By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Minister of Finance yesterday said it was “a safe bet” that Bank of the Bahamas (BOB) will drop its legal battle with the Central Bank, after it moved to comply with a key regulatory demand.

K P Turnquest said BOB’s move to bow to the Central Bank demand that a $10 million bond, issued to the Government, be converted into equity capital was part of a wider strategy to end the stand-off between state-owned bank and regulator.

The troubled BISX-listed institution, in a release to the capital markets late Friday, confirmed it will convert its contingent convertible bonds - all of which were acquired by the former Christie administration - into BOB ordinary shares.

The Public Treasury, as BOB’s majority shareholder, will be issued 6,756,756 shares in exchange for its bonds, pricing them at Friday’s market closing price of $1.48 per share.

The transaction, though, will further dilute BOB’s long-suffering minority shareholders, who will see their collective equity stake in the bank fall from around 21 per cent to around 17.42 per cent.

BOB’s notice strips out the non-voting ordinary shares held by the National Insurance Board (NIB) and other government entities, which also face dilution - from 28.42 per cent to 23.98 per cent.

In contrast, the “majority shareholder” or the Public Treasury will see its majority holding increase from 50.93 per cent to 58.6 per cent, with the number of outstanding and issued BOB ordinary shares jumping from 36,437,759 to 43,194,515.

Mr Turnquest, asked whether the bond conversion was a first step in bringing BOB into full compliance with the Central Bank’s demands, said: “The simple answer to your question is: Yes.”

And, pressed as to whether BOB’s legal action against the Central Bank would be discontinued, the Minister replied: “I would say that’s a safe bet.”

The bond conversion addresses one of the four issues that prompted BOB to seek Supreme Court protection from the Central Bank’s regulatory demands prior to the May 10 general election.

Tribune Business exclusively revealed in early May how BOB was seeking a court-imposed ‘stay’ of the Central Bank’s impositions, which included an “immediate” $50 million increase in loan loss provisions and legal action against “politically exposed” bad borrowers.

Next on the regulator’s list was the requirement for BOB to “convert the first $10 million tranche of contingent convertible bonds to common equity Tier 1 capital, and all future capital injections must be paid in cash and constitute common equity Tier 1 capital”.

The $10 million tranche referred to in Friday’s notice was intended to be the first of three equal tranches, set to ultimately total $30 million, that were to be 100 per cent financed by the Christie administration in a bid to shore up the stricken bank’s regulatory capital. However, only one was placed - possibly because of regulatory opposition.

BOB had previously asked the Central Bank to “reconsider” its demands over the contingent convertible bonds, with the regulator ultimately fining the troubled bank $100,000 for its non-compliance and regulatory breaches prior to it initiating legal action.

The BISX-listed institution’s ‘u-turn’ on the issue, following the general election and appointment of respected financial services professionals, Wayne Aranha and Anthony Allen, as its chairman and deputy chairmen, signals the end of a troubling incident that threatened to undermine financial services industry regulation.

Abhilash Bhachech, the Central Bank’s outgoing inspector of banks and trust companies, expressed concern in legal papers that BOB’s application for a ‘stay’ of the regulator’s demands could undermine its ability to properly supervise the troubled BISX-listed institution.

He warned that imposing a ‘hold’ or injunction on the Central Bank could also “further erode depositor and public confidence” in BOB, as well as undermine “the retail banking system of the Bahamas” given the bank’s systemic importance.

Many observers interpreted BOB’s legal action as a sign of the Christie administration’s inability, as the bank’s majority shareholder, to inject the necessary capital given the Public Treasury’s payments backlog and cash flow woes.

The matter effectively placed the Government and Central Bank at loggerheads, but the new Minnis administration appears to have moved quickly to end the impasse.

“The Government of the Bahamas is committed to good governance with respect to Bank of the Bahamas,” Mr Turnquest said yesterday. “We’ve put in place a very competent Board that we have the utmost faith in.”

He indicated that the $10 million bond ‘conversion’ was just the first step in BOB complying with the Central Bank’s wishes, adding: “There are going to be some capital requirements to which we are committed, and we do intend to pursue the loan portfolio and reorganise credit policies such that we return the bank to profitability as soon as possible.”

Shareholders yesterday gave a cautious welcome to the $10 million bond ‘conversion’ despite their dilution, saying it represented “a step in the right direction” towards making BOB compliant with key regulations.

“If it can help restore the bank to a position where it is run according to proper boundaries, maybe that’s a good place,” Mike Lightbourn, Coldwell Banker Lightbourn Realty’s president, told Tribune Business.

“If there’s anything they can do that might return it to some state of normalcy, and I know it will take a long time, that’s an improvement. I think it’s a step in the right direction, but there’s such a long way to go. There’s light at the end of the tunnel, and I don’t see a problem with that.”

Mr Lightbourn reiterated that most minority BOB shareholders had written-off their investments, and added: “I think most of us figure that we’ll never recover anything of our investment, although there’s some hope now.

“I don’t think any of us have any hope that something miraculous is going to happen.”

Dr Johnathan Rodgers, the well-known ‘eye doctor’, praised the Central Bank for standing firm and enforcing its regulatory requirements despite pressure from BOB and the former Christie administration.

He questioned, though, whether BOB’s crisis would have become so deep-rooted had the Central Bank taken a much harder line under former governors.

“If there are rules and regulations in the financial services sector, all parties have to comply with the rules and regulations,” Dr Rodgers told Tribune Business. “There’s no way around it. You have to comply.

“I think it’s good that the Central Bank is enforcing the rules and regulations. Had the rules and regulations been enforced by the Central Bank in the past, BOB maybe wouldn’t be in the position it is today.”