Monday, May 11, 2015 12.14 PM / SSS
On Friday, May 08, 2015 ProshareNG broke the news of shareholders of International Energy Insurance (IEI) Plc taking the company to task on its financial involvement and investment relationship with Heritage Bank Company Limited (HBC), formerly SGBN.
Details have since emerged that the Extra Ordinary General Meeting called for May 28, 2015 in Uyo, Calabar was necessitated by the unexplained financial investments in Heritage Bank plc funded by the application of the proceeds of its successful 2007 Private Placement that generated at least N8 billion.
Investors are also concerned about a dollar facility, equivalent to N2 billion sourced from Daewoo Securities, a UK based financial institution that provided similar type facilities to other insurance firms around the same period.
Investors have since then been wondering how a company that had about N10 billion in its kitty was unable to pay dividends in 2009 and had to resort to raising additional facilities through Afribank/Pan Ocean Capital to met this obligation.
It has not declared any dividend since then and have had to close down a number of its operations outside the country, specifically those in Sao Tome & Principe and most recently, Ghana.
Evidently, it now appears that NAICOM has been helping to guide the firm since 2010, after its target inspection revealed a challenging situation, requiring some restructuring interventions about its debt obligations, business operations and overall business condition.
These issues raise a lot of questions, chief of which bothers on corporate governance – the discharge of directors’ fiduciary responsibility of duty, skill and care to shareholders.
SGBN, the acquired entity by IEI Plc, was incorporated in December 1976 and commenced full banking operations in August 1977. SGBN introduced the use of computer and IT solutions in commercial banking, and later pioneered the use of ATMs as an alternative means of service delivery into the Nigerian banking system in 1990. The bank’s branch network spans every major commercial/industrial centre in all the geopolitical zones in the country. A good number of these branches are freehold premises in prime locations ideal for banking business.
Following the suspension of SGBN from the clearing house on July 14, 2003, several efforts were made to restructure and recapitalise the bank in order to ensure its re-admittance into the clearing house. This process of restructuring was not concluded before the Central Bank of Nigeria (CBN) announced the new Banking Reform Programme on July 6, 2004 which stipulated a minimum capital requirement of N25bn for banks. It was on this basis that the banking licence of SGBN was revoked by the CBN. This action was subsequently challenged in court by the owners of SGBN who obtained a favourable judgement in 2008. However, part of the judgement stipulated that they recapitalise the bank and recommence operations.
As part of its effort to restructure and recapitalise to meet the minimum regulatory capital, SGBN decided to source core investors. After a competitive process IEI Plc emerged as the preferred core investor, with Heritage Bank Company Limited (HBC )being the resultant bank.
IEI bid for, and was given approval to acquire a controlling ownership stake in SGBN. To this end, IEI established SPV for the sole purpose of the acquisition. SPV is issuing 72 convertible investment notes in units of US$1m each. Half of the US$72m of convertible notes will be eligible for conversion into an interest in HBC upon expiry of the notes, which shall be 12 months after issue.
The notes are secured by debenture over a portfolio of Nigerian equities and property assets
valued at US$75m provided by IEI. In addition, IEI guarantees all of the liabilities of SPV. IEI has been rated Bbb by Agusto & Co, which is described as an “insurer with satisfactory financial condition and adequate capacity to meet claim obligations”.
The structure of the acquisition is shown below:
Establishing a Nexus between entities
In its private placement document (snapshot below), Heritage Bank named IEI Investments Limited as its largest shareholder with 80% ownership and IEI Plc as its core investor; with messrs Ifie Sekibo and Tony Madojemu as Managing Director and Non-Executive Director respectively.
Mr. Ifie-Sekibo until he became Managing Director of Heritage Bank was the then Executive Vice Chairman of IEI Plc. In the case of Mr. Tony Madojemu, he was an Executive Director at IEI Plc then (Currently the GMD of IEI Plc). In Ifie’s bio on the website of HBC, he was described thus “A passionate game changer, he took on Global Assurance Limited and transformed it into International Energy Insurance (IEI). This led to the listing of IEI on the Nigerian Stock Exchange”.
Thus a strong relationship exist(ed) between both companies.
The review of IEI Plc’s financial statements however tells a different story, definitely not one of a company that was either financially healthy or one with an 80% ownership stake in a newly recapitalized bank. The picture one gets is that of an insurance group financially challenged with a questionable going concern status.
The 2010 and 2011 financial statements before the introduction of IFRS showed that the company had net assets of N8.89billion and N3.70billion, respectively; indicating a relatively healthy picture but nonetheless, showing a significant drop in shareholder value between the two years under reference.
Upon the review of its 2012 audited financials, after the introduction of IFRS requiring more disclosures; the 2011 opening balance sheet which for all intents and purposes is the 2010 audited balance sheet showed N618.64million in net assets and 2011 and 2012, N539.53million and N398.61million respectively. This begs the question as to what happened ?
Instructively, the audited financials for IEI Plc for 2013 AND 2014 has not yet been released by the company nor a statement on it issued by the NSE.
As market observers may recall, IEI Plc had a very successful Private Placement in 2007 where it raised at least N8 billion. Bouyed by this private placement, it expanded it operations into Ghana and Sao Tome & Principe. In 2008, it was one of a handful of Insurance Companies that consummated a bond transaction with KDB Daewoo Securities (the largest stock brokerage and investment banking firm by market capitalization in Korea). In that transaction, it raised an additional Y1,850,000,000 (Yen) or about N2.2 billion at the ruling exchange rate then. With a total of approximately N10 billion of new capital raised in 2008, it was surprising to see the IFRS audited numbers for 2010.
Naturally, the question about what happened to all the money raised attracted the interest of NAICOM and shareholders/investors.
This flies in the face of the disclosures made in the 2011 private placement document issued for the acquisition of Heritage Bank and the more recent private placement in 2011.
In both documents, it was clearly stated that IEI Plc was the core investor. In the private placement memorandum, it was indicated that IEI invested N1.7 billion in IEI Investments for the purposes of the recapitalization of SGBN while in the Heritage Bank brochure, that amount was N2.7 billion. It would appear that only the N1.7 billion has been reflected in the books of IEI Plc as at 2012. What happened to the other N1 billion and was there any other investment made after that?
It would be necessary for the Central Bank of Nigeria (CBN) and the National Insurance Commission (NAICOM) to shed some light and provide necessary clarification in the interest of shareholders.
Hopefully, the NSE/SEC would have step in to assure investors/shareholders of this public quoted company.
Needless to say, it is important that a forensic audit is imperative to determine if the representations made to investors and the records/management of the finances of IEI Plc are consistent with the representations made to shareholders about the firms relationship and role in the acquisition of SGBN, and by extension Heritage Bank.