The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Board battle at the Public Hospitals Authority (PHA) has cost the Bahamian people several hundred thousand dollars, with its $48.3 million bond issue left sitting unclaimed in a bank account for over two months.

Tribune Business can reveal that the rift between the Board and its managing director, Herbert Brown, has already created costly repercussions for the PHA and the Government, with the former yet to take the investor monies raised for it.

Sources familiar with the situation told Tribune Business that 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.

This is because the $45 million 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.

With the bond proceeds sitting idle, these loans have not been repaid and are still active, hence the additional interest payments that the PHA has incurred to service them.

And, in addition, sources close to the matter said the PHA is having to pay 6 per cent interest on the as-yet unused investor monies sitting in escrow with CIBC FirstCaribbean International Bank (Bahamas).

This, too, has 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 still unclaimed, the meter is continuing to run.

“RoyalFidelity is still sitting on the money in a bank account. They [the PHA] haven’t taken the money yet,” one source said.

“It’s been sitting in CIBC First Caribbean benefiting no one, and is costing the PHA 6-7 per cent in interest. It’s a lot of money.

“They’re past due on the payment of the loans. The PHA is not meeting its obligations.”

The PHA bond issue closed on November 15, meaning that it is now more than two months since the funds were 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 will ultimately accept the funds is also impacting these investors, as they have yet to be informed whether they will get 100 per cent of the bonds that they subscribed for.

While there is no set deadline by when the PHA must confirm if it is accepting their subscriptions, one source said: “There is an expectation that within 21 days of an offering, people will get advised of their allocations. The problem here is that they can’t get advised.

“The investors need to get their money back if they’re not going to proceed with it.

“It’s taking time to sort out what they’ve [the Government/PHA] got to sort out, and it’s costing the Government a lot of money in the process.”

Tribune Business was told that RoyalFidelity Merchant Bank & Trust, the bond issue’s underwriter and placement agent, had met with several investors, and their broker/dealer and placement agent advisers, to discuss the situation.

While there has been no suggestion that any investor wants to pull its money, or is getting agitated over the situation, those who bought into the PHA offering will want to get their money working swiftly for them in generating a return.

Tribune Business understands that the Government, and Ministry of Finance, are aware of the PHA situation, and have informally indicated that ultimately the bond proceeds will be accepted.

Yet with the first $1.006 million interest payment on the PHA bonds due in less than two months, on March 14, the situation needs to be swiftly resolved.

The failure to take the bond monies has 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.

Frank Smith, the PLP Senator and PHA Board chairman, declined to comment when Tribune Business posed a series of questions to him on the situation yesterday.

However, he did not deny the accuracy of any of the information detailed above, which Tribune Business included in its questions to him.

When asked by this newspaper whether the $48.324 million bond issue proceeds were still sitting in escrow at a CIBC FirstCaribbean International Bank (Bahamas) bank account, Mr Smith replied: “I have no comment.”

Questioned whether the PHA and the Government were incurring additional interest payments on the money held in escrow, Mr Smith again said: “No comment.”

Asked whether the PHA was also incurring unexpected interest payments on the loans that should have been repaid, and if the situation had cost it several hundred thousand dollars, Mr Smith reiterated: “No comment.”

Then, when the plight of the bond investors was raised, all the PHA chairman could muster again was: “No comment.”

Finally, when asked whether the current situation was embarrassing for the PHA, its Board and the Government, Mr Smith stuck to the tried and tested formula of: “No comment.”

It has been suggested to Tribune Business, meanwhile, that the impasse between the Board and Mr Brown could evolve into an ‘action replay’ of former director Algernon Cargill’s battle with the National Insurance Board (NIB).

Mr Brown is likely to fight his corner and resist efforts to ‘push him out’, with the Board understood to be complaining that he exceeded his powers in signing-off on the PHA bond.

A copy of the bond offering document obtained by Tribune Business, though, contains a space for Mr Smith, in his capacity as chairman, to sign off on the bonds’ issuance.

And among the documents available for investors to review when making their investment decision was a “Board resolution approving the Private Placement Memorandum” and another one approving the bond notes themselves.

The $45 million issue was also backed by a Letter of Support from the Government, which was approved by the Ministry of Finance and Cabinet-level policymakers, all of which raises questions about whether Mr Brown exceeded his authority.

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 $45 million offering was intended to generate $30 million towards repaying the Royal Bank loan, with the remaining $10 million dealing with the existing debt owed to NIB. The remaining $5 million will be used to finance the PHA’s “general operations” and the offering costs.

The last audited financial statements for the PHA, produced by the Grant Thornton accounting firm 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.