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Gov't assumes financial obligations to facilitate divestment

Divestment of CAP to reduce financial burden on Gov’t

BY BALFORD HENRY Senior staff reporter balfordh@jamaicaobserver.com

Thursday, July 24, 2014    

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GOVERNMENT is planning to assume approximately $27 billion in debt owed by Clarendon Alumina Production Limited (CAP) and the Wallenford Coffee Company (WCC).

In two Ministry Papers tabled in the House of Representatives yesterday, Minister of Finance and Planning Dr Peter Phillips said that the Administration was seeking to assume approximately $24 billion in debt owed by CAP to the PetroCaribe Development Fund (PCDF) and approximately $3 billion owed by Wallenford to the PCDF, as well as the National Export-Import Bank, and the European Investment Bank.

The House was reminded that the Government's objective is to divest or lease CAP, which has been financially burdened by a fixed price forward-sale contract with Glencore, which has cost taxpayers close to $30 billion since it was entered into in 2002.

Preparatory to divestment, however, the Government is seeking to remove all debt obligations on the books of CAP to facilitate a debt-free divestment entity.

The Ministry Paper said that with CAP's inflexibility with prices, due to the forward sale agreement, the persistent rise in production costs (fuel, caustic soda, bauxite, etc) over the years have outpaced revenue, resulting in a build-up of losses.

"At March 31, 2013, there was an accumulated deficit of $256 million, working capital deficit of $61 million and a deficiency of $181 million in shareholder's equity," the Ministry Paper said. "The company was, therefore, primarily funded from debt as at March 2013."

Given the low cash sufficiency, the company remains unable to service: (a) all its debt service obligations due on external debt, in excess of US$340 million; and (b) capital commitments, according to the document.

The Ministry Paper explained that the CAP obligations being assumed by the Government do not represent previously guaranteed debt. "Approval for the assumption, as at March 31, 2013, was granted by Cabinet in July 2013.

Accordingly, negotiations were concluded with the PDF for the assumption of the debts on more favourable terms," it said.

The Ministry Paper on the Wallenford assumption said that the company had experienced severe financial difficulties from its inception, as it was not properly capitalised.

Wallenford inherited most of the liabilities of the former Coffee Industry Board. As a result, financial problems continued to exacerbate with the company unable to meet its working capital needs, resulting in excessive borrowing from the EX-IM Bank and the PCDF, the ministry paper explained.

Following a bidding process, last September Michael Lee-Chin's Portland Private Equity/AIC Caribbean Fund (PPE/AIC) was selected as the preferred bidder for Wallenford's divestment. However, a term of the divestment agreement requires that PPE/AIC acquire all the shares in the coffee company, but without equity debts. PPE/AIC will, however, make capital investments in the WCC of an additional US$23.5 million in line with a four-year development plan.

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