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Is the CLICO debacle too big for Gov’t to solve?

Doug Skeete

Is the CLICO debacle too big for Gov’t to solve?

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HERE IS what the Ministry of Finance & Economic Affairs and the Central Bank of Barbados discussed with the Judicial Manager in the Addendum to its final report.  
“Government’s existing debt profile, particularly for domestic debt, is skewed to the front end, in that approximately 71 per cent of the existing debentures and T-notes are payable within the next ten years.
“Any recommendation for the issuance of medium term bonds will conflict with Government’s existing maturity profile resulting in higher roll-over risk over the coming decade.
“Barbados’ current debt levels are too high and hence unsustainable. At March 31, 2013, Central Government’s debt stood at approximately BDS$9.85 million or approximately 113.4 per cent of GDP.
“This represents an increase of $943.1 million over the previous year, or approximately ten per cent of GDP.
“To finance the 2013-2014 deficit a minimum of approximately $860.0 million in new debt will be incurred. This is about ten per cent of projected GDP.
“The proposed $460 million in new debt will add another 5.2 per cent of projected GDP ($8 854 million). The quantum and steepness of the increase runs contrary to any attempt to begin to address the high debt levels and will only assure a firmer footing in a vicious cycle.”
But let us put the above in context.
In December 2012 the Judicial Manager attended a meeting involving the Prime Ministers of Barbados, St Vincent and Antigua along with several regulators and government officials and others from Barbados and the East Caribbean Currency Union (ECCU).
It was agreed that a working group should be set up to work closely with the Judicial Manager to develop a CLICO?International Life (CIL) resolution plan consistent with certain principles and set out what each Government in the region would have to contribute to make the plan successful.
The principles tabled at this meeting were as follows:
1. That no individual country should use the assets in that country to settle its own policyholder liabilities at the expense of policyholders in other countries. i.e. the assets of CIL should be pooled for the benefit of all policyholders
2. That efforts will be made to provide the most optimal solution for policyholders in all practical circumstances.
3. That effort should be made to ensure that the failure of CIL does not become a systemic financial crisis for the region given the financial exposure of some regional banks and credit unions to CIL.
4. That effort should be made as far as practical to find solutions that are fair and equitable which may involve ring fencing parts of CIL portfolio and applying different treatments.
5. That legal action should be pursued to seek recovery from any company or individuals whose action may have contributed to the loss to CIL’s policyholders.
But what changed so fundamentally in 2012 and 2013 that these governments would wish to discard the decision they took in 2011?
So here are ten questions I have for the Minister of Finance some four years after the almost implosion of CIL.
• Will the CLICO debacle ever be solved if in addition to the $400 million fiscal deficit problem to be plugged, you have to add $460 million for CLICO and maybe $100 million for Mr Al Barrack? What about British American Insurance Co. Ltd? Is this awaiting funding from the Barbados treasury too?
• Are Executive Flexible Premium Annuities (EFPA) holders (individuals, governments and corporates) likely to agree to a solution that ignores payment of or compensation for $100 million in accrued interest up to March 31, 2012 on their principal balances?
• Some of the non-real estate assets going into the two property trusts will be provided by CLICO Holdings (Barbados) (CHB) Limited, the Barbados parent company. Since the Judicial Manager has no power over this company, is CHB’s board of directors functioning so as to facilitate such a request to transfer assets to the trusts?
• The conversion of individual EFPAs with a face value of $245 million to ten year annuities has resulted in a present value of $206 million or an interest rate of 1.8 per cent per annum. This rate is below the savings rate. Is it fair to these investors, especially when they have had to forfeit accrued interest of $58 million?
• Will the two property trusts issue common or ordinary shares? And if yes, who will be the owner(s)?
• Bonds – $460 million. What will be the interest rate(s) and repayment period(s)?
• The Judicial Manager in its interim report on May 27, 2011 stated that at April 12, 2011 the assets on the company’s books were valued at $802 million. These assets were worth $512 million and $448 million at July 28, 2011 and December 31, 2012 respectively.
Don’t you agree that the longer this matter remains unresolved the more likely the value of these assets will continue to deteriorate and add more cost to a solution?
• Related companies balances totalling $255 million are included in the $448 million above. These are part of the assets to be transferred to the new company and the two property trusts. Are you satisfied these are free from any encumbrances?
• Are you or the Judicial Manager at the stage yet to institute legal action to seek recovery from any company or individuals whose action may have contributed to the loss to CIL’s policyholders?
• If we are to learn from the past do you plan to have a Commission of Inquiry to probe the reason(s) for the collapse of the CLICO group so as to ensure this does not happen again?
Finally, the Ministry of Finance & Economic Affairs and the Central Bank both expressed doubts about the viability of the property trusts and the governance and management structure of the new company in the event that a sale to an existing insurance company is not possible.
Surely, if you are an optimist like I am you would want to believe that CLICO Barbados will once again rise like a phoenix from the ashes at the next coming of our Lord.
Of course, if you are a pessimist you might not want to believe that!
Douglas Skeete is an accountant and interim president of the Barbados Association of Corporate Shareholders.