An­tho­ny Wil­son

This col­umn came about as a re­sult of a tele­phone call I got about a month ago from an ac­coun­tant who has a keen in­ter­est in the rights of share­hold­ers. The ac­coun­tant alert­ed me to the an­nu­al re­port of AIC Fi­nance, the Mar­aval-based non-bank fi­nan­cial in­sti­tu­tion owned by for­mer Ja­maican bil­lion­aire Michael Lee Chin, which was pub­lished in the Trinidad and To­ba­go Guardian on Sep­tem­ber 4. Of sig­nif­i­cance in the ac­counts, which were au­dit­ed by Price­Wa­ter­house­C­oop­ers, was the fact that they were be­ing pub­lished near­ly a year af­ter the end of the com­pa­ny's Sep­tem­ber 30, 2008 year end and nine months af­ter the ac­counts were due. The fi­nan­cial re­port in­di­cates that AIC Fi­nance de­clared a loss of $10 mil­lion dur­ing 2008.

Al­so of great sig­nif­i­cance was the fact that the ac­counts re­vealed that AIC Fi­nance ex­pe­ri­enced what the fi­nan­cial­ly trou­bled non-bank fi­nan­cial in­sti­tu­tion de­scribed as a "tem­po­rary breach" in its cap­i­tal ad­e­qua­cy re­quire­ments. (All fi­nan­cial in­sti­tu­tions are re­quired to hold a cer­tain min­i­mum amount of cap­i­tal to be able to con­tin­ue op­er­a­tions.) This "tem­po­rary breach" in the cap­i­tal ad­e­qua­cy re­quire­ments, which is con­sid­ered to be a red-flag warn­ing in the bank­ing world, oc­cured be­cause some 35 per cent of the com­pa­ny's cap­i­tal, as at the end of Sep­tem­ber 2008, com­prised shares in the Na­tion­al Com­mer­cial Bank of Ja­maica (NCBJ), a fi­nan­cial in­sti­tu­tion in Ja­maica which is ma­jor­i­ty owned by Michael Lee Chin. In a re­al sense, there­fore, 35 per cent of the lo­cal sub­sidiary's cap­i­tal is held by a re­lat­ed par­ty–one sim­i­lar­i­ty be­tween the Lee Chin em­pire and Duprey's. The 55,754,983 shares in NCBJ were val­ued on AIC Fi­nances books in Sep­tem­ber 2008 at $103 mil­lion when the Ja­maican bank trad­ed at $1.85 per share on the lo­cal mar­ket.

AIC Fi­nance's stake in NCBJ are now worth $52.9 mil­lion as the Ja­maican bank is trad­ing at $0.95 per share–leav­ing the lo­cal­ly based, non-bank fi­nan­cial in­sti­tu­tion with a $50 mil­lion hole in its cap­i­tal.?Ac­cord­ing to note 35 of AIC Fi­nance's 2008 ac­counts, the re­duc­tion in the fair val­ue of the NCBJ shares by al­most half "has erod­ed share­hold­ers' eq­ui­ty of the group to the ex­tent that the com­pa­ny was in breach of the cap­i­tal ad­e­qua­cy re­quire­ments of the Fi­nan­cial In­sti­tu­tions Act 2008 (FIA)." The FIA re­quires com­pa­nies like AIC Fi­nance to have min­i­mum stat­ed cap­i­tal of $15 mil­lion "or such larg­er amount as may be stat­ed from time to time by Or­der of the Min­is­ter on the ad­vice of the Cen­tral Bank." The leg­is­la­tion al­so gives the In­spec­tor of Fi­nan­cial In­sti­tu­tions, a po­si­tion cur­rent­ly held by Carl Hi­ralal, the right to re­quire li­censed in­sti­tu­tions "to pro­vide ad­di­tion­al cap­i­tal in cash or ap­proved se­cu­ri­ties for the busi­ness­es it is con­duct­ing" in or­der to sat­is­fy the In­spec­tor that its cap­i­tal base is ad­e­quate "in ac­cor­dance with the cap­i­tal ad­e­qua­cy re­quire­ments im­posed by pru­den­tial cri­te­ria reg­u­la­tions."

Specif­i­cal­ly, Sec­tion 63 of the FIA al­lows the Cen­tral Bank to sus­pend for 60 days in­sti­tu­tions that are in­sol­vent, un­able to meet the min­i­mum cap­i­tal ad­e­qua­cy re­quire­ments stip­u­lat­ed in the pru­den­tial cri­te­ria or "un­like­ly to meet the de­mands of the de­pos­i­tors of the li­censee." About a month ago, the In­spec­tor of Fi­nan­cial In­sti­tu­tions and Gov­er­nor of the Cen­tral Bank de­clined to com­ment for the record on the ac­tion that the reg­u­la­tors were tak­ing to rem­e­dy this "tem­po­rary breach" or the pow­ers of the reg­u­la­tors to sus­pend reg­u­lat­ed in­sti­ti­tions which are un­able to meet the de­mands of de­pos­i­tors. In Note 35, AIC Fi­nance states: "Based on this tem­po­rary breach and the volatil­i­ty of qual­i­fy­ing cap­i­tal caused by fair val­ue ad­just­ments on NCB­JL shares, the cap­i­tal ad­e­qua­cy re­quire­ments of the com­pa­ny were in­creased from eight per cent to 10 per cent.?"As of 2 Sep­tem­ber 2009, the cap­i­tal ad­e­qua­cy ra­tio is 11.83 per cent."

