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PART 3 REPORT OF THE SENATE SELECT COMMITTEE INVESTIGATING THE SOCIAL SECURITY BOARD

GeneralPART 3 REPORT OF THE SENATE SELECT COMMITTEE INVESTIGATING THE SOCIAL SECURITY BOARD
(Continued from this week’s Wednesday edition, #2278 of Oct. 22, 2008)
 
Comment on private sector loans made to the DFC
 
The Special Auditor reports on page 22 that overall the performance of the DFC’s portfolio is very poor. Loans to DFC are not performing adequately and are unsecured, except for a verbal commitment by GOB to ensure that the SSB sustains no losses to the Fund. This prompted the General Manager, in her testimony during the second public hearing, to express concerns about the security of the Fund in light of the potential default of the DFC.
 
The Senate Committee recommends that the SSB obtains from the DFC a workable loan repayment program and the SSB institute a monitoring mechanism to ensure adherence to the rescheduled program to cover these liabilities. With respect to the non-performing commercial loans, the SSB must formally demand settlement from the DFC in order to pressure the DFC to take necessary action against delinquents to settle their debts. It is important that the SSB fund remain intact, because it represents the collective savings of the people of Belize who are by law required to contribute and so it must be available to meet the demands of the people, as beneficiaries, when required.
 
(b) Other Private Sector loans
 
Other Private Sector Loans on SSB’s books do not include the loans made to the DFC directly or transferred to DFC as discussed above. The total value of these loans is $37,349,742.14. This is made up of thirty-five (35) loans among twenty-one (21) borrowers. Of this, twenty-five (25) loans are performing satisfactorily, which is 75% of this portion of the portfolio by value. Three loans totaling $118,002.28 are recommended for write off and seven (7) loans totaling $9,418,046.54 are in difficulty. (Special Audit report pages 36 thru 58).
 
Part Three:
Guarantees
 
On May 5, 2003, the Board gave a guarantee to First Caribbean Bank International Ltd on borrowings by the Citrus Products of Belize Limited (CPBL) amounting to US currency of $4,500,000.00 with a further consideration that CPBL may at any time request that the Board provide a similar guarantee not exceeding BZ$6,000,000.00.
 
In the event the Board is called upon to make good on any default of payment by CPBL, the CPBL shall issue debentures to the SSB, those debentures to carry the option for the Board to convert them to ordinary shares. A one and one-half percentage (1.5%) fee is payable to the SSB on an annual basis on the guaranteed amount.
 
Other guarantees that the SSB has entered into include the guarantees on behalf of the mortgage loans and receivables sold as part of the mortgage securitization program. Most of these mortgage loans originated with the SSB and appear to be backed with adequate collateral. However, some of those emanating from St. James Building Society are extremely problematic as they lack adequate collateral to support the guarantee.
 
Furthermore, in the case of the mortgage loans sold on the North American Program, the SSB retained no collateral since the mortgages were transferred to the DFC for further transfer to the BMC. In this case the SSB was not holding any collateral which it could foreclose on to cover payments which it would be required to make under the guarantees.
 
Summary of Investments and Guarantees
 
Statutory instrument No. 86 of 1980 makes Financial and Accounting Regulations for the management of the Social Security Fund. Section 14, subsection 1 explains how the collected contributions shall be distributed among the Benefit Branches in the following proportions: (1) Short Term Benefit Branch 21.4%; (2) Long Term Benefit Branch 50.0%; (3) Employment Injury Benefit Branch 28.6%. Section 17, subsection 1 and 2 explains the minimum level of Short Term Benefits, Contribution Reserves and the minimum level of the Employment Injury Benefits (Short-Term) reserves that should be available at any one time.
 
The reserves, as specified in paragraphs (1) and (2) of section 17, shall be used to meet unforeseen or abnormal expenditure, which the current income of any Branch may not be sufficient to cover. There is a provision for appropriate action to be taken should the reserves fall below the prescribed levels.
 
