POINTE BLANCHE--In light of the recently leaked St. Maarten Harbour Holding Company (SHHC) NV Consolidated 2013 Financial Statements and 2014 Budget, The Daily Herald approached a financial expert to make sense of "the big picture," so to speak. Low cash flow, high investments and loan repayment issues take the focus.
The documents in themselves would need to be supported by additional background information to clarify some details, so there is a line between what can be judged objectively and what cannot. There also are points that are left up to personal perspective, such as one's approval of expenditure amounts for salaries and marketing budgets.
The most important conclusion is that the company's cash flow as it appears over 2012 and 2013 is very "slim" in view of the US $150 million bond loan that is due in 20 years. Some $50 million of that bond loan, which SHHC entered into on February 12, 2012, was earmarked for the causeway over Simpson Bay Lagoon.
"There will certainly be no room for other large investments based on the present financial structure," the expert said. At the very least, the cash flow should be $7.5 million, so that SHHC can repay the loan over the years. "There's a possibility to roll it over in the market on due date, but that's not certain, of course."
In his opinion the low cash flow is due primarily to the $50 million investment in the causeway bridge, which brings in no revenue, has to be financed and will have to be depreciated. "I would try very hard to sell it or – maybe – lease it to the Government. Commercially speaking, this investment is not justifiable for the harbour company," the expert said.
SHHC has other loans on the books, including the separate agreements it entered into with Carnival Cruise Lines and Royal Caribbean Cruise Lines in 2007 to finance investments in relation to the second cruise pier. The loan agreement with Carnival was made for a maximum of $34.5 million, and RCCL $10 million.
"No big repayment issues should arise there. Considering other loans, such as one from Carnival, the repayment is structured in a way that it is offset by income received from Carnival. The loan with RCCL is a different story, as it needs to be gradually repaid from the company's cash flow after a 10-year grace period. This should be manageable."
Taking all loans and borrowings together, SHHC's total debt stood at almost $204 million at the end of 2013.
The Octavio Holdings Inc. loan mentioned in the article "Documents point to conflict of interest in port crane purchase" in the December 12 edition of this newspaper is smaller still, "so from a liquidity perspective it's not really relevant."
The $3,736,206 loan agreement with Octavio Holdings financed the purchase of a new Gottwald crane, which was meant to increase cargo operations. Additional documents made available to this newspaper show the company to be registered in Panama and indicate that one of the three directors at Octavio is Peter Soons, the brother of former chairman of the Supervisory Board Michel Soons, who held the position when the loan agreement was made.
"This loan should almost be considered as a related-party transaction, in view of the fact that one of the Directors of the Panamanian entity is one of the Soons family and it is well known that Panamanian companies are structured in such a way that the outside Director is really the man who decides the company policy," the expert said.
"The question that would come up is 'why use a Panamanian company' for an amount that's not very high for this Company? It could be that they tried locally and banks refused in view of the uncertainty of the future cash flow and repaying this bond loan would be a major financial obligation. If it cannot be rolled over, it has to be paid in cash. Therefore, bankers may be reluctant to grant loans.
"Why go to such an unusual legal construction as to ask a Panamanian company for a loan which in the total framework of the company is insignificant, I would say. Unless, of course, the harbour was in difficult circumstances at the time and they needed to pay for this crane. It's hard to judge, but this 'smells' of a related-party transaction and in that case it should be mentioned in the notes to the financial statements."
It should be noted here that the expert was interviewed before SHHC Chief Executive Officer Mark Mingo issued a press release to explain the Harbour's reasons for entering into the loan. Besides expanding on the strategic reasons of improving and speeding up cargo movements, Mingo also explained why Octavio's terms and conditions were more favourable than those offered by the crane company Gottwald and local banks RBTT and Windward Islands Bank.
Mingo's press release did not address the issue of a perceived conflict of interest. However, the expert pointed out that it did not necessarily mean there was one.
"The related-party transaction does not automatically translate to a conflict of interest ..., but you would be extra careful and want to disclose and clarify the terms, take away any false impression, because that's very quickly involved in a related-party transaction," he said.
