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How much money will FINSAC cost the nation?


THE FINANCIAL Sector Adjustment Company Limited (FINSAC) has continued to work towards achieving its mandate of a comprehensive and sustainable rehabilitation of the financial sector. The rehabilitation phase of its operations is well underway and FINSAC is now primarily engaged in the divestment phase in which it will relinquish its ownership and shareholdings in more than 30 major entities intervened since January 1997, when the company was established.

FINSAC's gross obligations as at September 30, 1999 amounted to J$95.2B. Of this amount, a sum totalling $33.7B consisting of $22.4B, $10.2B and $1.1B was owed to the Bank of Jamaica, the Government of Jamaica and NIB/JDB respectively. When these amounts are deducted from the gross obligations the balance remaining is $61.5B. When adjusted for the written down value of assets held of $22.2B, the total net obligations amounts to $39.3B.

As at September 30, 1999, FINSAC has acquired $28.8B in non-performing loans from intervened entities. This represents 10,290 accounts and includes the portfolio acquired when Workers Bank was intervened. FINSAC and its affiliates have collected approximately $2.8B in respect of these loans.

(i) Of the 10,290 accounts acquired by FINSAC:

794 have been subject to action involving foreclosures or seizure of assets, of which 90.6 per cent of these accounts relate to real estate and the remaining 9.4 per cent relate to vehicles and equipment.

1,523 of these accounts with a total value of $6.5B have been subject to restructuring and rescheduling. It should be noted that of the total amount restructured, the majority represents payments rescheduled at the request of customers, after initial contact with the workout officer. The ability of the customers to maintain the agreed repayment schedule is assessed on a systematic and continuous basis.

There are several accounts with value in excess of $5M, which have been the subject of approved consensual restructuring arrangements. These accounts total approximately $1.3B. FINSAC will continue to monitor these rehabilitated accounts until they can be resold to the banking sector.

(ii) The total amount of outstanding interest and principal that has been written off is $403.8M, of which principal is $141.7M and interest is $262.1M. The rate at which interest continues to accrue on outstanding loans is, for US$ loans from 12 per cent to 15 per cent and for J$ loans from 25 per cent to 30 per cent.

(iii) The monthly expenses incurred in securing or managing assets that have been taken over by FINSAC is just under $9M per month.

The divestment of real estate, shares and businesses acquired by FINSAC through its interventions continues. Agreements have been concluded with Sandals Resorts for the sale of the Negril Gardens and Plantation Inn Hotels, following their purchase of the Sandals Ocho Rios Hotel earlier this year. In addition, Bass Hotels and Resorts acquired the Holiday Inn Sunspree Hotel. The gross proceeds from the sale of these four hotels will amount to US$44M.

Grand Lido - Sale in Progress

Under the 1st right of refusal clause, Mutual Life's 33.33 per cent shares in Grand Lido will be sold to Village Resorts Limited/Superclubs, which matched the offer which was received from Guardian Life. The offer price of US$9.0M has been accepted.

Hedonism II - Sale in Progress


Under the 1st right of refusal clause, Mutual Life's 50 per cent shareholding in this hotel will be sold to Superclubs/Village Resorts Limited, which matched an offer from Guardian Life. An offer of US$12.25M was accepted for shares in this hotel and 50 per cent of Trelawny Beach.

Trelawny Beach - Sale in Progress

Under the 1st right of refusal clause, Mutual Life's shares in this hotel will be sold to Village Resorts/Superclubs, which matched an offer which was received from Guardian Life. An offer of US$12.25M was accepted for shares in this hotel and 50 per cent of Hedonism II.

Ciboney

This hotel cannot be easily sold at this time due to the complex ownership and management structures and litigation issues. However, expressions of interest are still being received. It is hoped that court proceedings between Ciboney and its former directors will start in the Year 2000. An order for a speedy trial has been issued.

Jamaica Grande

Following the signing of a contract with Christie and Company of London to broker the sale of this hotel on behalf of FINSAC/FIS, the brokers have now prepared detailed information packages for distribution to potential investors. FINSAC/FIS is selling its 49.44 per cent shareholding.

Crowne Plaza

Following the signing of the contract between FINSAC and Christie and Company of London, detailed information packages have been prepared for distribution to prospective investors.

