Beximco Textiles (Bextex) has recently won the Securities and Exchange Commission's approval to pay off its foreign and local creditors by issuing 19 crore new shares at Tk 32, down from Tk 60, the going price of company shares.
Bextex also demanded a lifting of its lock-in system, which the SEC rejected.
The company will not issue the new shares to the foreign creditors directly, but to an “assignee” nominated by the foreign lenders.
After receiving the shares, the assignee will pay off the loans to the foreign lenders -- (Commonwealth Development Corporation), a UK-based equity investor in emerging markets, DEG, a German development finance institution, and Marubeni Corporation, a Japanese company.
The three lenders have nominated a Bangladeshi company, named New England Equity Limited, as their assignee. The issuance of new shares to a company with an unknown track-record has raised questions among businessmen.
A Daily Star investigation found that the assignee company was incorporated only on May 26 this year, 13 days after Bextex's announcement for loan repayments.
Mohammed Lutfar Rahman, one of the two owners of the company, is a close friend of Beximco Group's vice-chairman. Shoma Alam Rahman is the other owner.
The local creditors are all sister concerns of Beximco: Beximco Ltd, Shinepukur Ceramics, Bangladesh Online, New Dacca Industries and Beximco Holdings.
Now the deal throws up a host of questions because Bextex is a publicly listed company.
Why does the company not want to reflect the proper market price while it repays loans in shares? Why should the company push for issuing more shares to repay loans while it could do the same by issuing half the number and selling at market prices? Why are the shares being given to a company which was unknown even weeks earlier, and not to the creditors, to repay whose loan the exercise is purportedly being carried out?
Shareholders are concerned how their share value is being protected in such a case.
The regulators approved Bextex's plan for issuing shares which keep the prices low after some queries emerged: who the assignee is and what kind of deals the company had cut with its creditors and assignee.
UNUSUAL PRICING OF SHARES AT HALF THE MARKET RATE
Bextex said it owes Tk 635 crore to foreign and local creditors. Its Tk 315.18 crore foreign loans include Tk 43.78 crore from CDC. Bextex owes Tk 39.44 crore to DEG and Tk 231.96 crore to Marubeni.
It owes Tk 320 crore to local lenders.
Bextex felt that it should repay the loans to relieve itself of the interest payment obligation and push its profitability up. But the repayment is not in cash, but in shares.
Accordingly, it sought permission from the SEC to issue more than 19 crore shares at Tk 32 each to repay the loans while Bextex shares are currently trading at over Tk 60.
Why Beximco priced shares at half the market rate raised questions among investors.
Beximco argued that it fixed the price in line with weighted average price for the last six months from the announcement of the issuance of equity shares on May 13.
The company had also asked the SEC to lift any lock-in on its equity shares against loans but the SEC rejected the request.
The SEC rules say the lock-in will apply to shares against loan or debt securities without any predetermined conversion feature if such equity security is not issued at a price equal to last six months' weighted average market price on the stock exchange (s).
If the weighted average price of last six months had been determined from the SEC's consent date, Bextex shares would have been priced at Tk 50 at least. In such a case, it could pay off its loans by issuing a smaller number of shares. At this rate, the value of 19 crore shares that Bextex will issue to pay off its Tk 635 crore loans will be Tk 950 crore. And if the same number of shares had been sold to the market, they would have fetched Tk 1,140 crore, with prices remaining at Tk 60 each share.
Bextex could issue rights shares with premium, based on market prices -- an easy option to raise capital -- but it did not go for this.
According to the Bextex proposal, a third party called "assignee" will receive the shares meant for loan repayment. “CDC, DEG and Marubeni will assign the loan to third parties to whom the shares will be issued against payment of the outstanding loan amount and interest which will be remitted to CDC, DEG and Marubeni through Standard Chartered Bank which is the designated bank for this purpose,” the Bextex proposal reads.
“CDC, DEG and Marubeni have agreed that shares will be issued only to their assignees and that such assignees will be Bangladeshi and not foreigners thereby ensuring that in the future sale proceeds of these shares including capital gain (if any) will remain in Bangladesh and cannot be remitted abroad,” it further said.
WHERE DO SHAREHOLDERS STAND?
If the Bextex plan gets through, its share base will almost double to 40.56 crore shares from the existing 20.71 shares.
It will have a two-way impact -- first, as the company claims, it will free itself of loan repayment obligations, and secondly, as experts say, it will create dilution in market prices, the company's earnings and net asset value.
The company said the foreign loans carry interest and exchange fluctuations at an average rate of 16 percent a year. Except for the Bangladesh Online loan, which is interest-free, other Beximco Group companies loans carry interest rates at 10-15 percent a year.
Such high-financing costs squeeze the company's net profit, and consequently, earnings per share. Further, repayment of foreign loans causes a cash-flow strain. Higher loans also deteriorate the debt/equity ratio, the company said in the proposal.
Current earnings per share of Tk 3.08 will come down to below Tk 2. So it will divide the company's profit further. It means smaller profits, if any, to shareholders. A deeper analysis is needed to see if interest repayment is a better option or profit and price dilution for the shareholders.
BEXIMCO EXPLAINS
Beximco Group Vice-chairman Salman F Rahman told The Daily Star that Bextex had to find a way to pay the debts as it defaulted on repaying the foreign creditors, who were now pressuring Bextex to repay the secured loans.
“Even the foreign creditors had cautioned that they might sue us to realise their loans,” he said.
"After negotiations, the foreign creditors have agreed with debt conversion. In the conversion process, we will issue new shares against loans to an assignee, nominated by the foreign creditors, and the assignee will take the loan liability. It means the assignee will take the risk and responsibility of the loan repayment," Rahman said.
Rahman added that it would be a kind of investment for the assignee.
The assignee would be Bangladeshi so any capital gain from the sale of converted shares remains in the country. "The foreign creditors will just receive their loans," he said.
"We will be able to make our company loan-free. The deal will not only strengthen the company, but will benefit every shareholder, as the company's earnings will be increased," Rahman said.
"It will be a win-win situation for all -- the company, the creditors and the shareholders," Rahman said.
Asked why Bextex did not go for issuing rights shares, he said the company might not get the price of Tk 32 from issuing rights shares.
"The price would be far below Tk 32," he said.
He also said he did not lobby for lifting the lock-in system.