Sources state that AIC Fi­nance has been sell­ing down its 55.7 mil­lion shares in NCBJ in blocks in or­der to qual­i­fy for the FIA's cap­i­tal ad­e­qua­cy re­quire­ments. The com­pa­ny's 2008 ac­counts state that it de­vel­oped a plan in Jan­u­ary this year to dis­pose of its en­tire share­hold­ing in NCBJ at a min­i­mum price of $1.27 by No­vem­ber. This is about 30 per cent above the cur­rent trad­ing price and it is doubt­ful that any third par­ty would be pre­pared to pay $1.27 for shares that can be bought for $0.95. How­ev­er, the man­age­ment of AIC Fi­nance has re­ceived the as­sur­ance that a re­lat­ed par­ty will buy the shares at $1.27. Ac­cord­ing to the ac­counts, AIC Fi­nance "has se­cured the writ­ten sup­port of the ul­ti­mate share­hold­er,?AIC Glob­al Hold­ings?Inc, in pro­vid­ing what­ev­er as­sis­tance is re­quired in con­tin­u­ing to?meet its reg­u­la­to­ry cap­i­tal re­quire­ments.

"In par­tic­u­lar, AIC Glob­al Hold­ings Inc has com­mit­ted to pur­chas­ing a sig­nif­i­cant block of NCBJ shares at $1.27 per share by Oc­to­ber 2009." To­day is Oc­to­ber 15. There was no in­di­ca­tion up to yes­ter­day morn­ing that AIC Glob­al Hold­ings Inc had lived up to its com­mit­ment. AIC Fi­nance says the sale of the "sig­nif­i­cant block" of NCBJ shares to AIC Glob­al will place the lo­cal com­pa­ny in a sound cap­i­tal po­si­tion and re­duce the volatil­i­ty of its earn­ings. But AIC Glob­al, which is al­so owned by Michael Lee Chin, is fac­ing its own liq­uid­i­ty chal­lenges. Lee Chin's hold­ing com­pa­ny for his Caribbean in­vest­ments, AIC Bar­ba­dos, failed to re­deem bonds that had ma­tured on three oc­ca­sions this year on a US$170 mil­lion bond he raised in 2003. Lee Chin has told bond­hold­ers, which in­clude some lo­cal fi­nan­cial in­sti­tu­tions, that they must wait un­til No­vem­ber 27 in or­der to re­ceive the out­stand­ing in­ter­est and ma­tured prin­ci­pal pay­ments on their bonds.

If he fails to meet that dead­line, the bond­hold­ers would be en­ti­tled to have him de­clared as of­fi­cial­ly in de­fault and seize the as­sets that have been pledged to col­lat­er­alise the bond. Among Lee Chin's pledged as­sets in­clude a 35 per cent stake in NCBJ, prop­er­ty in New Kingston and a 20 per cent stake in Colum­bus Com­mu­ni­ca­tions, the ca­ble and fi­bre-op­tic op­er­a­tor which op­er­ates in the lo­cal and Ja­maican mar­kets as Flow. Lee Chin has been try­ing to sell the 20 per cent stake in Colum­bus Com­mu­ni­ca­tions since the be­gin­ning of this year, ac­cord­ing to news­pa­per re­ports out of Ja­maica. The Ja­maica-born for­mer bil­lion­aire has been try­ing to raise as much cash as pos­si­ble in or­der to pay off the hold­ers of a bond is­sued by AIC Bar­ba­dos, a Lee Chin sub­sidiary. News­pa­per re­ports out of Ja­maica in­di­cate that US$56.9 mil­lion of the bond ma­tures this year and US$51 mil­lion ma­tures be­tween Jan­u­ary 2010 and April 2011.

A short­age of cash meant that Lee Chin was un­able to re­deem (pay off the prin­ci­pal) AIC Bar­ba­dos was sched­uled to sat­is­fy on six strips of the bond which ma­tured in March, April and Ju­ly.

Fac­ing prob­lems sim­i­lar to those ex­pe­ri­enced by an­oth­er for­mer re­gion­al bil­lion­aire, Lawrence Duprey, ear­li­er this year, Lee Chin sold his Cana­di­an mu­tu­al fund busi­ness to Cana­di­an in­sur­ance gi­ant Man­ulife for what me­dia re­ports there said was stock in the pur­chas­er worth C$150 mil­lion. So far, cus­tomers of fi­nan­cial in­sti­tu­tions owned by Lee Chin have re­act­ed calm­ly. He has re­ceived le­nien­cy from the bond­hold­ers and no pan­icked with­drawals as oc­cured at Cli­co In­vest­ment Bank where de­pos­i­tors, in­clud­ing T&T's Min­is­ter of Fi­nance, sought to re­move ma­tured funds or to make ear­ly re­demp­tions on hun­dreds of mil­lions of dol­lars. This is gen­er­al­ly ac­cept­ed as the be­gin­ning of the end of Lawrence Duprey's con­trol of his CL Fi­nan­cial em­pire.