BOB to avoid default with $6.4m pay-out


Tribune Business Editor

Bank of the Bahamas (BOB) is making a $6.4 million pay-out to avoid defaulting on its preference shares, resulting in a $3 million "capital shock".

Wayne Aranha, the struggling BISX-listed bank's chairman, told last week's annual general meeting (AGM) that BOB needed to redeem its remaining Series D and E preference shares to avoid a default.

He explained that investors holding these preference shares could 'call' them in - demand full repayment - if BOB missed three consecutive interest payments due to them.

Two such half-yearly payments have already been missed and, with the third consecutive dividend due this month, Mr Aranha said BOB's Board had decided to fully redeem the outstanding preference shares to avoid a default. "The terms and conditions governing the issues [preference shares] provide that the bank would be in default if, inter alia, it were delinquent on the payment of three consecutive dividend payments," Mr Aranha said. "Unless the dividends are paid in January 2018, the next scheduled payment date, the 'Callable Shares' would be subject to call.

"The Board determined that it is in the best interest of the bank to avoid a call by the holders of the 'Callable Shares', and that they should be redeemed. Having received the approval of the Central Bank, waiver of notice by the majority of the holders of the 'Callable Shares', and subject to the approval of the Securities Commission of the Bahamas, the bank intends to repay the principal sum due on them in January 2018."

Explaining the consequences of the accelerated redemption, Mr Aranha said BOB would need to find an extra $3 million to add to the $3.4 million it has been allocating annually to redeem the Series D and E preference shares.

"Therefore, the full redemption of the 'Callable Shares' will result in a $3 million shock in capital," he added. "The $6.4 million redemption would result in a reduction in the total capital ratio of approximately 2 percentage points (from 42 per cent to 40 per cent) at September 2017, and an approximate reduction of the LAR [liquidity at risk] from 175 per cent to 169 per cent."

The $6.4 million preference share redemption is unlikely to strain BOB's solvency or balance sheet, especially since the second Bahamas Resolve 'bail-out' brought all its regulatory capital ratios back into line with the Central Bank of the Bahamas' requirements.

However, Tribune Business sources yesterday disclosed that not all preference shareholders were happy with the payout's terms, given that they will not receive the accrued interest from the two previously missed payments.

BOB's position is understood to be that it cannot pay the outstanding interest dividends on the preference shares due to its recent heavy losses, and lack of retained earnings.

One source, speaking on condition of anonymity, told Tribune Business: "They've offered to redeem the preference shares, and shareholders waive the 90-day notice period, but I don't know how they can pay the principal and not the outstanding interest.

"I can't imagine it will make a huge difference to the bank, and the Central Bank should be willing to accommodate them paying interest on the outstanding shares if they're allowing them to repay the principal."

However, they acknowledged of BOB's position: "It will be nice to have that issue resolved and put behind the bank. Having a potential default hanging over your head is never very comfortable."

Other preference shareholders and market analysts were also more sanguine about BOB not paying the outstanding preference share interest. One source, confirming that the $6.4 million redemption was due to be paid by January 10, said: "From my perspective the bank is in trouble, so people should be happy to get their principal back."

Another, also speaking on condition of anonymity, added: "We're quite happy with that. While it's not a perfect scenario, I think they're [BOB] working out some issues."

Mr Aranha said BOB's Board had "deferred" asking the Central Bank to change its position that the Government "cease payment of dividends" on the bank's preference shares, adding that the directors were awaiting extra information and advice.

"The bank has not generated profits from which dividends can be paid," the BOB chairman said. "However, it is conceivable that the Government and the bank would come to the view that the restoration of the bank's reputation and creditworthiness warrants Government paying the dividend as it did in the past.

"In such event, it would be appropriate to apply to the Central Bank for reconsideration of its recommendation. Meanwhile, the status quo remains: The preference dividends cannot be paid until the bank returns to profitability, but under the terms of their issue such dividends will rank ahead of the payment of dividends on common shares."

Mr Aranha, meanwhile, informed BOB shareholders that "moderate growth targets" set by the Board were not being met due to commercial banking sector competition and "regulatory restrictions" on its lending.

"The ultimate success of the bank is dependent on healthy growth in revenues; cutting costs alone will not suffice," he warned. "Targets have been set to achieve moderate growth over the next year but, so far, competitive pressures and continued regulatory restrictions on credit extension have contributed to the targets not being achieved."

BOB's financials for the five months to end-November 2018 show the positive impact of the second Bahamas Resolve 'bail-out', with the bank's net income for the period standing at $1.295 million compared to a $6.182 million loss for the year-before.

