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CAP indebtedness raises solvency concerns

Published:Wednesday | December 13, 2017 | 12:00 AMMcPherse Thompson
The Jamalco plant in Clarendon in which Clarendon Alumina Production Limited holds a 45 per cent stake.

In a five-year review of Clarendon Alumina Production, CAP, the Auditor General raised concerns about the state company's solvency, saying that while there was marginal improvement to two per cent, it was well below the threshold of 20 per cent, above which entities are considered to be financially sound.

Further, CAP consistently recorded a negative capital turnover, which was linked to its inability to generate profits or a positive return on its investment.

"Accordingly, CAP will require greater operational efficiency by Jamalco in order to improve the financial position on a sustainable basis," said the report by Auditor General Pamela Monroe Ellis that spanned fiscal years 2013-2017.

CAP currently executes a joint venture between Jamalco and General Alumina Jamaica, a company owned by the Noble Group. CAP holds 45 per cent interest as co-tenants in the assets of Jamalco.

In the report tabled in the Senate two weeks ago, because the House of Representatives had already been adjourned for the Christmas recess, Monroe Ellis said the worsening position was underpinned by a combination of rising liabilities and a shrinking asset base.

In addition to the solvency ratio being below the threshold, the interest coverage ratio of 0.45 times for fiscal year 2016-17 was substantially lower than the threshold of 1.5 times, implying that both ratios failed to meet the respective benchmarks for financial soundness, she said.

In the report, prepared to assist Parliament and the Public Accounts Committee in their review of the financial performance of public bodies, the auditor general found that CAP's net losses narrowed substantially at year ending March 2017 to US$15.2 million, from US$95.2 million in fiscal 2014.

Net losses declined in a context where total expenses fell at a faster rate than total income over the five-year review period.

However, CAP's net profit margin remained negative throughout the period, even as it contracted moving from -0.46 per cent in 2013 to - 0.10 per cent in the current period.




"The decline in the ratio was, however, not reflective of an improvement in operational efficiency attributable to CAP's efforts, but rather the impact of external factors on net losses engendered by lower fuel prices," Monroe Ellis said.

CAP's total debt amounted to US$250.5 million at the end of fiscal year 2016-17, reflecting a 55 per cent decline relative to 2012-13, but a 33.8 per cent increase over the stock at the end of 2013-14.

The decline in liabilities mainly reflected reductions in outstanding loans by US$253.7 million through government's acquisition of CAP's debt in 2013, which engendered a fall in the stock to its lowest level of US$187.1 million in 2013-14.

At the same time, the annual drawdown on the US$120-million loan facility and capitalisation of interest under the joint-venture agreement reflected in incremental increases in the debt stock between fiscal years 2014 and 2017.

Further, in a context where CAP's liquidity position deteriorated as the entity demanded more cash to finance its operations than was being generated, it borrowed US$27 million from the government in fiscal year 2017 to settle outstanding arrears to the joint-venture partner.

The value of CAP's operations and its net worth were positive in fiscal year 2013-14, but returned to a negative position in fiscal year 2016-17, eroding the benefits brought on by the government's acquisition of its debt and hence thwarted its divestment efforts, the auditor general said.

The 2016-17 debt ratio also suggested a significant imbalance in CAP's capital structure as it financed its entire asset base from external sources, Monroe Ellis added.

That imbalance was also reflected in the debt-to-equity ratio which returned to a negative position in fiscal year 2016-17 similar to the position which existed before the government's debt acquisition.

Monroe Ellis said the high use of external financing could constrain CAP's ability to borrow funds in the capital markets if required, especially given the current non-provision of loan guarantees by the government.

Furthermore, the associated high and increasing debt-servicing level poses a financial risk and increases the potential for insolvency, particularly if juxtaposed against the inability to generate sufficient cash flow from operations and existing cash reserves, the report said.

The entity's management of receivables deteriorated in a context of lower collections from Noble from deliveries made under the sales agreement although its management of payables improved, an indication that it was paying off its short-term debt at a faster pace.