Deloitte and order: SPV
By Pat Hoyos | Sun, June 10, 2012 - 12:04 AM
The Judicial Manager (JM) recently sent a memo to the Government on a new way to deal with Clico.
If, like me, you struggled to read through the edited text as published in last week’s Sunday Sun under the heading Finding A Way Out For CLICO, you might have understood it better than I did. But I will try to summarize it in simple terms and then make a few comments.
The main difference in this go-round from previous efforts by the JM to find a solution is the idea of setting up a trust fund, called a Special Purpose Vehicle (SPV), which would then float a bond.
The money raised would be used to “acquire qualifying assets that would be transferred to a buyer of CIL’s [CLICO International Life] traditional business as well as to fund the partial repayment and restructuring of the EFPA [Executive Flexible Premium Annuities] portfolio”.
The first is necessary because CIL has mostly real estate assets and a properly run insurance company can only have up to 20 per cent of its portfolio in real estate. The second use of the money would be to give every EFPA holder $25 000.
The purchaser would therefore have new assets raised from the bond issue to cover the liabilities of taking over the life insurance policies of CIL and 60 per cent of the remaining sums (without accumulated interest) due on each EFPA after each $25 000 payout. The other 40 per cent would stay in the trust fund with the accumulated interest.
Transfer of assets
In the meantime, the trust fund’s managers (hey, it’s Deloitte again) would have been busy transferring all of CIL’s real estate and other assets into the SPV portfolio.
Since it would have been buying T-bills and so on in the Eastern Caribbean islands where Clico operated, using the money from the bond issue to do so, the idea is to start selling off some of that real estate to raise the money needed to pay the interest on the bonds.
And if all that went sailing along smoothly, each EFPA holder would have received $25 000, have an annuity for 60 per cent of his remaining former Clico annuity transferred into a sparkling new Sagicor or Guardian annuity, and the other 40 per cent and all accumulated interest to date remaining in the trust fund as preferred shares (which means they would have a fixed interest rate, I presume), and in the case of corporates and governments, common shares (which means they would get dividends, I presume).
Remember, this trust fund is an SPV whose only purpose is to facilitate the selling of Clico’s policies to a new purchaser, yet it is expected to raise millions of dollars through a bond issue, and then sell off real estate to pay the interest on both the bonds and the remaining 40 per cent annuities plus interest.
According to an investment bank hired by the JM, “the attractiveness and hence success of the SPV’s bond issue will be highly dependent on a credit enhancement being provided by the governments of Barbados and Trinidad and Tobago”.
The two governments would have to guarantee that the interest on the bonds sold to the market would be paid and even agree to put in equity if, say, the bonds didn’t sell too well. Barbados would have to agree to put up as much as Bds$150 million if necessary and Trinidad and Tobago up to EC$300 million.
Good and bad side
There is a good side to this plan and a bad side.
The good side is that the purchaser gets fresh assets on which to base the liabilities of taking over the traditional insurance policies of CIL, and only 60 per cent of the EFPA amounts above the first $25 000 with no accumulated interest.
The bad side is that in the likely event the bonds will be undersubscribed, or that even if fully subscribed, ensuing real estate sales do not yield enough to pay the interest on the bonds, the governments of Barbados and Trinidad and Tobago will have to put big bucks into that SPV with probably unsaleable assets as its only stock in trade.
It would be a little easier for Barbados since 71 per cent of all those real estate assets are located here, so in that event, the Government could take over some of the properties, like the plantations, and do some new residential areas à la Coverley.
But I personally think that it is too much to lay on the SPV to make it take up the remaining 40 per cent of CIL’s EFPAs plus accumulated interest. This is only going to add more pressure to the trust fund to find the money every year to pay interest on the bonds sold initially to the marketplace, and also the interest or dividends on the shares issued in respect of the EFPA sums not transferred cleanly into the purchasing company.
The JM is trying to please all sides, but I think that is going too far and would certainly hasten the day when the governments would have to step in.
If we could agree to get rid of that provision, the whole project would have an easier time getting up to speed. But don’t bank on it.
• Pat Hoyos is a publisher and business writer.
- Editor's Choice