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Business & Finance, Trinidad & Tobago

Standard & Poor’s downgrades Sagicor Life Inc

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I tend to bang on about these rating agency downgrades, but they are important.

For those of you not familiar with these companies, their essence can be distilled thus:  ratings agencies are arbiters of creditworthiness.

In other words, agencies like Moody’s, Standard & Poor’s and Fitch bestow upon companies and countries  grades that indicate the likelihood that the rated entity will be able to pay its debts.

These ratings range from the gold standard – triple-A – which suggests the likelihood of default is minute, to Cs, which suggest the company or country poses a substantial risk to its creditors. The lowest grade – D – is reserved for those entities that have actually failed to pay their debts.

On that – last week, S&P lowered its rating Sagicor Life to BBB from BBB+, which is a one-notch downgrade. Here is the statement, highlighting and bracketed commentary is my own:

S&P: Sagicor Life Inc. Rating Downgraded To ‘BBB’ From ‘BBB+’; Outlook Stable

* Sagicor’s financial flexibility and liquidity could be under pressure if Jamaica’s economic environment continues to deteriorate.
* We are lowering our ratings on Sagicor, including lowering the long-term counterparty credit and financial strength ratings on the company to ‘BBB’ from ‘BBB+’.
* The outlook is stable.

MEXICO CITY July 24, 2009–Standard & Poor’s Ratings Services lowered its long-term counterparty credit and financial strength ratings on Sagicor Life Inc. to ‘BBB’ from ‘BBB+’. The outlook is stable.

At the same time, we lowered to ‘BBB-‘ from ‘BBB’ our rating on the long-term senior unsecured debt rating on the $150 million senior unsecured obligations with up to 10-year maturities issued by Sagicor Finance Ltd., a Cayman Islands-based subsidiary of Barbados-based Sagicor Financial Corp. Sagicor and Sagicor Financial Corp. irrevocably, unconditionally, and jointly guarantee these notes.

“The rating action reflects our opinion that a continued worsening in Jamaica’s economic conditions compromises Sagicor’s financial flexibility and liquidity,” said Standard & Poor’s credit analyst Alfonso J. Novelo. “Also, profits could be pressured as a result of poor conditions in the financial markets and the likelihood of a prolonged period of weaker-than-expected economic conditions in the main countries where the insurance company operates, in particular in Jamaica, where Sagicor has placed 27% of its financial investments.”

On June 10, 2009, we lowered our long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’; in addition, our rating on the Republic of Trinidad and Tobago, another one of the countries where Sagicor has a leading position, is on CreditWatch with negative implications. The U.S., the U.K., and other countries of operation are also facing economic challenges.

[In S&P speak, any country or company on “CreditWatch with negative implications” is likely to be downgraded in the very near future]

The counterparty credit and financial strength ratings reflect Sagicor’s strong operating performance, conservative underwriting discipline, good profitability, and strong capitalization. The ratings also reflect the company’s dominant market position as the leading life insurer in the Caribbean and its increasing geographic diversification.

These positive factors are partially offset by a relatively high concentration in revenues and investments in Jamaica, and the aggressive inorganic growth strategy the group has implemented in the past three years, somewhat mitigated by Sagicor’s long and successful track record in mergers and acquisitions.

The rating on the senior unsecured obligations reflects the subordination of the notes to obligations owed to policyholders and creditors of Sagicor’s subsidiaries.

The stable outlook incorporates our expectation that Sagicor will maintain extremely strong capitalization and good profits, even under the more challenging economic environment that the different countries where the group carries out business are experiencing.

We could lower the ratings if capitalization decreases dramatically, even if it remains at more than the 175% target, or if profits deteriorate substantially. Furthermore, ratings will be pressured in the case of negative rating actions on Barbados or Jamaica and the degree of a downgrade of Trinidad and Tobago.


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Business & Finance, Trinidad & Tobago

S&P says may cut ratings on FCB and Republic Bank

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S&P, which said today it was considering downgrading T&T’s sovereign credit rating, is also scrutinising the ratings of both First Citizens Bank and Republic Bank due to the fallout from the CL Financial bailout.

Here are the statements, any emphasis/explanations mine:

S&P: First Citizens Bank Ltd. ‘BBB+/A-2’ Rating Put On CreditWatch Negative

[“CreditWatch Negative” means that a downgrade is likely within the next three months, pending further information/review]

[A triple-B rating is borderline investment grade; the institution is considered ‘satisfactory’]

MEXICO CITY Feb. 3, 2009–Standard & Poor’s Ratings Services said today that it placed its ‘BBB+/A-2’ counterparty credit rating on First Citizens Bank Ltd. on CreditWatch with negative implications.

