The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas was eyeing a Bahamas Resolve-type solution to its ‘bad loan’ woes two years ago, having moved to transfer assets securing $18.6 million worth of troubled credit to an ‘off balance sheet’ vehicle in late 2012.

The December 2012 letter from Central Bank governor Wendy Craigg to the bank’s chairman, Richard Demeritte, reveals that Bank of the Bahamas was in some respects ‘ahead of the game’ in seeking to transfer collateral for problem commercial loans to a special purpose vehicle (SPV).

This is exactly the same strategy that the Government, Central Bank and BISX-listed institution agreed on at end-October, with the transfer of $100 million in ‘bad credit’ to the Bahamas Resolve SPV in a ‘problems loans for bonds’ swap.

However, Mrs Craigg’s letter makes clear that Bank of the Bahamas had also moved too quickly for the regulator’s liking, and that of its examiners, disclosing that it had failed to gain the Centra; Bank’s prior approval as required under existing regulations.

Referring to a November 2012 examination of Bank of the Bahamas, Mrs Craigg wrote: “The examiners also noted that the licensee has taken advanced steps to pursue a strategy of transferring ownership of four real estate properties with outstanding loan balances totalling $18.6 million (which are mortgaged to the licensee as collateral support for three large corporate clients) to a special purpose vehicle (SPV), which is proposed to be beneficially owned by the licensee.

“However, the examiners saw no documented plan which outlined the specific procedures to be followed in the execution of the strategy (including an outline of the process, timelines, accounting framework and pro-forma transactions, the capitalisation and funding of the SPV etc.”

Mrs Craigg then added: “In addition, the establishment of the subsidiary had not been approved by the Central Bank, as required by section 3 (a) of the Banks and Trust Companies (Equity Investments) Regulations 2005.

“Further, the examiners saw no evidence that the strategy (though discussed by the Board) had been approved by the Board, or that a formal independent legal opinion had been obtained prior to the commencement of the initiative.”

Mrs Craigg issued a directive that the $18.6 million asset transfer plan be “suspend immediately”, until the nature of the transactions - and all legal, accounting, asset valuation and recovery processes - had been documented for the Central Bank to review.

Bank of the Bahamas, in its February 28, 2013, response agreed to this, and the provision of a report detailing all these requirements in 30 days.

The Central Bank, replying to the bank, said it had received a report on one of the properties, and would review it and provide feedback.

“We recognise that all documents were signed in December 2012,” the Central Bank said. “We further note that the other two properties have been out on hold.”

It is understood that a legal opinion from one of the Bahamas’ leading commercial law firms, backing the 2012 SPV deal, was obtained by Bank of the Bahamas.

And subsequent events, particularly the structure of the Bahamas Resolve ‘rescue’, could be interpreted in some quarters as vindicating Bank of the Bahamas’ own 2012 SPV plan, given that there are some similarities between the two arrangements.

Mrs Craigg, together with Mr Demeritte and Michael Halkitis, minister of state for finance, all touted the Bahamas Resolve ‘bail out’ plan in their joint statement issued on Tuesday, adding that it had brought Bank of the Bahamas back into compliance with Central Bank-mandated capital ratios.

The final ‘rescue’, though, has involved the Bahamian taxpayer, who is now ‘on the hook’ for the liabilities and risk exposure associated with collecting on the $100 million of ‘bad loans’ transferred to Resolve Bahamas.

It is unclear which properties were supposed to be transferred to Bank of the Bahamas’ own SPV, but one is thought to have been the Palmdale head office for the former John S George retail chain, which is now being advertised in the newspapers for sale.

Sources close to Bank of the Bahamas have suggested that Mrs Craigg’s December 2012 letter, which Tribune Business has obtained, needs to be set in context, and the process by which a Central Bank interacts with its licensees post-examination better understood.

Their argument is that banks and trust companies are given an opportunity to review and respond to the Central Bank’s regulatory findings, and the December 12 letter, and bank’s February 28, 2013, response are part of the regular ‘back and forth’ between the two sides.

Mrs Craigg tried to hint as much in her Tuesday statement, saying: “Writing to and engaging with our licensees is a regular part of our supervisory process, and constitutes one of the tools through which we seek to ensure compliance with best practices, and thus to promote stability in our financial system.”

Some have suggested that Bank of the Bahamas was able to rebut much of the Central Bank’s findings, but there is little doubt that Mrs Craigg’s December 2012 letter details some troubling findings.

Tribune Business revealed on Tuesday this week how the Central Bank and its governor slammed “all facets of its credit risk management processes” as “unsatisfactory”.

Mrs Craigg’s letter, which appears to highlight the flaws that led to the BISX-listed institution’s recent $100 million ‘rescue’, said the examination by Central Bank inspectors found “that a large measure of the basic tenets of industry sound credit practices are either missing, not evident, or compromised within” Bank of the Bahamas’ credit processes.

Mrs Craigg summed it up thus: “Based on the limited sample of credit files examined, the examiners observed that the credit initiation and approval process was weak, shoddy and inconsistent.

“The credit control weaknesses identified by the examiners are pervasive and require urgent remediation to avoid further deterioration of the licensee’s credit portfolio, and the resultant erosion of capital.

“The findings are deemed to be material gaps in management and oversight of credit risks in the licensee’s operations,” the Governor added.

“We have concluded, after careful deliberation of the issues identified, that the gravity and severity of the issues highlighted below require immediate remediation.”