Business News of 2013-12-10

Sale of Merchant Bank: Why SSNIT endorsed Fortiz

The Social Security and National Insurance Trust (SSNIT) has fully endorsed the sale of Merchant Bank Ghana (MBG) to Fortiz Private Equity Fund Limited (Fortiz PE) on grounds that the transaction is in the best interest of the Fund and its contributors, the GRAPHIC BUSINESS has gathered.

According to a confidential report on the deal intercepted by this paper, the pension fund manager is satisfied that all procedural steps had been undertaken in a transparent manner, while in-depth due diligence was properly conducted to ensure that the sale would be to the benefit of the Trust, including assured generation of profits instead of the perennial losses which had threatened the collapse of the bank, with associated contagion effect on the banking industry.

The confidential report also makes a cogent case that unlike FirstRand of South Africa which had tried to acquire MBG, Fortiz PE had demonstrated beyond reasonable doubt that it was committed to wholly absorb the debt portfolio of Merchant Bank.

“They have also underwritten 30 per cent of the loan debt and further given SSNIT and SIC Life an option to use 70 per cent of the remaining debt (beyond the 30 per cent they have underwritten) to buy more shares in MBG,” the report said.

Due Diligence Report

The GRAPHIC BUSINESS also gathered that SSNIT had enough evidence on Fortiz and after a meeting between the parties, it eventually emerged as the company with the best strategy to turnaround the bank.

Renowned accounting firm, KPMG, also advised SSNIT that Fortiz’s proposal met the guidelines laid down by the Bank of Ghana for the bank’s such as Merchant Bank to operate.

MBG has Capital Adequacy ratio and liquidity concerns which the Bank of Ghana wanted them to correct. The central bank was therefore concerned that any acquirer of the universal should have plans to address those concerns.

Nature of loans on MBG

Previously, an operational and financial audit commissioned by SSNIT and conducted by pwc (PriceWaterhouseCoopers) revealed how bad the loans portfolio of the bank was.

This compelled the major shareholder of the bank, SSNIT, to recapitalise the bank on two occasions to save it from total collapse the report indicated, adding that “this move comes with its attendant consequences to the economy, the workers therein, not forgetting the corporate and individual deposits with the bank.”

The GRAPHIC BUSINESS investigations indicate that it is against this background that SSNIT considered an exit, even if not totally, to allow a pure private sector led approach to turning the bank around.

The report also indicated that “SSNIT has a duty to minimise any loss to any of its portfolios” and that “It does not, therefore, make financial and business sense to accept a proposal which makes SSNIT responsible for the said debt (which is a major cause of the bank’s woes) or deceptive proposal of SSNIT taking over the debts and employing a debt-collector to assist it to collect same.”

Resignation of appointed directors

The report described as unfortunate, the resignation of some directors on the board of the ailing bank.

The report observed that the directors resigned after the FirstRand agreement had mutually been terminated and after KPMG had submitted its report in September this year.

The GRAPHIC BUSINESS gathered that whereas SSNIT paid only US$50,000 to KPMG to be a transaction advisor, the board of MBG paid Toad Capital, a South African company, more than US$518,000, including accommodation for officials of Toad with a provision to release another US$1.3 million had the transaction gone through.

Payments made to Toad began in January 2012 when it was appointed on retainer basis and paid US$45,000 in each month of the first quarter 2012, while US$25,000 was paid each month between April and December 2012.

Between January and June 2013, the company was also paid US$10,000 each month.

The total amount paid to cover travel expenses and accommodation amounts to US$98,135, this paper found.

Comparism between FirstRand and Fortiz PE

The report said in comparing the two bids, both institutions established the negative value of the bank and therefore it was of no value to SSNIT. This is because MBG has a large loan book.

Again, FirstRand wanted to have nothing to do with the Merban Assets Recovery Trust (MART), which had been set up as a subsidiary to recover bad loans for MBG.

That is, FirstRand indicated that the owners of MBG (SSNIT and SIC Life) should buy off the entire MART – which has absorbed 100 per cent of the bad loan book of MBG, off the balance sheet of the bank – before it (FirstRand) becomes a shareholder. However, Fortiz took full responsibility of the bad loan book. This implies that Fortiz on becoming a shareholder of MBG will take up 30 per cent of the MART and seven per cent will go to the other shareholders.

The Ghanaian entity has also expressed its willingness to engage in the recovery of the remaining 70 per cent. That is not all; and any further recoveries of the debt in excess of 30 per cent will be split between SSNIT and SIC Life in the proportion of 70:30 respectively.

Whereas in the Fortiz deal, there is no further contribution from SSNIT for the 10 per cent stake, in the FirstRand deal additional GH¢88.3 million contribution from SSNIT was envisaged. FirstRand agreed to pay GH¢140 million for the existing bank but SSNIT was required to pay back this amount into the bank.

This paper learnt that by June 2013 when the completion period lapsed, the parties had still not agreed, hence there was a mutual agreement to terminate and afterwards, SSNIT began to receive new bids and FirstRand was duly informed.

However, the date was extended to enable FirstRand to re-submit a bid but the South African company did not accede to the call.