Standard & Poor’s also said that it placed its ‘BBB+’ ratings on the $100 million bonds from First Citizens and First Citizens (St. Lucia) Ltd. on Credit Watch negative.

The CreditWatch placement follows Trinidad and Tobago’s announcement on Jan. 30, 2009, that it will assume control of or provide support to several key subsidiaries of CL Financial Group (CLFG), a large Trinidadian financial conglomerate. According to the central bank, CLFG’s financial condition has deteriorated because of related-party transactions, high-risk investments, and high leveraging of the group’s assets. The central bank has announced that it will take control of CLFG’s flagship bank, Clico Investment Bank (CIB), transfer its assets and deposits liabilities to First Citizens Bank (wholly owned by the government), and revoke CIB’s banking license. The government has announced that CLFG will divest assets, including its shares in Republic Bank Ltd. (a 55% share) and Methanol Holdings Trinidad Ltd., to First Citizens Bank and the government to make up the statutory fund shortfall, with the government backstopping any deficiency.

“We expect to resolve the CreditWatch status of the ratings when there is further clarification of First Citizens Bank participation in the bail out process and the impact that this will have on the bank’s overall creditworthiness,” said Standard & Poor’s credit analyst Angelica Bala.

S&P: Republic Bank Ltd. ‘BBB/A-2’ Rating Put On CreditWatch Developing

MEXICO CITY Feb. 3, 2009–Standard & Poor’s Ratings Services said today that it placed its ‘BBB/A-2’ counterparty credit rating on Republic Bank Ltd. on CreditWatch with developing implications.

The CreditWatch placement follows Trinidad and Tobago’s announcement on Jan. 30, 2009, that it will assume control of or provide support to several key subsidiaries of the CL Financial Group (CLFG), a large Trinidadian financial conglomerate that owns 55% of Republic Bank Shares. The government has announced that CLFG will divest assets, including its 55% share in Republic Bank Ltd., to First Citizens Bank and the government to make up the statutory fund shortfall, with the government backstopping any deficiency.

“We expect to resolve the CreditWatch status of the ratings when there is further information on how the transaction is going to be done and the implications to Republic Bank, currently the largest bank in the country,” noted Standard & Poor’s credit analyst Angelica Bala.


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Business & Finance, Trinidad & Tobago

The CL Financial Bailout – Central Bank Statement

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Presented verbatim, here is the full text of the statement made by Central Bank Governor Ewart Williams at the press conference on Friday:

Some of you may know that CIB has been facing liquidity challenges over the past few weeks. These challenges came to a head in the last few days when the bank began to face an unusually high level of withdrawal requests which put a strain on their available liquid resources. Clico has also been facing liquidity problems, though nowhere near the levels of CIB. Of course, given the close integration of these two financial institutions within the CL Financial Group. It is just a matter of time before Clico also begin to come under severe liquidity pressures. The Inspector of Financial Institutions and the Governor of the Central Bank met with the Chairman and Chief Financial Officer of CL Financial on January 7 2009. In a second meeting on January 13, 2009, Clico’s Chairman formally raised the issue of possible financial assistance from the Central Bank.

There is no doubt that the increase in CIB withdrawals and the nervousness seen at Clico have something to do with the depositors’ concerns about the impact of the sharp decline in methanol and real estate prices on CL Financial’s overall financial situation. In the Bank’s view however, the current financial difficulties being faced by CIB and Clico have more to do with four things:

*Excessive related-party transactions which carry significant contagion risks. I should note that the high level of concentration is not specifically prohibited by the present legislation.

*An aggressive high interest rate resource mobilization strategy to finance an equally high risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad).

*A very high leveraging of the Group’s assets, which constrains the potential amount of cash that could be raised from the asset sales. In our regular monitoring of CIB and of Clico since 2004 (when insurance supervision was transferred from the Ministry of Finance), the Central bank has consistently focused on these deficiencies but have been stymied by the inevitable challenge of change and by inadequacies in the legislative framework which do not give the Bank the authority to demand these changes. The Central bank is very conscious of the contagion risks that financial difficulties in an institution as vast as the CL Financial Group could have on the entire financial system of Trinidad and Tobago and indeed in the entire Caribbean region. For the record, ladies and gentlemen, the CL Financial Group has an imposing presence with potentially systemic consequences for the financial sector and the economy of Trinidad and Tobago and the entire region. For example:

1 The Group controls over ($100) billion of assets in at least 28 companies located throughout the Region and the world.

2 The Group’s financial interests cover several industry sectors including banking and financial services, energy, real estate and manufacturing and distribution. The four largest financial institutions in the Group manage assets of over $38 billion, over 25 percent of the country’s GDP.