Boscobel Beach

This hotel has been put into receivership by virtue of its inability to service its debt obligations. The receiver is currently reviewing its operations to determine whether it should be: (a) restructured; or (b) sold as a going concern.

Terra Nova

Following the signing of a contract between FINSAC and Christie and Company of London, information packages have been prepared for distribution to prospective investors. An expression of interest has been received.

Two of the housing/commercial complexes acquired by FINSAC, Devon House East and Skyline Drive, as well as a number of other residential properties have now been sold. In addition, of the 42 apartments in Renfew Apartments off Trafalgar Road, 34 have been sold. Strong interest has also been expressed in a number of commercial properties.

As a result of the acquisition of the insurance portfolio from Guardian Life andFirst Life, some properties will be transferred to these companies to provide backing assets for some of the liabilities represented by the portfolio. To date four residential apartments totalling $20M have been transferred to Guardian Life.

In total, FINSAC has sold J$6.6B of assets to date, and sales of assets valued at a minimum of J$4.1B should be concluded in the next six to nine months. To expedite the divestment of the hotel holdings, international real estate agents, Christie and Company of London have been retained to market the properties worldwide.

Subsequent to the discussions to divest Eagle Unit Trust Management Company to (EUTMC), a joint venture between Pan-Jamaica Limited and Seprod Limited, it was indicated that PANSEP was no longer interested in acquiring EUTMC. Bids were accepted from a number of companies, and after careful evaluation it was decided to sell EUTMC to Dehring Bunting and Golding (DB&G). The sales process with DB&G has commenced and should be completed shortly.

Rehabilitation of financial institutions

 Banks

(i) With effect from April 23, 1999, a number of commercial and merchant banks under FINSAC's control, namely Eagle Commercial Bank Limited, Island Victoria Bank Limited, Workers Savings & Loan Bank, Citizens Merchant Bank Limited, Corporate Merchant Bank Limited and Island Life Merchant Bank Limited transferred their respective businesses into a single entity - Citizens Bank Limited. At the end of June 1999, Citizens Bank Limited changed its name to Union Bank of Jamaica Limited. Recapitalisation of the institution is now fully underway and the process will be completed shortly.

(ii) International management consultants McKinsey & Co., were retained to carry out an interim assessment of the merger exercise and make recommendations for improvements where necessary. This exercise was completed in September 1999 and recommendations are now being implemented at Union Bank.

(iii) Operational consolidation is underway, with conversion of the Union Bank entities to the same information technology system proceeding without problems. Final conversion took place on September 10, 1999. It should also be noted that the system is Y2K compliant.

(iv) The following summarises the condition of institutions prior to the formation of Union Bank of Jamaica:

In the Area of Finance

unreliable financial statements over three years;
over 5,000 outstanding reconciliation items; - unrecorded liabilities of approximately $200M dating to 1993;
inaccurate Bank of Jamaica reporting; estimated balances reported;
financial reporting in excess of 60 days late;
audited financial statements for 1996 to 1998 not completed for several entities;
non-existent investments recorded on bank accounts;
bank-owned property abandoned and subsequently vandalised;
basic internal controls missing from treasury area to prevent potential fraud;
loans diverted to subsidiary companies to avoid reporting as past due;
lack of policies and procedures for finance/treasury personnel;
assets and corresponding liability recorded, mis-stating financial statements and inflating balances

In the Area of Credit

poorly documented files, that is, financial statement non-existent or obsolete, poor and incomplete appraisals, unsatisfactory and incomplete loan write-up;
poor collection and workout programmes; - staff not properly trained to handle the types of credits assigned;
many inferior liens on real estate;
overdraft lending against collateral that was pledged on direct funded loans resulting in the collateral having insufficient value to cover both the loan and the outstanding overdraft;
misuse of advanced funds arising from insufficient control;
bank guarantees were issued at the officer level and often not reported, secured or documented in the bank's official records;
authorisation of overdrafts and uncleared effects at the branch level without established and approved credit limits;
overdraft issued against security that had a depreciating value;
inconsistent and unstructured collection efforts;
borrowings in foreign currency funds (primarily US$) were allowed even though customers had no earnings or potential earning in foreign currency;
lending to connected parties in breach of regulations;
lending in excess of statutory approved limits