As at the December 31, 2002, as per the audited Balance Sheet of the SSB, the totals of the reserves allocated to the various Branches were as follows:
 
•   Short-Term Benefit Branch:
$ 28,429,374.00
 
•   Long –Term Benefit Branch: $164,835,184.00
 
•   Employment Injury Benefit Branch:
$ 35,338,317.00
——————————
$228,602,875.00
 
This sum was tied up in investments as follows (1) $13,298,402.00 were in term deposits with maturity dates ranging from January 2004 to March 2005. Of this, $2,000,000.00 was restricted; (2) $3,000,000.00 was on deposit with Belize National Building Society and virtually unredeemable, therefore the only amount that would be readily available to the board in case of an emergency was $8,298,402.00.
 
The balance of the investments was as follows:
 
Real Estate:
$ 6,610,588.00
 
•   Investment in Associates: $70,526,601.00
 
•   Shares: $10,832,490.00
 
•   Private Sector Loans (10-20 years) $62,588,249.00
 
•   Mortgages and Housing (10-20 years) $66,686,943.00
—————————
$230,543,273.00
 
The Senate Committee notes that the entire sum which was allocated to reserves was tied up in long term commitments with a large proportion of these in non-performing loans. This does not, however, include any indirect or contingent liability resulting from the guarantees extended to the DFC and the RMB under the securitization programs.
 
Section 18 of the Statutory Instrument No. 86 of 1980 states that each of the reserves constituted under Regulation 16 shall be invested only in accordance with general or specific directions given by the Social Security Investment Committee or as may be prescribed. Provided that due regard shall be had to the nature and purpose of each reserve and to the probable period at which it may be necessary to realize the investment. It appears that this has not been followed, and the Fund as at that date could be considered over-exposed.
 
Part Four:
Securitization Transactions
Overview of the Local and Eastern Caribbean Securitization Programs
 
The evidence is that, upon being returned to office in 1998, the new government began implementing a policy of “growth economics”. In summary this policy sought to grow the domestic economy by securing through various mechanisms increased financial capital inflows from abroad. One of the mechanisms used was “Securitization”.
 
Securitization, despite its seeming exoticism, is not a complex concept. Fundamentally, it involves nothing more sophisticated than the selling by a lender, the receivables or future flows of mortgage loans or the Mortgage Loans themselves, which that lender has made to a borrower, and the transferring of the Mortgages, as collateral, to secure the debt to institutional investors directly or through agents to individuals as bondholders.
 
The idea was to be able to bring fresh capital into the country by selling on the international market genuine collateral backed mortgage loans to investors in this type of business.
 
This would be achieved by using various mechanisms to ensure that the institutions selling the loans received new funds to enable them to continue their lending program, new foreign currency came into the system to help with the expansion of investments and the investors were repaid in a timely manner.
 
One of the fundamentals of the program would be that, with time, confidence in the international market would be built up around commercial paper coming out of the country which would eventually reduce the cost of doing this type of business, remove the need for government intervention, and ensure a continuous source of hard currency for further investment as development continued.
 
It follows, then, that in order for there to be a securitization transaction, there must be an original debt owing to the lending institution wishing to sell that debt, and there must be a mortgage over valuable assets in favor of the institution to secure the debt. When the debt is sold and the mortgage transferred to the new party, then the transaction is complete.
 
Mr. Ian Macmillan, the General Manager of the Belize Investment Management Company (BIMCO), was assigned overall management responsibility for the securitization program.
 
He confirmed that the impetus behind the securitization effort was government’s effort to grow the economy. Mr. Macmillan described the purpose of the program, as “the utilization of the securitization methodology was to be part of that stated agenda, which is to bring capital into the country and provide for development.” (Excerpts from transcripts of Public Hearing # 5, page72)
 
Mrs. Narda Garcia, the General Manager of the SSB, also confirmed that the Securitization Program was a part of the general policy of the new Government to attract capital from abroad for development. “It was a decision made by government,” she said, “to bring in fresh money.” (Excerpts from transcripts of Pubic Hearing # 3, page 58). The securitization program was therefore, from the start, a program fully supported by the Government of Belize as part of its overall growth economics agenda.
 
Consistent with this agenda, BIMCO was restructured and assigned to lead the securitization campaign. BIMCO was initially a subsidiary of the SSB, involved primarily in generating and managing residential mortgages at the consumer level.
 
