The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Investors in the Public Hospitals Authority’s (PHA) $45 million bond issue will this week finally receive their subscription confirmations, Tribune Business can reveal, after “sloppy” errors in the offering document were corrected.

Sources close to developments yesterday confirmed that the issue’s placement agent, RoyalFidelity Merchant Bank & Trust, had received authorisation from the PHA Board to transfer the funds raised to it, and confirm to investors that they had received 100 per cent of their allocations.

Tribune Business understands that while the PHA Board has elected to accept the first $45 million raised, it has yet to decide whether to accept the extra $3.3 million raised over and above the offering amount.

“Confirmations will get mailed out this week [to investors] for the first $45 million,” one well-informed source said.

“They [the PHA] haven’t figured out what to do with the balance and excess monies. They’re still in discussions over the extra surplus they got. Hopefully, they can get that resolved this week. The extra people will have to wait and see.”

Michael Anderson, RoyalFidelity’s president, could not be reached for comment. Nor could PHA chairman Frank Smith, while Herbert Brown, its managing director, did not return a detailed phone message seeking comment.

Still, yesterday’s moves are the first steps in bringing an embarrassing, and expensive, three-month saga to an end. Tribune Business revealed last month that the rift between the PHA’s managing director, Herbert Brown, and the Board had cost the Bahamian people several hundred thousand dollars.

This was because the $48.3 million proceeds had been left sitting unclaimed in a CIBC FirstCaribbean International Bank (Bahamas) bank account for more than three months, given that the offering closed on November 15.

The PHA’s failure to take the money, and apply it to the purposes for which it was raised, had resulted in the loss-making Authority incurring unanticipated interest payment costs.

The private placement proceeds were intended to part repay the Royal Bank of Canada (RBC) construction loan, which financed the new Princess Margaret Hospital (PMH) Critical Care Block, plus take out another $10 million National Insurance Board (NIB) loan.

Tribune Business can reveal that the $30 million “settlement”, or repayment, of a significant chunk of Royal Bank’s construction loan took place yesterday, while NIB got confirmation that its $10 million loan has been swapped for an equivalent value of bonds.

With the bond proceeds sitting idle, these loans were not repaid and left active, hence the additional interest payments the PHA has incurred to service them.

And, in addition, sources close to the matter said the PHA had to pay 6 per cent interest on the investor monies as they sat in escrow. This, too, created extra costs for the Government/PHA. Given that both are funded by the Bahamian people, the tab is ultimately being picked up by the taxpayer.

Interest at 6 per cent on $48 million is some $2.88 million per annum, translating into $240,000 in monthly interest costs. And, with the bond proceeds unclaimed for over three months, the meter has likely run to around $720,000 in unnecessary costs.

“I don’t know what people must think about it all,” one source said about the internal wranglings at the PHA. “There were some internal issues that got in the way, and it took an extremely long time to get sorted out.”

Tribune Business, though, can also disclose that a major factor behind the delay in accepting investor monies was Board concerns over “inconsistencies”, and inaccuracies, in the original offering document sent to investors.

The PHA, following a Board meeting last week, is sending a letter to investors to inform them of these issue, the “biggest” of which was the identity of its external auditors.

The private placement document, while confirming that Grant Thornton (Bahamas) had stepped down from its auditor role following the 2012 audit, said PKF (Pannell Kerr Foster) had been appointed to replace them.

This was untrue, as no Board decision had been taken to hire PKF. In addition, one Board member, Renee Lockhart, works as an accountant for the firm, and Tribune Business understands the contract will likely go to Baker Tilly Gomez.

This, and the omission of one PHA director from the document, will be among the clarifications sent to the bond issue investors.

“It was really sloppy,” one source said of the PHA bond offering document. “The Board got the required amendments to the private placement memorandum, and then it was a specific course of action that needed to take place to properly complete the transaction.

“They [the Board] were anxious to get it complete, but couldn’t circumvent protocols. There was incorrect information in the private placement memorandum that had to be corrected. They wanted to make sure corrections were made and that investors were made aware of them.”

The $48.3 million was raised from around 50 leading Bahamas-based institutional investors - such as mutual funds, pension funds and insurance companies.

The delays and uncertainty over whether the PHA would ultimately accept the money also impacted them.

And the failure to take the bond monies also deprived the PHA of almost $5 million that was supposed to provide it with working capital, and left RoyalFidelity and other advisers short of $587,500 in fee income.

Tribune Business revealed in late November how the $45 million PHA issue was oversubscribed by $3.324 million, raising a total $48.324 million.

This was the first tranche of what could ultimately be $100 million worth of PHA bonds sold into the Bahamian capital markets, as a means of raising debt to finance the Princess Margaret Hospital’s renovation and expansion needs.

And it is just the first phase of refinancing plans intended to repay the $55 million Royal Bank of Canada loan that funded the Critical Care Block construction, plus provide the Princess Margaret Hospital (PMH) operator with more working capital.

Some $65 million of the $100 million will be used to repay Royal Bank, leaving roughly $35 million - almost one-third - of ultimate bond proceeds free for other purposes.

The last audited financial statements for the PHA, produced for the year to end-June 2012, were ‘qualified’ due to its ‘current’ solvency deficiency.

“We draw attention to Note 22 in the financial statements, which indicates that the Authority’s current liabilities exceeded its current assets by $18.628 million,” Grant Thornton said.

While this was down from the $26.405 million that existed at end-June 2011, the accountants noted that the PHA’s accumulated deficit stood at $73.042 million on June 30, 2012.

Data contained in the private placement memorandum shows the Government injected subsidies of $183.439 million and $207.136 million into the PHA in 2011 and 2012, respectively.

While it still suffered a $10.195 million comprehensive loss in 2011, the PHA was able to turn a small $2.888 million profit the following year, albeit with a massive government subsidy.