Failed Laparkan bond offer was flawed
-says merchant banker
Stabroek News
April 16, 2004
Laparkan Holdings Limited (LHL) bond offering has failed to realise the minimum subscription of 50% after the third deadline of March 31.
This is the second bond failure for the company, and Chairman of the group and sole proprietor, Glen Khan could not be reached to say what his next steps would be.
LHL was seeking $2.4B in a bond subscription of which $1.2B was to refinance existing debt and $1.2B to modernise its operation. Of the latter, $500M was to be used by the Guyana National Industrial Corporation (GNIC), $400M to upgrade properties and equipment including William Fogarty's, $100M for new projects and $200M for the international operations, Laparkan Investments Limited (LIH). But although $700M was to be spent on GNIC and LIH, the assets of these companies were not pledged as security in the bond offer, making that portion of the debt unsecured.
Three calls were made to Khan's offices in the USA to determine the extent of the bond failure and what he planned to do next but he was not available nor did he return the calls. LHL was guaranteeing a net return of eight per cent interest per annum for the issue of 480 $5 million redeemable 7-year bonds.
Asked for his opinion on what went wrong with the issue, merchant banker and independent adviser, Dr Graham Scott says the risks simply outweighed the returns. Scott had quietly disassociated himself from the issue (GuyAmericas Merchant Bank, which he heads, had been listed as an agent for the bond in the information memorandum). Scott had not made this disassociation public because he says he wanted to give the bond issue a chance.
Graham Scott
"What stood out a mile was that this was not just an ordinary corporate bond issue. It was for $1.2B to refinance an existing debt and an increase in the debt by a similar amount." He points out that repayment was premised on cash flows from projects to come on stream and not the current operations of the company, making it a high-risk project.
Scott says when he first perused the information memorandum in January, what struck him was that none of the existing creditors of the company were prepared to say that they were committed to refinancing their part of LHL's existing debt.
"Such a statement would have given comfort to new investors that existing creditors would be willing to roll over their debts and were not looking to exit from the company. The absence of such a statement puts doubts in potential investors minds....Why are the existing creditors not prepared to roll over?....For me, that was a major no-no!" Scott asserts.
But that was just one problem. Scott says the accounts of LHL shows that the group is thinly capitalised with a "horrendous" debt to equity ratio. LHL's indebtedness was around $2.6B while shareholders fund was $1.137B (d/e ratio of 2.2 to 1).
"No company in its right mind would think of raising debt to that level. You can stop paying dividends on equity investments but you cannot stop servicing your debt payments," Scott says. He also notes that only the assets of a select few companies of LHL were available as security while $700 million would go as inter-company loans to GNIC and LHI as unsecured loans. Should these companies within the seven years take on additional secured debt, the bondholders would rank down the list for repayment. However, he points out that it is the cash flows associated with these two operations, which would have been depended on to service the bond debt while bondholders would have no security on these businesses.
Scott notes that the net profit position of the group has been declining; interest charges have been rising and when he looks at the consolidated balance sheet all he sees is debt.
"It is a highly leveraged business. There is no way the existing business would have been generating enough cash to service and retire $2.4B and therefore it would clearly be dependent on cash flows coming from projects which are to come on stream and this is just too risky."
Scott says the cash flows suggest that the bonds could be repaid out of new borrowings as just sufficient cash flows would be generated to repay the bond holders with no margin should things not go according to plans. The company's cash flows are very weak.
Eight per cent interest, net of taxes, would not be attractive in such a scenario, as the risks outweigh the benefits.
"A single shareholder business is a high-risk business and investing in highly leveraged private companies is not exactly the flavour of the day. One reason the banking sector had got into trouble is the proliferation of unsecured lending with no regard for cash flows," Scott asserts.
He says it was for these reasons that he indicated to Laparkan that he would not be able to support the deal, as it was not structured in a proper manner.
He says Laparkan has to reassess its plans, its strategy and its vision. He says the company has tried to raise significant debt finance but with such ambitious plans, it should really look to go public so that it would widen its equity base and reduce the debt to equity ratio.
"One way to start would be for Mr Khan to convert his advance of $1B into equity and to look to raise equity capital by going public. The company is too thinly capitalised, too highly leveraged financially and will need to get more balance between debt and equity in the business. There is need to raise the equity component. For potential shareholders coming in, if the current shareholder is willing to convert his debt to equity, that will give great comfort," Scott says. At the end of the day, getting an injection of equity/debt into Laparkan would require for a properly packaged transaction.
A convertible bond issue by Laparkan some years ago failed but the company was able to place a private bond for $400M in 2002. The sum of $325M is still outstanding on that bond.