Shortly after the change of Government in 1998, BIMCO was brought under the control of the Ministry of Finance and given the responsibilities of developing and implementing the securitization program. These responsibilities, Mr. Macmillan said, were equivalent to those of “a domestic investment banker.” BIMCO was initially quite successful in its efforts to get the program off the ground. To this end it sought the participation of local lending institutions, since getting a large enough pool of mortgages was crucial to the success of the effort.
 
Mrs. Garcia, Manager of the SSB, remembered that “there were heavy discussions with the credit unions, for example, to participate because they had, collectively, a large mortgage portfolio and some of the credit unions had initially been positive to the discussions.” She remembers also that, “some of the commercial banks were very much interested.” (Excerpts from transcripts of Pubic Hearing # 3, page 58).
 
BIMCO also sought mortgages from the building societies, including the Belize National Building Society and the Saint James National Building Society, and quasi government institutions such as the Development Finance Corporation, the Reconstruction and Development Corporation and the Social Security Board.
 
Once a critical mass of mortgages was gathered, Mr. Macmillan then set out to find buyers for the collected mortgages. Mr. Macmillan described their first venture into the international markets as follows: “Initially we dealt with the Eastern Caribbean Financial Market, with our primary agent there being the Royal Merchant Bank of Trinidad and Tobago. I believe late 99 and up to early 2001, or barely 2001, if my brain serves me correctly, we entered into transaction with RMB, four transactions in all on the face value of probably 102, 103 million U.S. dollars.” (Excerpts from transcripts of Public Hearing # 5, page 72)
 
The local counterpart institutions handling these mortgages were the DFC as the lead institution and the SSB through which mortgages from Government and other institutions were channeled.
 
SSB participated in the Securitization Program by selling flows from loan receivables to the RMB in the Eastern Caribbean Program and mortgage loan receivables to the DFC for sale in the North American Program. These sales were backed by an assignment of the relevant Mortgages to the institutions as collateral to secure the indebtedness.
 
In the Eastern Caribbean Program the SSB sold these flows from mortgage loan receivables to the RMB in four Tranches as detailed below. These sales included six (6) commercial loans which SSB claimed to have purchased from St. James National Building Society, (St. James).
 
In the North American Program the SSB sold Mortgage Loans to the DFC which in turn sold them on the North American Market. In this program the SSB sold loans totaling $33,957,467.38.
 
This included Mortgage loans for housing purchased from Belize National Building Society, a commercial mortgage loan made to the Belize Boarder Management Agency by the SSB and two (2) mortgage Loans which the SSB claimed to have purchased from St. James Building Society.
 
In November of 2003 there was the first default on the entire commercial mortgage Loans purportedly purchased by SSB from St. James. As mentioned above, these loans were sold by the SSB to other institutions, namely the RMB and the DFC.
 
Because of guarantees given by SSB to these institutions to make payments in respect of these Loans irrespective of any default of payment by the borrowers, SSB was required to make these payments to RMB and the DFC respectively when St. James defaulted.
 
These payments by the SSB on behalf of St. James’ Loans came to public attention in August of 2004, resulting in great controversy and in the appointment of this Senate Committee to investigate the matter.
 
Throughout the entire securitization program there was one transaction undertaken with a local bank, four transactions with the Royal Merchant Bank of Trinidad and Tobago, referred to as the Eastern Caribbean Program, and one transaction through the Bank of New York as trustee bank, referred to as the North American Program. Details of these transactions are given below.
 
Section 1.
Local Programme
(I) Transaction No 1
 
    On December 31, 1999, SSB became a go-between for St. James Building Society and Provident Bank and Trust of Belize Limited in a securitization agreement. In essence, mortgages held by St. James were secured with Provident Bank for $1,774,547.94 via SSB. (Special Audit report page 73) This transaction is supported by a transfer of charge from St. James National Building Society to SSB dated December 30, 1999. There is a further transfer of charge from SSB to Provident Bank and Trust also dated December 30, 1999. The agreement is also supported by a Put and Call Option Agreement dated December 31, 1999, between the Government of Belize and the SSB and Provident Bank and Trust of Belize Limited, and a Government Contingency Guarantee in favor of Provident Bank and Trust dated December 31, 1999.
 
