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.