The near-$7.5 million 'swing' was largely due to the 'toxic' credit removal, with loan loss expenses down by 61.4 per cent at $2.39 million compared to $7.23 million for the same period in fiscal 2017. Balance sheet provisions fell year-over-year from $101.153 million to $60.946 million.

While interest income was down, interest expense was reduced by an even bigger margin, resulting in a $1 million-plus improvement on BOB's net interest income margin. Total gross revenues were up 3.5 per cent at $20.212 million.

BOB's loan portfolio shrunk due to the Bahamas Resolve transaction, but total equity jumped from $97.479 million to $182.628 million due to the resulting 'earnings write back'.

The bank's operational efficiency was improved year-over-year, from 92.15 per cent to 77.11 per cent, while its return on assets and return on equity were both back in positive territory.

BOB has incurred $630,000 in severance costs from laying-off around 30 staff in November, as it closes the Eight Mile Rock and Exuma branches. Mr Aranha said the closures will have "a favourable effect" on staff and operating costs going forward.

He warned, though, that BOB's solvency and regulatory issues had prompted "close supervisory oversight" from the Central Bank, which was likely to result in increased operational and compliance costs for the already-troubled institution.

Mr Aranha said this had "limited" BOB's ability to extend loans to borrowers, and added: "The Board has deployed resources, including by way of external contract, to accelerate the curing of all deficiencies."

The chairman's AGM address again highlighted how BOB's two bail-outs, through the switching of 'toxic' credit to Bahamas Resolve, has resulted in a spectacular transfer of risk/liability from the bank and its shareholders to the Bahamian taxpayer.

Apart from lumbering the Government/taxpayer, through Bahamas Resolve, with the responsibility for collecting on the collateral securing these 'bad loans', the Public Treasury is also 'on the hook' to make interest payments due on the promissory notes injected into BOB's balance sheet to fill the hole created by the transfer.

Bahamas Resolve is supposed to finance these interest payments through the collateral it collects/liquidates, but its former chairman, James Smith, previously warned that the bail-out vehicle has found this process arduous and slow going.

As a result, the Government/taxpayer will likely have to make these interest payments to BOB, as the bail-out's terms enable the bank "to recover outstanding balances" from the Treasury if Bahamas Resolve cannot deliver.

The $166 million promissory note issued by the Government for the last bail-out, in August 2017, carries a 3.5 per cent, semi-annual interest coupon with the first payment due on February 28, 2018.

Tribune Business previously revealed that the Government/Bahamas Resolve paid $167 million for a loan book with just $50 million 'net value' in the latest bail-out. This compared to a $100 million promissory note and $45 million 'net book value', later deemed to be worth half that latter figure, in the first bail-out.

Mr Aranha told the BOB AGM that the Government had made the second $19 million payment towards fully redeeming the first $100 million promissory note, the first $50 million instalment having been received at end-August 2017. Two final payments, worth $19 million and $12 million, are due to be made in February and May 2018.

The BOB chairman said the Board was now focused on "restoring consumer confidence" and "sustainable profitability", acknowledging that its problems "are most acute" on credit portfolio quality.

"The bank is focused on critical areas, including stronger corporate governance structure, improved operational efficiencies, revision of credit policies and procedures, regulatory compliance, cost control and moderate growth," Mr Aranha added.


bogart says...

The previous gpvt 100 million note crustallised for it to be redemed even it was only worth 45 ( also see 22.5m Guardian Bus Fri, Oct 28, 2016 sectB - Resolve loans were only worth $22.5m) million and the second bailout by govt of 166 millipn was only worth 50 million net value. Plus govt bought rights issue for some 40 million noone wanted and while this was gping on share prices fell losing some 160m in value.
Forensoc investigations are needed and people fired because the national cookie jar should not be emptied And pouring money for less value needs to follow business common sense, value for money.
Bank needs to compete under fair and level market conditions when other international banks must follow the rules.
International banks BahamianRegistered must now increase fees to survive the Bahamian govt intervention in unfairly propping up BoB when the govt charges us VAT and props up BOB. Getting goosied by govt and other banks
BoB should have immediately been sold after 166m intervention rather and even now or consolidated with similar Mortgage Corp andDevBank
Investigations are needed and with all of this unbalances in figures and value coming up it is obvious it does not happen by itself and noone dismissed so far.

Posted 5 January 2018, 1:43 p.m. Suggest removal

Well_mudda_take_sic says...

Bottomline: Bahamian taxpayers, the National Insurance Fund and the minority ordinary shareholders of BOB continue to get royally screwed as a result of the Minnis-led FNM government keeping the doors of this failed bank open. The preference shareholders are being bailed-out by Bahamian taxpayers and most Bahamians would be very surprised to learn just who those privileged preference shareholders are!