3 In addition to Clico, among the Group’s holdings is the British American Insurance Company Limited, which is one of the main insurance companies in the Eastern Caribbean.

After intense discussions over the past week the Central Bank, the Ministry of Finance and representatives of the CL Financial Group have reached agreement on a strategy to deal with the liquidity challenges of CIB and Clico and to address the underlying problems that have given rise to the current financial stress.

The principal objectives of the strategy are to ensure that resources are available to meet withdrawals of third-party CIB depositors and Clico policy holders; to protect the funds of the depositors and policy holders and in so doing maintain confidence in Clico and reinforce confidence in the financial sector as a whole. The main elements of the strategy are as follows:

*The Central Bank will take control of CIB under section 44D of the Central Bank Act.

*Early next week all the third-party assets and liabilities on the books of CIB and CMMB will be transferred to First Citizens Bank. These liabilities will be matched by resources from the sale of CIB’s holdings of certain high quality assets. The Central Bank will provide short term liquidity as needed to ensure that these liabilities are serviced.

*Following the execution of these transactions, CIB’s banking license will be revoked.

*Clico has a sizeable Statutory Fund deficit. CL Financial has agreed to divest additional assets to help fund this deficit. The Government has committed to provide any additional funding that is needed by Clico.

*Government funding will be provided in exchange for collateral and an equity interest in Clico. It will also act as a catalyst for implementing a change in the current business model and corporate governance structure of Clico. The intention will be to return Clico to its original moorings.

I would like to emphasize that these considerable steps being taken – by the CL Financial Group, the Government and the Central Bank are specifically designed to tell CIB’s depositors that your funds are safe and to maintain confidence in Clico which for decades has been the strength of the insurance sector in Trinidad and Tobago and in the region. Clico’s policy holders can also be assured that the long term future of Clico will be guaranteed by the adoption of a more robust and less risky model. Because any stress in one corner of the financial system tends to raise concerns throughout the sector.

I would also take the opportunity to remind the national community of the tremendous strength of our financial system, which indeed is the envy of the region. Excluding CIB, the banking system now boast of an average capital adequacy level of 18 per cent, compared with a recommended minimum of 8 per cent; in contrast to the illiquidity of CIB, the rest of the banking system is plagued by excess liquidity; the overall level of non-performing loans is an impressively low 2 per cent and the banks have more than adequate level of provisions against bad loans.

Let me support the point raised by Minister Tesheira on the need to accelerate some aspects of the new Insurance Act on which we have been working for some time in collaboration with industry stakeholders. We absolutely need updated insurance legislation to regulate the insurance industry in normal times as well as in times of financial stress.

The ‘fast track’ amendments to the 1980 Insurance Act that are being proposed will provide us with the authority to conduct on-site supervision; will give us the legal basis to share information with other regulators (I should note that CLICO and its affiliate British American have vast regional operations) and will allow the Central Bank to take prompt corrective action to protect depositors, if and when necessary. Before ending I would like to acknowledge the high level of cooperation that we have received from Mr. Duprey in our efforts to address what must be a very difficult period for the CL Financial Group.

I should also recognize the role of First Citizens Bank in doing its part to help stabilize the banking system. Resolving the problems of Clico will call for continued collaboration between CL Financial, Government and the Central Bank, but moreso on the collaboration of the entire financial community led by ATTIC and BATT. While it is currently a CL Financial problem, only the concerted and vigorous action of the entire financial sector would stave off financial contagion. This is not the time for companies to take advantage of CIB/Clico’s problems to expand their balance sheet; this is the time to let competition take a back seat and to support the Government and the Central Bank to keep Clico as a functioning entity and to ensure the continued stability of our financial system.

The actions that we will be taking over the next several weeks and months will only work if they have the support of the community of depositors and policyholders as well as the entire financial sector. We are confident that the proposed strategy will lead to a financial sector that is more resilient to deal with the adverse currents now buffeting the global economy.


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