CL Financial Group: Meltdown and bailout

As promised last week, this week I begin a review of the CL Financial Group meltdown. I shall start with a broad description of the company structure and main operations just prior to the meltdown.

Structure and operations

The CL Financial Group is a holding company headquartered in Port of Spain. It had more than 70 subsidiaries and affiliated companies at the time of its meltdown. The group operates in over 32 countries. The principal regions are the Caribbean, Central and Latin America, North America, Europe and the Middle East (mainly Oman, Saudi Arabia and Qatar). In the Middle East, its main focus is on methanol plants, and plans were afoot at the time for more of these to be established in that region.

The assets of the CL Financial Group have been estimated at about US$15B. These include a wide range of operations in finance (mainly banking, brokerage, and insurance); energy and related products; real estate in several countries including the USA and Caribbean; manufacturing (mainly beverages); forestry and agriculture; and, a variety of services. Its largest subsidiary operation in Caricom is in Barbados (estimated at US$500M).

Readers would know by now of the fate of its CLICO financial operations in Caricom (The Bahamas, Belize, Guyana, Suriname and of course Trinidad and Tobago). These companies are all in dire straights. The Belize and Guyana operations are under judicial management. The one in The Bahamas is being liquidated. In Trinidad and Tobago the group is being administered through a Memorandum of Understanding (MOU) between the group and the Government of Trinidad and Tobago and its Central Bank.

The bailout/rescue package

Two months ago (January 30) several measures were announced at a joint press conference held by the Minister of Finance and Governor of the Central Bank of Trinidad and Tobago, along with the Chairman of the CL Financial Group − Lawrence Duprey. That press conference announced measures to govern the future operations of the CL Financial Group, in exchange for the bailout/rescue package that was to be provided.

Five key measures formed the basis of the MOU. Together, these were aimed at protecting the many depositors, policy-holders and creditors of the group and its subsidiaries and affiliates.

The first measure was the divestment to the Trinidad and Tobago Government of the CL Financial Group’s shareholdings in Republic Bank, Caribbean Money Market Brokers and Methanol Holdings (Trinidad).

Second, in the event this was not enough to secure the revenue expended in the government’s bailout of the group, the divestment of such other additional assets as was necessary to ensure this would take place.

Third, in light of the above two measures, the government committed to provide whatever additional bailout funds were needed to attain the objective of returning the group to a healthy state.

Fourth, the assets of CLICO Investment Bank which were held by the CL Financial Group, were to be transferred unencumbered to the state-owned First Citizens Bank of Trinidad and Tobago. The CLICO Investment Bank would be wound up and any additional assets would be assumed by the Central Bank of Trinidad and Tobago. Its banking licence was also revoked.

Finally, the government would appoint its own board of directors and management team to operate the assets it took over.

Different explanations

At the time of the press conference held on January 30, the Chairman of the CL Financial Group had offered four explanations as being responsible for the group’s difficulties. One was the global credit crunch which had created a freeze on credit made available to it by German bankers. The second was the fall in energy and energy related prices. Third, was the fall in real estate prices. And finally, the Trinidad and Tobago parliament had recently legislated restrictions on inter-party transactions which adversely affected the group.

At the same press conference, the Governor of the Central Bank was at pains to point out that it was an unusually large number of depositors in the CL Financial Group’s Trinidad and Tobago operations who had cashed in their holdings, which had precipitated the collapse of the company.

Among those seeking to withdraw was the state-owned National Gas Company. It sought to withdraw US$250M of its deposits and was only able to obtain US$14M. As the saying goes, this turned out to be perhaps the proverbial straw that broke the camel’s back.

More surprises

At a subsequent press conference held in mid-February, the Governor of the Central Bank announced that the new board, management team, and CEO had been appointed as agreed to in the MOU. Regrettably, however, he declared that it appears as if “the financial position of CLICO was much worse than he had envisaged.”

More pertinently, the CEO appointed by the Central Bank had on a separate occasion reported that he was failing to locate billions of dollars of assets held by affiliates of the group.

Cash cow

The Central Bank Governor further claimed that CLICO was a major source of cash for financing investments held by, and in the name of, the group’s affiliated and subsidiary firms. CLICO, he said, has ended up as “guarantor for many of the group’s assets most of which are heavily pledged.” These pledges clearly limit the proceeds that can be realised through sale of the group’s assets.

At the end of January 2009 CLICO Trinidad, had policy surrender requests on maturing obligations of TT$650M. It also had a “sizeable bank overdraft” and its bank balance was only TT$15M!

As we shall see in the coming weeks the explanations offered by the group’s Chairman Lawrence Duprey for its troubles were, to say the least, odd. Before the group’s troubles started he had revelled in its strength and boasted of the exemplary growth performance and dynamism of the group as captured in its related-parties business model. Furthermore, the Chairman also lauded the outstanding opportunities for the CL Group created by the very shocks and challenges occasioned by the global financial crisis, credit crunch and economic recessions, which he was then blaming.

Next week I shall explore this and other contradictions.