While the countdown to a possible US default looms large for the American economy, little note has been made of a potential impending default here at home with potentially equally calamitous consequences. It is the tale of two companies; one aggressively acquisitive and some might even say recklessly so, the other a 250 year old franchise steeped in tradition and conservatism.

CL Financial, the troubled Trinidadian conglomerate, continues to struggle with ways to repay its debts, as the shareholders of the company and the Trinidadian government continue to lock horns on how best to proceed. At the centre of the debate seems to be the fate of the Jamaican conglomerate Lascelles deMercado (LdM).

CL acquired the group in 2008 and financed the purchase through the issuance of US$340 million of debt in both Jamaica and Trinidad. The notes were originally due to be repaid in early 2010, but when CL got into trouble the note holders were persuaded to forebear from exercising their rights to foreclose on the company with the promise that the company would sell down assets sufficient to retire the debt.

This was entirely consistent with a Memorandum Of Understanding signed between the Trinidadian Government and CL in which CL promised to enter into an aggressive programme of subsidiary liquidations to help reduce the company’s indebtedness. Core to that agreement was the planned sale of CL’s interests in Republic Bank and Methanol Holdings, two assets that were of very high strategic importance to the Trinidadian economy.

Two years after the signing of that MOU the company appears no closer to selling these assets than when they entered the agreement and the war of words between the Trinidadian Government and the CL shareholders and directors has culminated in a civil suit brought by the Trinidadian Central Bank against two former CL directors. The suit alleges that the two directors misappropriated assets of Clico to the detriment of policy holders and mutual fund investors. One such case of the alleged misuse of the insurance company’s funds includes the acquisition of Lascelles deMercado.

The LdM acquisition was fraught with controversy almost from the start. Local Trinidadian pundits predicted that this latest acquisition of the Laurence Duprey-led CL Financial would be the straw that ultimately broke the camel’s back. While it seems far more likely that it was the global financial crisis of 2008 that brought down the debt laden company. As the cracks began to show in the CL facade a lot of questions surrounding the LdM transaction were raised. Analysts began to question how it came to be that Angostura, a publicly traded company which, while majority owned by CL, had a sizable minority shareholding came to be one of the guarantors of the CL acquisition?

Pledging its interests in LdM to the benefit of CL but to no discernible benefit of Angostura itself.

By early 2010 it was pretty clear that the debt issued by CL to finance the LdM acquisition was going to slip into default. Encouraged by the recent intervention of the Trinidadian Government into the affairs of the troubled conglomerate, the note holders were persuaded to extend the debt to early 2011. Note holders received assurances that the company was now squarely in the control of the Government of Trinidad and Tobago and steps were to be taken to liquidate assets as needed to retire the debt.

In January of 2011 the debtors were again asked to hold sway until late July — again with promises of impending sales. Rumours of a pending sale of the LdM crown jewel J.Wray& Nephew swirled in the market, which company insiders claim unsettled the spirits business’ ‘global partners, the uncertainty surrounding the future of the company combined with the global recession continued to pressure the stock price of Lascelles de Mercado.

As the share price of Lascelles continued to tumble so did the company’s legendary cash reserves as it paid ever higher and higher dividends and capital distributions which were ultimately used by CL to service its debt, which by now was costing the company a whopping 12 per cent, at a time when US interest rates had fallen to virtually zero.

Still, comforted by the fact that the Trinidadian Government was in the picture and Lascelles still had at its helm the indomitable Billy McConnell, the debt holders remained sanguine that all was well, even as a veritable merry-go-round of CL directors were appointed to the board only to seemingly inextricably resign shortly after their appointments.

Still, the stalwart original Jamaican directors, McConnell, Anthony Bell, Michael Fraser, David Henriques, Richard Powell and the more recent addition of Jason Abrahams all gave the debt holders confidence that the asset which secured their loan to CL was in good hands and in good shape. Then, all that changed.

At the end of March the company announced the “retirement” of William McConnell and the man most had picked to be his successor, Anthony Bell. Two days later Jason Abrahams resigned, the JSE notice of his resignation hinted that his departure was a result of some kind of disagreement at the board level. The following month David McConnel, head of marketing at J.Wray& Nephew jumped ship.

In June, Henriques, Powell, and Fraser resigned en bloc. By a count, CL has appointed 16 directors in three years of which seven still remain. During the same period a total of 15 directors have resigned their posts. What is it that makes them not want to remain as directors of a company with such a longstanding tradition of corporate probity? Some of LdM’s businesses have been around for over 250 years. One cannot help but wonder if the directors are concerned about decisions occurring at the CL Board level. In any event such apparent chaos at the board level does very little to engender market affection for either the company or the debt that it secures.

Scrambling to shore up confidence following the departure of the Jamaican directors, CL quickly announced the appointment of Messrs Downer, George and Bernard — all of whom are widely respected Jamaicans with deep corporate experience. However the fact that there were now only three independent Directors on the board meant that the balance of power at the LdM board had now shifted dramatically in favour of CL. Less than a week after the board changes, LdM announced the biggest dividend in its history.

Attention must be drawn to the fact that the dividend was paid only after the stalwart directors left and one canât help but wonder if the dividend was the point of departure for them. One would reasonably be concerned that the distribution doesn’t put the company at risk as it is only the latest in a series of large dividends that continue to deplete the company’s working capital. Also very concerning to several analysts was whether or not the note holders were informed of the massive dividend before the Jamaica Stock Exchange?

This would have meant that one sector of the Jamaican investment community was given inside information prior to the rest of the market. Knowing about a US$35 million dividend two days before the rest of the market could be potentially very valuable information.

With the departure of McConnell and the massive shift in the balance of power at the LdM board level, debt holders secured by the LdM assets are growing increasingly concerned that the asset they hold as collateral may continue to fall in value. In the past, the Trinidadian note holders were inclined to be patient secure in the knowledge that the Government was supporting the company. However as reports begin to circulate that the Government is likely to withdraw its support shortly, even the Trinidadian note holders are starting to weigh their options.

One banker in Trinidad lamented that the mere presence of the notes on his institution’s balance sheet was a source of concern for his clients. It seems reasonable to assume that the various fund managers that hold the notes, while they may have been motivated to try and aid their government’s efforts to prop up CL they now must consider their fiduciary duties above all else.

The question is will CL be able to repay its debts by the end of this week on July 23 considering it is faced with increasingly concerned creditors and waning support from within the Trinidadian Government. But more importantly, at what point will the creditors declare enough is enough?