Comment on transaction No 1.
 
Social Security entered into this arrangement as a facilitator for payments between the two companies. However, no fee was charged by SSB for facilitating this transaction.
 
While St. James pays the SSB in Belize Dollars; the SSB forwards these payments to Provident Bank and Trust Limited in US dollars. However in the event of a default by St. James, Social Security is not liable for payment. Social Security could offer the Senate Committee no logical explanation for their involvement in this transaction and why the Government would guarantee this transaction. Furthermore, the Senate Committee notes that the Special Auditor did not get a response from Provident Bank on this transaction.
 
Section 2.
Eastern Caribbean Programme
(I) Tranche- A
 
On April 21, 1999, the Board entered into an agreement for the assignment of mortgages (Tranche-A). (Special Audit report pages 75-78) The SSB, the DFC, and the Government of Belize signed an agreement with the Royal Merchant Bank and Finance Company of Trinidad and Tobago. Under the agreement, the Board assigned a total of BZ $18,940,271.83 worth of mortgages. Tranche A was the first issue in which the SSB participated in the sale of mortgage receivables to the RMB. Signing on behalf of the SSB were the Chairman; Mr. Eberto May, the Manager; Mrs. Narda Garcia; and Board member Ms. Martha Williams.
 
A “Put and Call Option Agreement” was executed between the Government of Belize, the DFC and RMB as well as a Government Guarantee in favor of the RMB to support this agreement. The agreed purchase price for the entire group of mortgages was US$31.0 million. The fixed return to RMB is 168 monthly payments of US$315.000.00 (BZ$630,000.00) per month, and the SSB’s portion of this is BZ$293,643.00. The expiration date of this agreement is April 30, 2013.
 
The sale was a combination of mortgages issued by the DFC and the SSB, an approximate value of US currency totaling $23,600,000.00 or BZ currency totaling $47,200,000.00. (Special Audit Report, page 75).
 
As stated above, the agreed sale price to RMB was US currency of $31,000,000.00. The total money received from RMB after deduction of costs was US currency $30,685,000.00 or BZ currency of $61,370,000.00, which included a sum of US currency of $8,000,000.00 that was placed in a sinking fund and deposited with The Royal Bank of Trinidad and Tobago. The fund belongs to the DFC, but was assigned by the DFC to the RMB under a deed of assignment. The beginning date of the transaction was April 21, 1999 and the termination date is April 30, 2013. Under the administration agreement, the monthly commitment is paid to DFC, for further payment to RMB, and was scheduled to remain in force until April 30, 2013.
 
Comments on Tranche A.
 
The committee notes that under this agreement the proceeds of the transaction before pro-rated costs should have been as follows:
Proceeds to SSB:
Bze $18,940,271.83
 
•   Proceeds to the GOB:
$3,237,485.88
 
•   Proceeds to DFC:
$25,268,429.00
 
However, the breakdown of the proceeds received were distributed as follows:
 
•   Proceeds to the SSB: $18,080,131.96 (-$860,140.00)
 
•   Proceeds to the GOB: $19,127,519.98 (+$15,890,034)
 
•   Proceeds to the DFC: $24,162,348.02 (-$ 1,106,081.)
 
It would appear that the GOB received the portion of the sinking fund that should have been deposited with the Royal Bank of Trinidad and Tobago. However, there is no record that the government was repaying this sum. This situation is not significant now because GOB has taken over the liabilities from RMB and therefore the sinking fund is now to the benefit of the Government. This sum should not have gone to GOB since the government was not a party to the benefit of the mortgages before they assumed the liability from the RMB in 2005. The Special Auditor could not determine whether the mortgages pledged by GOB were generating enough income to pay their portion of the monthly payments, since the collections are reported combining SSB’s and GOB’s portfolio. (Special Audit report, page 78).
 
In a subsequent development since the date of the audit report, the GOB has paid off the debt with the RMB, and so now the liability of both the SSB and the DFC is with the GOB. According to the Manager of the SSB, the arrangements remain the same as previous, except that the payments now go to the GOB and are made in Belize dollars instead of in U.S. dollars.
 
(II) Tranche B.
 
On December 23, 1999, a second agreement for the assignment of mortgages (Tranche B) agreement was signed between the SSB, DFC, and RMB. (Special Audit report pages 79 through 84) The total value of mortgages assigned by the SSB in this transaction is $15,473,754.00, and the servicing agreement is for $175,200.00 monthly payable to DFC, for further payment to the RMB, and shall remain in force until December 30, 2013.
 
The overall sale was a combination of mortgage receivables due to the DFC and the SSB totaling a value of BZ currency of $25,753,004.26. The agreed sale price to the RMB was BZ currency $28,800,000.00 or U.S. currency of $14,400.000.00. The total money received from the RMB after deductions was BZ currency of $ 21,564,000.00. A sinking fund was established and retained by the bank in this Tranche. The sinking fund of BZ currency of $6,600,000.00 was assigned to the Royal Merchant Bank by an assignment of deposit agreement, and through an investment management agreement the bank may invest the sinking fund as it sees fit and retain the returns therefrom. This gives the bank an additional income over the fixed return arrangement.
 
Comment on Tranche B.
 
Similar to the arrangement under Tranche A, the GOB has also taken over this arrangement and so now payments are from SSB and the DFC to the government instead of the RMB, and payments are made in Belize dollars instead of in US dollars
 
(III) Tranches C and D.
 
    On March 21st and again on August 30th of the year 2000 a third (Tranche-C) and a fourth (Tranche D) agreement were signed between the SSB, DFC and the RMB. (Special Audit report, pages 84 through 100) Under these two agreements, the mortgages assigned to RMB by the SSB came from St. James and totaled $27,731,240.00.
 
Tranche C included the following Mortgages:
 
1. Data pro International Limited for Bze $ 17,810,000.00
 
2. Aquarius Limited for Bze$1,800,000.00
 
Tranche D included the following Mortgages:
 
•   Aquarius Limited for Bze$ 5,000,000.00
 
•   A Mortgage for Bze$1,463,140.58
 
•   A Mortgage for Bze$ 1,658,099.32
 
Under the Assignment of Mortgage agreements between SSB and St. James, St. James agreed to pay the SSB a total of $1,221,720.00 on a quarterly basis. The SSB then pays that amount to the DFC for further payment to the RMB. Under a guarantee agreement, the SSB is responsible to collect from St. James and pay the DFC for further transmittal to the RMB. This responsibility remains in force until March 21, 2009 for Tranche-C and August 30, 2010 for Tranche-D. Under the Agreement if there is a default in payments by St. James, the SSB is still required to make the payments to the DFC for further payment to the RMB. (Section 3.1 of Assignment of Mortgage document)
 
The Senate Committee points out to the Senate that at the date of this report, this arrangement is no longer in force since the GOB in May 2005 assumed the liability of SSB under these agreements. This is discussed in detail in a subsequent part of this report.
 
The Tranches C and D documentation is as follows: (1) Guaranty Agreement, (2) Administration Agreement, and (3) Purchase Sale Agreement.
 
Tranche C Loans.
 
As mentioned above, the mortgages which the SSB securitized in these two Tranches came from St. James. The SSB did not include any of the mortgages from its own loans portfolio in any of these Tranches.
 
There was no financial benefit to the SSB fund for engaging in these transactions and furthermore, because SSB undertook to unconditionally guarantee payments to the RMB in the event of a default by St. James, and in fact St. James defaulted on payments to the SSB, SSB was therefore required under the Guarantee to make payments to the RMB on behalf of these loans.
 
Because of the foregoing circumstances, the Committee examined the nature and origins of the loans from St. James securitized by the SSB in Tranches C and D.
 
Two loans listed above and securitized in Tranche-C by SSB came from St. James. One of these loans was made by St. James to a company named Data Pro International Limited for the sum of US$8,905,000.00. The other loan was made to a company named Aquarius Limited for the sum of US$ 900,000.00.
 
Because the loan to Data Pro is one of the loans which defaulted and for which the SSB was forced to make payments to RMB, the Senate Committee examined this loan to Data Pro in depth and the details are given below.
 
(To be continued in next Wednesday’s edition of the Amandala, October 29, 2008, issue 2280)

 

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