Troubled investment bank Vanik Incorporation Ltd, struggling through years of financial turmoil, is appealing against a decision by the District Court of Colombo earlier this month to wind up its operations pursuant to applications made by HSBC, as the Trustee for the holders of capital guaranteed debentures and Ruhunu Development Bank.
In an interview with The Sunday Times FT, Vanik's Managing Director and founder Justin Meegoda said despite submitting to the same (District) Court a restructuring plan which got the backing of 75% of the creditors and the shareholders, the Court has given the judgment to wind up without any reference made to the restructuring proposal. Mr. Meegoda said Vanik has given a notice of appeal and filed papers in the courts.
"These are costly affairs but I had a meeting with all my senior officers and even though we cannot predict if the appeal will win, I believe we have a strong case in the Court of Appeal and if the Court doesn't appeal, we will go to the Supreme Court," Mr. Meegoda said. "We feel we can make a better case at that level." According to the October 3 judgment, the case will be called on November 21 for further steps.
Mr. Meegoda said that having started the company back in 1993, he feels he has a moral obligation to the employees and to the smaller individual investors who have put their hard earned money and savings. "I want to pay them all," he said. "I want to show to the business world that you can restart. Unfortunately, we don't have the proper statutory framework in Sri Lanka such as in the US where you can file for Chapter 11 Bankruptcy so that creditor actions can be put on hold. I had to do the restructuring amidst all that."
For the last eight years, Mr. Meegoda said there has not been a single bank that has loaned him a single rupee and stated that the banks have unilaterally sold his securities at very low prices. "They have sold my investment in Pan Asia Bank at Rs. 5, my investment in LB Finance at Rs. 15 and my investment in Watawala Tea which was 20% at Rs. 9. If I had those things today, I wouldn't have to go and beg to anyone."
Vanik was started in 1993 by Mr. Meegoda, the former Managing Director of Merchant Bank and other professionals in the banking sector. "It was unique because before that, no one had started a finance institution in Sri Lanka of this magnitude without the sponsorship of the state or a large corporation," he explained. "We grew very rapidly in a period when the market was growing very fast and merchant banking was new as a concept which we started."
Vanik got involved in many privatization deals at that time as an investment bank and in a number of other projects. "Growth was expected to continue for a number of years but unfortunately, no one including other financial institutions and investors knew that Sri Lanka was at the tail end of growth and when the government changed in 1994, I think that was the start of the downturn," Mr. Meegoda said. "The stock market started coming down continuously for about seven or eight years. Many of the projects that we financed such as hotels and others did not get off the ground because of the war situation that came back. Other banks were not willing to co-finance."
Mr. Meegoda described the Rs.2.5 billion acquisition of Forbes Group in 1999 as the major mistake Vanik made. "Forbes was one of the largest groups and it was basically exposed to the plantation sector. They owned certain percentages of plantations and they were tea brokers and provided services to the tea industry. The total value of the acquisition was very large and if you look at the financial viability at that time, it looked good," he said. "Anyone would have said our decision to acquire was good. One thing we didn't look at during that time through our own enthusiasm was the macroeconomic risks. If something goes wrong, do we have the holding power being a new company?"
Immediately after the acquisition, Mr. Meegoda said tea prices went up and for the first time, Vanik reported a loss. He described it as a shock to the market because Vanik was increasing in profits and growing; then it reported a loss. "It led to all kinds of rumours and this is a small market," he said. "People started pulling their money out and we could not cope up with. No finance institution can cope with something like that."
Mr. Meegoda, a former employee of the Central Bank (CB) went to the CB Governor at that time. According to Mr. Meegoda, the Governor stated that Vanik was not a commercial bank and therefore, the CB was in no position to help. "That is not the reply you expect to come from a Governor," Mr. Meegoda said. "I can expect that from the bank supervision department or an officer. What I wanted was for them to just give an indication to banks that they should have supported me and then I would have been able to manage the things."