In the operations area

manual backroom operations at four banks;
lack of controls;
lack of documented policies and procedures;
unreliable ATMs caused customer and operational problems;
lack of proper investment in staff training

In the area of information technology

undocumented computer operation processes;
lack of clear EDP audit trail in all banks;
seven of twelve ATM machines not Y2K compliant;
lack of integrity of customer information files (400,000);
major capital projects with no controls on spending;
lack of detailed documentation inventory of hardware and software;
lack of co-ordination and integration between IT and Operations

Key accomplishments of Union Bank of Jamaica to date

consolidated IVB, ECB, Workers and Citizens Bank into Union Bank of Jamaica; completed conversion of all operations to a single platform - FINWARE. Final conversion took place on September 10, 1999, the system is Y2K compliant;

branch rationalisation and staff reduction - branches reduced from 42 to 24 branches as at September 1999. Staff reduced by 608 from 1434 in November 1998 to 826 at November 1999;

rationalised and consolidated branch and head office functions;

completed harmonisation of salaries and benefits;

formal opening of merged entity on November 8, and presentation of new logo. The following specifies what has been done in the respective areas:

Finance and Treasury

Performed clean up of old reconciling items;
Consolidated BoJ reporting process of all banks;
Consolidated Financial Statement presentation
Booked unrecorded assets and liabilities discovered in the different institutions;
Merged treasury functions, producing single deposit rate sheets, loan rates, inter-bank borrowing and lending rates and foreign exchange trading rates;
Reviewed and rationalised from 70 to 35 the Correspondent Bank Accounts (to be further reduced to 6); Managed the closure and transfer of the business of the three Building Societies;
Established systems for forecasting and cash management;
Analysed liquidation/divestment of over 40 subsidiaries


Credit

Reviewed and upgraded documentation standards for Credit files;
Developed policies and procedures for Credit personnel;
Established consistent collection efforts and methodology across institutions;
Established single securities department;
Perfected securities being held but not registered


Operations

Consolidated the back office operations of the four banks at 16A Half-Way-Tree Road;
Automated operations of Workers Bank;
Installed new Y2K compliant ATM's;
Established and documented policies and procedures;
Established a Branch Rationalisation Plan;
Performed Product Mapping Exercise;
Determined product retention from menu across the 4 banks Information Technology
Conversion of ATM and credit cards;
Facilitated CONFIDA IT Audit;
Presented conversion plan and Y2K Plan to Bank of Jamaica;
Configure and deliver User report requests;
Document computer operating procedures;
Established Information Technology Plan;
Established co-ordination and integration between IT and Operations;
Established detailed inventory of hardware and software;
Formulated and tested disaster recovery plan.

Human Resources

Developed and implemented redundancy plan for Head Office and Branches; - Union negotiations;
Harmonisation of compensation and benefits;
Developed promotion, transfer and leave modules for the bank;
Modified teller training manual;
Established relationship for Group and health insurance plans with external providers;
Conducted exit interviews and counselling at each phase of redundancy;
Advised on staff selection and retention across branches in Head Office National Commercial Bank of Jamaica Limited continues to implement its rehabilitation plan, and recorded its second consecutive quarter of profit.

The Building Societies associated with the merged commercial banks have been merged into Eagle Permanent Building Society and the deposits were subsequently sold to Jamaica National Building Society. Insurance Companies

(i) The latest development in this area is the sale of the combined portfolios of traditional life, equity-linked, group life, non-lump sum interest-sensitive, and health policies and pensions of Mutual Life, Dyoll Life and Crown Eagle Life, as well as management of the pension schemes formerly managed by these companies to Guardian Life Insurance Company of Trinidad and First Life Insurance Company of Jamaica.

(ii) In order to substantially shorten the transfer process, an application was successfully made to the Supreme Court for a judicial manager to be appointed over this portion of the business of all three companies. On July 29, 1999 the Supreme Court approved the Agreements for Sale, and ordered the transfer of the business. First Life and Guardian Life took over management of the portfolios on August 1, 1999. The portfolio was transferred to Guardian Life on November 5, 1999.

