An­tho­ny Wil­son

If I were a Cli­co pol­i­cy­hold­er, I would be forced to ad­mit that there is a very re­al pos­si­bil­i­ty that the Gov­ern­ment may opt to re­vert to the take-it-or-leave-it pos­ture adopt­ed by Prime Min­is­ter Kam­la Per­sad-Bisses­sar, at a news con­fer­ence at the Pi­ar­co Air­port on her re­turn from her Unit­ed Na­tions en­gage­ment in New York one month ago. The Prime Min­is­ter would be able to say that she has lived up to her promise to con­sult by man­dat­ing the es­tab­lish­ment of the in­ter­min­is­te­r­i­al com­mit­tee led by Agri­cul­ture Min­is­ter Vas­ant Bharath. This com­mit­tee has held very healthy, use­ful and de­mo­c­ra­t­ic con­sul­ta­tions with the Cli­co Pol­i­cy­hold­ers Group and oth­ers over the last three weeks.

It would be a mis­take but the Prime Min­is­ter may choose to re­vert to the take-it-or-leave it pos­ture of the Dook­er­an Plan for Cli­co,which may be un­con­sti­tu­tion­al be­cause it takes away the right to prop­er­ty of the Cli­co pol­i­cy­hold­ers, as a re­sult of the de­mands be­ing made on the Gov­ern­ment by pub­lic ser­vants and the con­trac­tors. She may ar­gue that to shift from the ze­ro-coupon pol­i­cy out­lined in the 2011 bud­get,which must have had the bless­ing of the Cab­i­net, would ex­pose the Gov­ern­ment to the very re­al charge that it was favour­ing the 25,000 Cli­co pol­i­cy­hold­ers and hold­ers of the Cli­co mu­tu­al funds, who are owed the sum of $12 bil­lion, and ig­nor­ing the plight of the pub­lic ser­vants and the con­trac­tors. She may ar­gue that the fi­nan­cial re­sources of Trinidad and To­ba­go, now and in the fore­see­able fu­ture, do not al­low the State to come to an ac­cept­able ne­go­ti­at­ed agree­ment with pub­lic ser­vants, pay off the Cli­co pol­i­cy­hold­ers and make good on the Gov­ern­ment's debt to con­trac­tors (both lo­cal and for­eign).

She may de­cide that the State has al­ready con­tributed $5 bil­lion in bail­ing out Cli­co–$3.1 bil­lion in bonds placed on the in­sur­er's bal­ance sheet in Feb­ru­ary 2010, and $1.9 bil­lion most­ly in cash that the com­pa­ny re­ceived in March 2009, and that the Gov­ern­ment has bud­get­ed to spend a fur­ther $3.3 bil­lion on this is­sue in the 2011 bud­get. That $3.3 bil­lion com­pris­es $1.5 bil­lion that the Dook­er­an Plan pro­posed should be used to pay all pol­i­cy­hold­ers the first $75,000 of their short-term in­vest­ment prod­ucts (most­ly the Ex­ec­u­tive Flex­i­ble Pre­mi­um An­nu­ity) and the $1.8 bil­lion that the Dook­er­an Plan pro­posed should go in­to a sink­ing fund to pay the Cli­co pol­i­cy­hold­ers the bul­let pay­ment on the ze­ro-coupon bond af­ter 20 years. Now, in the 2011 bud­get speech, the Min­is­ter of Fi­nance made the fol­low­ing state­ment: "As of June 2010, Cli­co and British Amer­i­can com­bined to­tal li­a­bil­i­ties were ap­prox­i­mate­ly $23.8 bil­lion but to­tal as­sets were $16.6 bil­lion." (The draft Cred­it Su­isse/Mil­li­man re­port of March 1, 2010, which was first and ex­clu­sive­ly re­port­ed in this space a cou­ple weeks ago, states that Cli­co's to­tal as­sets are worth an es­ti­mat­ed $20.4 bil­lion and its li­a­bil­i­ties are $22.7 bil­lion–see ta­ble).

Mr Dook­er­an said the li­a­bil­i­ties com­prised $6 bil­lion owed to hold­ers of 225,000 Cli­co pen­sions, tra­di­tion­al life in­sur­ance and health in­sur­ance and $12 bil­lion owed to hold­ers of short-term in­sur­ance con­tracts (such as the EF­PA and mu­tu­al funds). It seems to me, from what the Min­is­ter of Fi­nance ad­vanced in his bud­get speech, that Cli­co has $18 bil­lion in in­sur­ance li­a­bil­i­ties and $16.6 bil­lion in as­sets. If one as­sumed that the Gov­ern­ment would want to re­serve the $6 bil­lion owed to the hold­ers of long-term in­sur­ance con­tracts, that still leaves, in the­o­ry, $10.6 bil­lion with which the hold­ers of short­term poli­cies and mu­tu­al funds can be paid. By my reck­on­ing, if the Fi­nance Min­is­ter were cor­rect, the hold­ers of the short-term poli­cies would be able to re­ceive 88.3 per cent of their in­vest­ments ($10.6 bil­lion di­vid­ed by $12 bil­lion) based on a man­aged liq­ui­da­tion, but not a fire sale, of Cli­co's as­sets. If the $3.3 bil­lion that the Gov­ern­ment has com­mit­ted to mak­ing avail­able to the Cli­co pol­i­cy­hold­ers in 2011 is added to the $10.6 bil­lion in Cli­co as­sets–ar­rived at af­ter back­ing out the amount due to the hold­ers of long-term Cli­co poli­cies–the re­sult­ing $13.9 bil­lion would be more than enough to pay off the ALL Cli­co pol­i­cy­hold­ers.

What's more, the Cred­it Su­isse/Mil­li­man re­port states that some $4.3 bil­lion in short-term Cli­co con­tracts ma­ture in 2010, $4.8 bil­lion next year, $1.2 bil­lion in 2012 and $1.2 bil­lion in 2013. This means that Cli­co will have to gen­er­ate $9 bil­lion in cash be­tween now and the end of 2011. If there is a way of treat­ing with the Cli­co pol­i­cy­hold­ers, what about its oth­er cred­i­tors. Ac­cord­ing to the Cred­it Su­isse/Mil­li­man re­port, Cli­co's main non-pol­i­cy­hold­er or mu­tu­al fund li­a­bil­i­ty is bor­row­ings of $1.6 bil­lion–much of which fi­nan­cial in­sti­tu­tions would have writ­ten down if not off their books. Of course, un­lock­ing Cli­co's $16.6 bil­lion in as­sets would mean liq­ui­dat­ing Cli­co. The ques­tion then be­comes what would Cli­co be worth if the com­pa­ny's as­sets and eq­ui­ty were sold off in a man­aged and pro­grammed way?

First of all, the bud­get speech refers to the re­struc­tur­ing and merg­ing of the tra­di­tion­al, long-term in­sur­ance busi­ness­es of Cli­co and British Amer­i­can and prepar­ing this merged en­ti­ty for di­vest­ment. One as­sumes, there­fore, that if the State were to hive off Cli­co's tra­di­tion­al port­fo­lio by match­ing its $6 bil­lion in pol­i­cy­hold­er li­a­bil­i­ties with $6 bil­lion in as­sets that the re­sult­ing en­ti­ty would be worth at least $6 bil­lion or some mul­ti­ple of $6 bil­lion, es­pe­cial­ly if the $2.2 bil­lion in Cli­co bonds left over from the $3.1 bil­lion were made avail­able to the pur­chas­er. That would ac­count for the tra­di­tion­al pol­i­cy­hold­ers who would as a re­sult be re­quired to pay their pre­mi­ums to a new com­pa­ny such as Guardian Hold­ings Ltd, Sagi­cor or Tatil, each of which may be in­ter­est­ed in ac­quir­ing the port­fo­lio. It's wor­thy of not­ing that the Cred­it Su­isse/Mil­li­man re­port states that Cli­co gen­er­ates net pre­mi­ums of over $1 bil­lion a year and that 76 per cent of that comes from group pen­sions.

Sec­ond­ly, the CS/M re­port rec­om­mends that Cli­co "should con­sid­er the mag­neti­sa­tion of its en­tire stake in Re­pub­lic Bank via a strate­gic sale or IPO" and that a a strate­gic sale "is the most like­ly al­ter­na­tive to achieve pre­mi­um val­u­a­tion in the short-or-medi­um term" and that the Gov­ern­ment can max­i­mize the pre­mi­um on the sale by en­sur­ing that the buy­er ac­quires con­trol of the bank by ag­gre­gat­ing Cli­co, CL Fi­nan­cial and Gov­ern­ment en­ti­ties' hold­ings. Based on a price of $73.49 a share, the re­port es­ti­mates that Cli­co's 32.3 per cent stake in Re­pub­lic Bank is worth $3.8 bil­lion but, one as­sumes, that if the State were to arrange to sell con­trol of Re­pub­lic Bank that the val­ue of Cli­co's stake would in­crease sub­stan­tial­ly. The re­port al­so rec­om­mends that the Gov­ern­ment should ac­quire Cli­co's 56.5 per cent stake in Methanol Hold­ings (Trinidad) Ltd,which was es­ti­mat­ed to be worth $4.3 bil­lion as of No­vem­ber 2009, by a trans­fer from the Her­itage and Sta­bil­i­sa­tion Fund.

If the Gov­ern­ment does not have the ap­petite to buy Methanol Hold­ings, I am sure that the Ger­man mi­nor­i­ty share­hold­ers would

be pre­pared to pay a very sig­nif­i­cant pre­mi­um to gain con­trol of this com­plex of methanol, am­mo­nia, urea and melamine plants lo­cat­ed in Point Lisas. Some would ar­gue that MHTL has be­come an ex­treme­ly valu­able as­set–made much more so by the fact that it be­comes es­sen­tial­ly debt free in 2012 and the com­mis­sion­ing of the AUM com­plex of sev­en petro­chem­i­cal plants. The op­ti­mum choice, of course, would be to di­vest MHTL on the lo­cal stock mar­ket. The sale of Cli­co's Re­pub­lic Bank and Methanol Hold­ings stakes would raise $8.1 bil­lion in cash but would be op­posed by many of the Cli­co pol­i­cy­hold­ers who have this sopho­moric no­tion that they can get the mon­ey owed to them AND the in­sur­ance com­pa­ny can con­tin­ue in busi­ness. This may prove to be un­re­al­is­tic. It may end up be­ing ei­ther, or. Take it or leave it.

�2 Cor­rec­tion from last week's col­umn: Buck­ley's is the cough med­i­cine that tastes aw­ful but works, not Ro­bi­tussin. Thanks to AA and RR for point­ing that out.