However, Mr. Meegoda said the CB did not only refuse to help Vanik but they gave instructions to the bank supervision department to ask other banks what their various exposure to Vanik was. "That frightened all the banks and they closed all credits to me and up to today, they have not given me a single rupee. They foreclosed and all kinds of things happened in addition to people pulling our investments. During this period, more than Rs.7.5 billion went out. If it was some other company, it would have collapsed and gone. It was our sheer determination and confidence that we managed to so far survive and save this company."
Vanik subsequently submitted several restructuring proposals to the government. "We didn't just ask for money," Mr. Meegoda said. "We had a lot of solid assets which at that time were not liquid." The CB had questioned the value of the assets to which Mr. Meegoda suggested an independent team to go through them. "With CB agreement in 2002, they got a team together and asked me to select a private sector man to vet my proposal and it was coincidently Ajith Nivard Cabraal, the current CB Governor and two officials from the CB." Mr. Meegoda said he doesn't think anyone even looked at his proposal or the team report.
In the end, Mr. Meegoda said without any changes of assistance, Vanik came up with what he says is a unique restructuring proposal. Under a section of the old Companies Act, Vanik went to the District Court in 2006 and asked them to call a meeting of the creditors. "We proposed to creditors, mainly the institutional creditors, to view the accrued interest which we had not paid from 2002 and to have a debt equity swap in which part of the debt, 60% on average is to be converted to new shares in Vanik and the balance 40% to be repaid over a period of three years by annual installment and for future interest to be paid again in shares." Around 75% of the creditors approved the plan which under the Act would make it binding on all creditors. Mr. Meegoda further said he will get shareholder approval to not only issue new shares to the creditors but also existing shareholders will sacrifice by reducing their capital by 90%."
There were a series of delays in getting shareholder approval including delays by the auditors to release the company's audited accounts. "For no apparent reasons, our auditors were sitting on the audited accounts and not releasing them," Mr. Meegoda explained. "We finally had the shareholders meeting about two months back and they approved it. What happened was when the auditors delayed releasing the accounts, we passed to another financial year and we had to audit that year. Since the early auditors were not responding, we changed the auditors and they moved fast. Then the New Companies Act came into effect and we had to comply with certain things there." There were a series of events that led to the delay. On this basis, we were confident that we could turn around the company.
According to Mr. Meegoda, the winding up case against Vanik was originally filed by the public bank in 2000 for Rs.8 million after the company had already settled Rs.7.5 million in debts. "Winding up procedures cannot be used as a debt recovery exercise but these lawyers did exactly that. We were paying the bank and there was a dispute about interest because they had charged high market rates of interest as high as 30%. We paid the public bank the Rs.8 million and thought it would be over." Then, two other banks, HSBC and Seylan Bank got into the winding up operation about two years ago. "I have never heard of this happening when a company tries to restructure itself and start paying off debts," Mr. Meegoda said. "We have told the banks they will recover all their money but they are trying to liquidate ourassets." Mr. Meegoda explained that the creditors will get nothing if Vanik's assets are sold under distressed conditions because it will go towards paying off statutory dues and the creditors will not get anything. "There is no purpose. They should give a little bit of time to see if we can do it."
Mr. Meegoda said Vanik's major asset is Capital Reach Investment which he is planning on selling at the right time at his target price to be used to repay some of the liabilities and strengthen the subsidiaries. Vanik has a one third stake in both Capital Reach Leasing and Capital Reach Credit and has approximately a 6 or 7% stake in Capital Reach Holding. Altogether, Vanik has around 10 million shares.
According to Mr. Meegoda, Capital Reach is trying to go public and was valued at Rs.18 a year back. "Capital Reach is trying to go at Rs.20 on a small issue but I want a price of Rs. 35 and I have to wait until I get that," he said.
Due to the debt equity swap, the stake of existing shareholders has been diluted from 100% to 4.6% with the creditors owning the balance with the swap. