Banking on FINSAC - Alex
Source: Financial Gleaner, September 15, 2000
It was good to see so many shareholders at the NCB Group informal meeting two weeks ago.
As the Supreme Court has now allowed NCB to put the plan to their near 35,000
shareholders, it's time to focus on the proposed reorganisation of the financial
institutions.
In fact, there'll be two meetings, one for the ordinary, 35,000 investors in the Group and
another for the preference shareholders, which means it will be a very short meeting with
the Financial Sector Adjustment Company (FINSAC) representative as it owns all the Group's
pref shares.
The meetings will take place on Wednesday, November 8 at the National Arena in Kingston,
starting with the ordinary shareholders' meeting at 10 a.m. Perhaps NCB should get the
national football team to play a five-aside game during the half time interval. They may
well need a referee, if the last meeting is anything to go by.
While a lot was said at the last meeting, several of the central issues seemed to have
been lost among the humorous exchanges.
The first and most obvious point is the fact that this deal should have been done in 1997
and none of this would be necessary. I think it's why, many local investors are asking
what have they missed about this deal. I got the sense from the previous meeting that
people are wondering if they are being ripped off somehow, and they just can't see where
or explain exactly why.
It is no surprise that the move has elicited suspicion. However, the plain fact of the matter is that FINSAC has so far pumped in $48 billion and wants to exact, as much as it can, as quickly as possible. In order to do that, FINSAC needs to sell its stake, because even if NCB pays dividends soon, they won't match the kind of return a sale would bring.
If truth be told, whatever deal the shareholders get is better than the one they were facing back in 1997, when FINSAC first stepped in. As the chairman Oliver Clarke put it, the bank would have failed and their investment would have been worth nothing.
In addition, for those of you saying, well you would say that as Mr. Clarke is also my ultimate boss at The Gleaner, you should know me better by now. If I can write about the Prime Minister's deals, Butch Stewart's deals, surely I can pen a little something on NCB. Need I not remind that I told you The Gleaner was one of the best stocks in town earlier this year. You'd have made a pretty penny if you'd have backed my hunch.
I don't blame the 35,000 investors for trying to maximise returns, even if memory loss occurred somewhere over the past three years. Moreover, if FINSAC messed up, why should you pay for it?
The problem for FINSAC is that although it has effective control of 67 per cent of the NCB Group, it only actually currently controls 45 per cent of the Group shares. It also has a 40 per cent direct stake in the bank and $5.3 billion in preference shares, which means that the bulk of any profits, if paid out would go to FINSAC.
FINSAC is paying $5.3 billion in preference shares for the 55 per cent it does not own of the mediocre real estate the Group had struggled to sell and getting an extra 36 per cent in the Bank. This will give it a 76 per cent stake in Bank, which will be listed in its own right on the Jamaica Stock Exchange.
FINSAC and its boss Patrick Hylton appears to be paying over the odds again, just not in cash.
The closer I look at those pref shares and Bank stake, the more I realise the need for shareholders to get rid of them. The pref shares call for a fund, that is designed to set aside a sum from profits each year until it is time to redeem the prefs. If the Bank has met capital adequacy requirements and paid into the redemption fund, then shareholders get their slice. And don't forget, that's after FINSAC has creamed 40 per cent of the main subsidiaries' earnings, it gets another 45 per cent of anything that is left at the Group level.
If NCB does tremendously well and earns enough to pay out and redeem FINSAC's prefs over the next 5 years, it would have to post annual net profits of $1.2 billion over that time. That could indeed be possible but what will happen to the share price during that time. Surely it would not rise.
At first I was sceptical of this scheme. However, the closer I look, the more obvious it gets. If the company doesn't pay out dividends to anyone but FINSAC and investors see that it has no way to pay out profits after FINSAC has taken its chunks, what will drive the shares upwards? If the company performs poorly, which I think is all but impossible with its FINSAC paper set to pay annual interest of $10 billion plus, it will need another bailout anyway and the shares certainly won't appreciate in value.
With $48 billion of FINSAC paper set to be switched to Local Registered Stock (LRS) and interest paid in cash rather than more FINSAC paper, the sooner the company's profits start being paid to shareholders the better. The promise of a dividend if the company does well next year is no doubt a carrot, but one that should not be scoffed at because it is a prelude of things to come.
There is also the question of what will happen if the bank is taken over. Investors are likely to get a huge windfall if the bank is sold.
Its not quite clear what will happen once FINSAC strikes a deal, but the new bidder should be forced to offer the same price to everyone under JSE take-over rules. No exceptions this time, unlike the Carib Cement deal.
As a result of the heavy premium FINSAC has paid, the net asset value of the Bank is far larger than the value of the Group. This immediately unlocks a potential bonanza for investors, whose stock was languishing at $1.45 a year ago.
How can FINSAC justify selling its stake in the company at lower than the $4.01 net asset value per share, or worth, or market price. As banks such as BNS and CIBC are trading at over two times net asset value, they will not do that. And, with $48 billion of LRS on the books giving a guaranteed earnings stream, NCB's cleaned out loan portfolio and 450,000 plus customers, I think a bidder will emerge pretty quickly.
More to the point, the share is likely to be delisted and relisted at around the same price. There will be a short break between the delisting of the Group and the relisting of the bank.
When the shares start trading again, there is clearly upside in the price.
With a net asset value of $4 per share plus, there is likely to be some buyers when the deal is consummated and prifts begin to flow to the bottom line.
My guess is that it will list the Bank and before long the shares will be trading at $5.00 and $6.00, this giving some premium on net assets, but much less than the market valuation of other rivals.
Therefore, for a share worth less than three dollars, you could conceivably end up with one twice its worth, which should compensate you for most, if not all, of the stock you gave up when FINSAC saved the Group in the first place.
Some shrewd investors doubt that the stock price will hold up but with a price/earnings ratio of around 11 at $3.00 per share. This does appear fully valued but, within a year the profit stream of the Bank will jump sharply and eat into that. If those same investors are pointing to the profit potential of the Group then we can expect an earnings per share of around 55 cents to emerge pretty quickly, which would be a P/E of 5.5.
As the stock has paid no dividends for five years, healthy, sustainable profits should have a positive impact on the stock and compensate in part for the dilution in shareholding following this latest FINSAC deal.
Given all that I have said, why have investors not moved more aggressively in the market to buy stock at below $3.00 in anticipation of a windfall?
Could it be that they know the market is imperfect and that most of what I have said is just theory? That investors will not stomach a premium over net assets and the stock will plunge.
Perhaps, it is that we have all become so shell-shocked, we do not realise the value of FINSAC paper these days. I have been amongst its harshest critics but Finance Minister Dr. Omar Davies's promise to provide legitimate Government backed paper after April 2001, is literally worth its weight in gold. It will transform the quality of the Bank's assets enormously.
When that FINSAC paper switches to LRS or some other form of Government guaranteed debt being paid in cash, the Bank's asset quality will be much enhanced. And as long as its overheads don't outstrip interest on the bonds it will make substantial profits.
For those of you that still say, what else could I say, I have but one reminder, that
not even I can buck the market.