The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

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.