"If I had not seen this excerpt from the Panamanian commercial register, I would not have known ... if it were not for the whistle-blower," he added, referring to the "very concerned private citizen" who leaked the financial statements to the local media.
Fiscal loss, profit tax
Another point of interest is the accumulated fiscal loss of more than $54 million. This means that for the foreseeable future the harbour will pay no profit tax.
"In simpler terms, that means that after January 1, 2014, the company can make $54 million in profit without paying a single cent in profit tax and that is reasonable because they sustained fiscal losses in the past – up to 2013 – for this $54 million.
"Normally speaking, the commercial profit and the fiscal profit are the same, but in this case there is an exemption for the head tax and the container tax," the expert explained, referring to the exemptions laid down in law by Parliament.
"Total revenues are about $48 million. Of this, $15 million are exempt from profit tax. That means that you have revenues – including the head tax and the container tax – of $48 million, and you have various expenses. That means that the taxable income before these exemptions (the fiscal profit) is less than $3 million.
"Then, subtract the $15 million of head tax and container tax and you already have a fiscal loss (in 2013) of $12 million. ... This is a structural situation, where if this does not change the harbour will possibly not pay profit tax in the foreseeable future."
Not paying profit tax does not mean the company is awash in cash, he said, returning to the heavy burden of the $150 million bond loan.
"Over the coming years, the company will depreciate its assets. ... Depreciation ends up on the bank account, because you sell your product and you get compensated for the depreciation. In the case you do not invest in new assets, you accumulate the depreciation and that stimulates the cash flow. From this cash flow the loans must be serviced – that is, paying interest and redemptions.
"They're depreciating the various facilities. ... The deprecation is lower than the finance charge they have to pay to the bond holders," he said.
"This means that any profit the company makes on top of the depreciation will not automatically generate enough cash flow to repay the bond loan after 20 years.
"To generate liquidity to the tune of $7-8 million, simply to redeem this bond loan the company's cash flow will have to be tightly managed and probably... any real profit will have to be accumulated to create enough reserves."
The balance sheet did not appear to be the problem at all. "There are $290 million total assets and a shareholder's equity of $73 million. ... That's actually very solid. Many companies have a less favourable ratio. That is not the problem. ...
"The problem is that the loans need to be redeemed in the future and that is directly dependent on the future profits, because the future depreciations alone will not be enough to generate enough cash to repay these loans.
"The fact that the bridge needs to be depreciated and maintained, but generates practically no revenue, is a burden to the company," he said.
He also questioned why some essential information was lacking from the reports. In addition to showing the financial position, the SHHC financial statements also have another function: to give the shareholder, and stakeholder, insight into the company's performance. It is not sufficient to show the total net profit, as it results from the revenues minus the total expenses, he explained.
"The organisational structure of the Group follows the several activities on the island [i.e. Cruise, Port, Simpson Bay Lagoon Authority – Ed.] These activities are carried out in different locations and probably with separate assets and staff.
"Now, in my opinion, this enables the Holding's management to report not only on the total results, but also on the results of the separate subsidiaries.
"It is to be expected that in the books of the subsidiaries there already exists a 'natural' allocation of expenses, like personnel, depreciation and specific overhead. Interest expense can easily be allocated to the subsidiaries, based on the investments in fixed assets and working capital.
"That leaves the Holding's own overhead as a final expense item. Unfortunately the financial statements as presented to the shareholders do not give this essential info," he pointed out.
"That means that the shareholders cannot judge if certain activities are profitable and maybe need a different approach. In other words: an important instrument for the Board of Supervisors and shareholders is lacking. Management does give in its own report some figures on the results of the separate subsidiaries, but the underlying figures do not remotely tie in to the Profit and Loss Statement over 2013.
"It is possible that this by-subsidiary economic information exists, but in that case one wonders why this was not included in the financial statements. One simple annex in the annual accounts, allocating the cost totals in the profit and loss account 2013 over the separate subsidiaries would have given a wealth of information."