(iii) In respect of the interest-sensitive policies issued by these companies, the FINSAC/BNS Trust initiative has been accessed by 4,091 policyholders, with a total liability of J$2.5B. For United States dollar denominated policies, 11 policyholders have taken advantage of the scheme, with a total liability of US$334,000. The combined figures represent 52% of all policyholders and 80% of the total liabilities.

(iv) As an interim measure, FINSAC provided the facility of an Emergency Fund
which allowed policyholders establishing hardship and extreme need to obtain advanced funds from their policies. A total of $32,733,861.77 to 2,514 policyholders was advanced under the programme.

(v) In response to request for assistance from representatives of the Board of Directors of Island Life, FINSAC arranged the signing of a Letter of Intent between Island Life, FINSAC and Barbados Mutual (one of the firms that competed for the life insurance portfolios). The proposal was presented to an Extraordinary meeting of the Island Life shareholders and approved. The agreement requires FINSAC to eliminate the insolvency position of the company (approximately $340M) and for Barbados Mutual to inject additional capital of approximately 260M. This will give Barbados Mutual a 64% ownership with FINSAC retaining approximately 26%, and the previous shareholders 10%.

Based on the equity injection, Island Life will be the best capitalised insurance company in Jamaica.

Regulatory Reform of the Insurance Sector

The FINSAC/Insurance Project team continues the task of drafting the proposed new Insurance Act for submission to Cabinet. This project which will assist in streamlining the operating regulations and standards for the industry, is partially funded by the Inter-American Development Bank. The third draft of the Insurance Act and Regulations incorporating comments from the Office of the Superintendent of Insurance (OSI) and the local insurance companies is expected to be completed shortly.

The annual reporting forms are also being finalised in consultation with representatives from the sector.

Update on Status of Forensic Matters

Formed in early March 1999, the FINSAC Forensic Unit currently oversees the investigation of suspected fraudulent activity at a number of FINSAC-intervened institutions. Where these investigations lead to civil or criminal proceedings, the Unit works will legal advisors and/or the Director of Public Prosecutions to bring the matters to successful completion.

The status of the investigations currently under FINSAC is as follows:

Blaise: In the main civil proceedings, FINSAC, on behalf of Blaise Trust and Merchant Bank (BTMB) and Blaise Building Society (BBS), is suing the former directors of these two companies for recovery of sums wrongfully paid out to them and for breach of fiduciary duties. As part of the suit, FINSAC is also claiming against companies privately owned by the Pantons, who formerly controlled Blaise. A number of other suits involving loans to related parties and outstanding credit card debt are also before the courts. In addition, there are a number of criminal cases being handled by the DPP, which are on hold pending resolution of constitutional motions brought by the accused. These constitutional motions are currently on appeal.

Century: A judgement in the civil proceedings in FINSAC's favour for roughly J$2B in cash was handed down by the Chief Justice in May 1999. The defendants (Don Craw-ford, et al) are currently appealing the ruling. The appeal is to be heard in January 2000.

Ciboney: Ciboney has filed suit against its former directors and companies privately owned by them to recover over J$600M which they are alleged to have defrauded from the group. A speedy trial order has been granted but a date for trial has not yet been set.

Eagle: FINSAC has commenced civil proceedings against Dr. Paul Chen Young.

Workers: In May 1999, Workers Bank, together with four other plaintiffs (NIF, NDB, JDB, Mutual Life), filed suit against Delroy Lindsay and others in connection with the 1993 Friends Group share issue. The suit alleges that the share issue was undersubscribed and that the investor's money should therefore have been returned to them.

Debt Management

The status of the FINSAC debt held by the public sector amounting to $33.7B is being reviewed and an appropriate strategy is being developed to address this, as part of a comprehensive approach to debt management.

Other Issues

FINSAC and its affiliated companies, Recon Trust Limited and Regin Trust Limited are Y2K compliant. It has also successfully worked with both commercial banks in which it has a stake to ensure Y2K Compliance. As at September 30, both Union Bank of Jamaica and National Commercial Bank became Y2K compliant and all mission critical systems at the life insurance entities have been deemed Y2K compliant. FINSAC's web site has been launched and can be accessed at www.finsac.com.17. FINSAC's Audited Accounts and Annual Report for the period to March 31, 1999 have been completed and approved by the Board. 

 

 December 10, 1999

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