By Dennise Williams, Staff Reporter
Lee-Chin
GOVERNMENTS ARE no different from individuals in their behaviour when a huge debt burden hangs over their heads. One of the best tactics is to put the squeeze on those who owes you money.
And so, the Ministry of Finance has reportedly decided to tap Michael Lee-Chin on the shoulder and encourage him to pay off the debt owed to the Government for the sale of the National Commercial Bank (NCB). And this makes sense, because it can pay off to go after the man with deep pockets. Remember that when he purchased NCB in March 2002, for $6 billion, his company, AIC Management paid as a deposit $2.65 billion or $2.65 per share.
On March 25, NCB shares traded for $20.00. That is over 1000 per cent on his initial investment. In the reported deal made in 2002, Mr. Lee-Chin had nine years to pay off a balance of $3.38 at interest rates tied to the treasury bill rate. Now, Mr. Lee-Chin is a billionaire who reportedly has increased in this billionaire status due to his investments in Jamaica. And as a billionaire, Mr. Lee-Chin can just write the Government a cheque for the outstanding balance. But in several published reports, Mr. Lee-Chin has emphatically stated that you get rich by using other people's money.
OPTIONS
And so, with the help of financial industry analysts, the Financial Gleaner decided to take a look at some of the options that Mr. Lee-Chin has in order to pay off the Government. Bear in mind those experts who spoke to the Financial Gleaner fully expects Mr. Lee-Chin to negotiate a reduction on the debt outstanding as he will have to get something in return for giving up the time component of the loan.
USE PROFITS FROM NCB
TO PAY OFF DEBT
In 2003, NCB profits of $2.1 billion and retained earnings of $2.6 billion put them in a position where they could well afford to pay off the debt. However, it would put a strain on the company's cash flow and would have to be approved by the shareholders. Now as Mr. Lee-Chin is the majority shareholder, that should not be a problem, but he does have a board to report to.
NCB COULD BORROW THE MONEY
TO PAY OFF THE DEBT
This option can take two tracks. The first option, and the one financial analysts like, is for AIC to loan NCB the funds. This is attractive because the interest rates would be in the 5 to 6 per cent region, as the funds would originate from Canada. This would be a good return for AIC and a lower cost source of debt funds for NCB. Alternatively, NCB could approach the local market and offer commercial paper. Now, financial institutions that take up the paper would then resell to their clients. However, this has two possible hiccups.
One, the interest rate that NCB would have to pay would be in the region of 21.5 per cent. Secondly, if interest rates go up significantly, as they did last year, holders of the commercial paper would make the switch to higher yielding investments, leaving the financial institutions holding 'cheap' commercial paper in a high interest rate environment.
Of course, we can't leave out the shareholders who might not take kindly to the additional debt burden from any source. Debt damages the balance sheet as it cuts the asset value of the firm and this will serve to depress share prices.
NCB COULD ISSUE MORE SHARES
TO THE LOCAL MARKET.
As the majority shareholder, Mr. Lee-Chin could conceivably reduce his equity ownership to 51 per cent. The plus side to this would be to create a greater buzz for the local equities market and provide NCB with conceivably low cost funds. The risk is that $3 billion worth of NCB funds up for offer could depress the share price, as investors would see a buying opportunity. Said one analyst, "I would buy as many NCB shares for $12 as I know that the bank will be so well managed that the share price will go right up to even $22 per share."
BUY MORE SHARES FROM
THE GOVERNMENT
If the Government owns any additional NCB shares, AIC could then buy those shares from the Government plus pay a part of the debt down instead of paying off the debt in full one time.
NCB COULD FLOAT A BOND.
Now this option is the most complicated. In fact, this option is the most interest rate sensitive as bonds are generally more long term in nature. One fact of the bond market is that when interest rates go up, bond prices go down. Echoes of ICD's bond came to mind as the Financial Gleaner spoke to industry experts. When this bond was floated, after a few years, interest rates went up and when bond holders wanted to sell, they could only get 50 cents for every dollar invested. It was a public relations nightmare for ICD.
Analysts caution that in the Jamaican marketplace where interest rates are known to be cyclical, NCB's image and share price could get hurt if the bond price goes south. However, if NCB does go this route, they have a few options. For bonds issued in Jamaican currency, the interest rate offered must be better than the market rates currently available, which is about 16 per cent. A US dollar or Canadian dollar bond would be the most attractive to investors say analysts. However, these bonds are taxable and so a yield of 10.5 per cent would be needed."
Basically, whatever option Mr. Lee-Chin pursues, it is believed by industry players that it would give another option to investors and generate excitement in the financial marketplace. However, we were informed that, "The only fly in the ointment is if there is the perception that interest rates are going up."
