2013 Letter of Intent–addressed to Permanent Secretary in the Ministry of Finance Vishnu Dhanpaul and signed by CL Financial MD Marlon Holder–the group identified several of its assets held among itself, Clico and CIB which CL Financial proposes be applied to settle the Government debt.
The first two identified are MHTL and MHIL (which is the Oman-based methanol producer) with shareholding in Republic Bank being identified as third on the list.T
he Letter of Intent refers to the fact that the Republic Bank shares held by CL Financial would be "disposed of entirely," and adds that the group "further claims that it is entitled to the benefit of a control premium reflecting the fact that at the time of the intervention by Government into the affairs of the CL Financial group of companies" they held a majority interest in Republic Bank shares."
This, of course, is either an outright contradiction or an interesting sleight of hand because having identified Republic as one of the assets to be sold to settle the debt to the Government, how can CL Financial "further claim" an entitlement to "a potential control premium" from the sale of the group's shares in the bank?
The whole concept of "a potential control premium" in Republic Bank assumes that CL Financial still owns at least 51 per cent of the bank's shares, which would be much more valuable than say 49 per cent because 51 per cent would give the purchaser control of T&T's largest bank.
However, at page 11 of Republic Bank's 2013 annual report, the bank's largest shareholder is revealed to be the Clico Trust Corporation, which holds 40,072,299 shares equal to 24.87 per cent of the bank. The Clico Trust Corporation is the entity that holds the Republic Bank shares that are domiciled in the Clico Investment Fund.
In other words, if a majority stake in Republic Bank is to be sold, the Government would have to unravel Clico Investment Fund and presumably pay off the holders of the CIF unit, which replaced the 11 to 20 zero-coupon bonds, that were given to holders of Clico mutual funds and Executive Flexible Premium Annuities.
On Friday, when the Republic Bank stock closed at $121.88, the bank's market capitalisation–which is the total number of the bank's shares multiplied by its share price– totalled $19.7 billion (US$3.1 billion), which means that if CL Financial still owns 51 per cent of T&T's largest bank, that that stake is worth $10 billion today.
On the issue of the bank's future, here is what David Dulal-Whiteway, the managing director of Republic Bank, said in an interview conducted by Business News Americas and published on November 12, 2010:
BNamericas: Obviously, the CL Financial situation has been a major event in the company's history. Can you frame what the government's stake in Republic means for you in your management of the bank?
Dulal-Whiteway: First, I should say that CL never interfered with Republic and had a hands-off relationship. They treated it like an investment and never had any executives on Republic's board. They really only cared about–at the end of the day–the dividends. Over the last few years, we've been paying over TT$500mn in dividends.
When (CL Financial) got into difficulty, the shares–which were held by their insurance company CLICO and CLICO Investment Bank (CIB)–came under the supervision of the Central Bank. The shares are now controlled by the Central Bank under the judicial arrangement, and so far neither the government nor the Central Bank has had any interference in the running of the bank. We continue to run very independent of the shareholders' arrangement and to be a pretty strong bank.
BNamericas: What is the stake right now held by the government?
Dulal-Whiteway: I wouldn't say the government's ownership, rather the trustee arrangement's stake. It's just over 51 per cent.
Down the road, we recognize that Republic will have to be sold and those shares will have to be liquidated to deal with CL Financial's indebtedness. In all our meetings so far, both this government and the last have basically said that Republic runs a good ship and there's no need to interfere. Therefore, it's not a frontline item for them. They have other things to deal with at CL Financial, before they can consider a liquidation of (our) shares.
BNamericas: Do you have any view on how this process will play out? You said the Canadian firms are very present in the region. Do you see yourselves as a potential target for a big international bank?
Dulal-Whiteway: That could happen. We can't rule that out, but we've presented plans so that the government can dispose of the shares and still have the company remain a regionally-owned bank, and that's one option. There are other alternatives being looked at it, but no firm decision has been made as of yet.
BNamericas: Is there a timeframe on this process?
Dulal-Whiteway: I don't know, but it all depends on how you solve CL Financial's indebtedness. If there is a demand for more cash flow up front, there will be a need to liquidate assets, which will bring the timeframe forward.What we need to do is first understand the timeframe of dealing with the indebtedness, and from there we'll know (how Republic Bank fits into this planning).It is difficult for me to comment on speculation such as the possibility of the significant percentage being sold to a third party.
A significant percentage is currently in the hands of a third party so the sale from one third party to another is not, in and of itself, a concern. There are also no additional rights which come with owning a significant percentage unless it is a majority percentage. With respect to RBL buying back all of those shares, the possibility of that is low given the quantum involved and the possible impact of such a purchase on the Bank's share capital."
In November 2010, the MD of Republic Bank was saying: "Down the road, we recognize that Republic will have to be sold and those shares will have to be liquidated to deal with CL Financial's indebtedness."
On Friday, Republic Bank executive director, Nigel Baptiste said: "From my perspective, given the size and role of RBL in the financial ecosystem of Trinidad and Tobago and the wider Caribbean, we would certainly appreciate being consulted on any proposed transaction since our correspondents and various regulators are usually as concerned with our ownership structure as they are with our own subsidiaries."
It's interesting that Mr Baptiste would indicate that the bank "would certainly appreciate being consulted on any proposed transaction," which suggests that such consultation has not taken place hitherto.Finally, on Saturday morning, Minister of Finance Larry Howai said: "About your Republic Bank query: This is a very important matter and premature and uninformed statements can have a serious impact on the financial system.
"Government would want to be very mindful of and consider fully the possible implications of any statement. Government is still in discussions with various stakeholders and is not ready at this time to make a public statement until the various options being considered are resolved and Cabinet has agreed and approved the statement."
How does Mr Baptiste's statement that the bank "would certainly appreciate being consulted on any proposed transaction" square with Mr Howai's assertion that the Government "is still in discussions with various stakeholders?"Thirteen months after a Cabinet Note outlined that Republic Bank shares would be sold to satisfy up to $20 billion in debts to Government, is it conceivable that Republic Bank has not been consulted as yet?
Also, if 24.87 per cent of Republic Bank is locked up in the Clico Investment Fund and another 10.05 per cent of the bank (some 16,196,905 shares) is held by Clico Investment Bank, which is in liquidation, does that mean that the stake that is actually available for sale is 16 per cent?