Posted 5 January 2018, 1:46 p.m. Suggest removal

TheMadHatter says...

The dude says ... "Mr Aranha, meanwhile, informed BOB shareholders that "moderate growth targets" set by the Board were not being met due to commercial banking sector competition and ..."

Mr. Aranha - here is a news flash for ya. YOU HAVE NO COMPETITION. Have you visited other banks in Nassau, Freeport, and Abaco? They have MANY teller stations empty and dozens of people waiting on lines for over an hour for the two (sometimes one) tellers to serve them. God help you if one gats to check with a supervisor.

PUT SOME DAMN TELLERS in your teller stations and run these Canadian banks out of business!!!!!!!!!

Why not? Won't cost much. Tellers only get paid like about three Fox Mints per hour. So that's cheap.

Posted 5 January 2018, 2:06 p.m. Suggest removal

bogart says...

While you and many can see that again it up to the same nomenklatura to authorize.
Plus in addition BoB accepts the web shop funds and the Canadian Banks by policy do not at least in theory anyhow.

Posted 5 January 2018, 2:39 p.m. Suggest removal

tetelestai says...

Wellmuddatakesick: I do not disagree with your logic. My only issue is, if you close the bank, then what do you do with the employees? Given the already lackluster employment numbers, do we really need more unemployed citizens?

Posted 5 January 2018, 3:59 p.m. Suggest removal

John says...

The only way for the Bahamian economy to recover is for the retail sector to recover and banks must start lending again. There is too much money sitting up in bank vaults that need to be circulating through the economy. BUT as more and more persons find jobs over the next few months, consumer confidence has to be restored. Past experience has many Bahamians thinking of banks as big, bad wolves baiting them to make one bad move so they can gobble them up financially. So while many may say yes to high interest consumer loans and credit cards that they can easily dispense of, Bahamians are wary of mortgages and even car loans. They have learned to save and buy Japanese cars for cash. And while some say BoB is a failed bank, it is more a bank that was raped repeatedly by politicians and cronies. The bank was profitable until that burden became too much to bear. And yes, talk is cheap because persons are gobbling up BoB shares as soon as they become available, despite the noise in the market In fact there are no sellers and the buyers list is as long as the sellers list was a few months ago. A BoB recovery will put more pressure on the Canadian banks.

Posted 5 January 2018, 6:02 p.m. Suggest removal

realitycheck242 says...

The WEB shops funds has bin a saviour for the books at BOB. The new boards Policies being implemented with out political inteference will make a the economy turns arounds. Investors who are presently buying BOB shares realize this.

Posted 6 January 2018, 7:31 a.m. Suggest removal

killemwitdakno says...

Capital BOB in the title. What is up lately Tribune?

Posted 6 January 2018, 7:46 a.m. Suggest removal

John says...

As licensed business institutions, the web shops should bring a class action lawsuit against the banks that refuse their money, if only for the hell of it. But why waste precious time that can be spent capturing a vast lucrative market. Apparently some people have no problem supporting crypto currencies that are popping up like gremlins, but they would like to put nails in the coffins of every web shop owner. BTW who won the 1/2 Billion lottery in the US and isn’t there a pending lawsuit?

Posted 6 January 2018, 12:20 p.m. Suggest removal

bogart says...

Tetelestial ..persons are already been laid off by govt ,businesses which are not viable are closed, liquidated, merged, sold, Carls jr, Nassau Shop, Mauras, Ironmongery, Clico, Barclays Bank, Gulf Union Bank,Junkanoo Carnival, Hotel Corporation, former Bahmarownership changing and many others. People get laid off its the way business is run globally.
While we believe in Bahamians we have common sense not to waste money, who doesnt. Last May the majority voters put 29 persons MPs including the former PrimeMinister out of work because they wanted to know where their hard earned VAT money is and wastages in running a 8 billion dollar economy.
Our people are suffering like Grand Bahama, some islands up to this 21 century do not have proper water supply, some have their homes destroyed, some islands infrastructure destroyed. Clearly in the above article who among us would not prefer our VAT 100 million and 166 million money to help our truly suffering brothers and sisters yhan poured into a bank especially needing a public independent investigation. Who are the 13 loan in Resolve?
We operate in a global envoronment and when we invite investors and businesses govt must not intervene to unbalance the market against the investor be they banks, (who charge high fees) or open bids for contracts etc

Posted 6 January 2018, 3:22 p.m. Suggest removal

Log in to comment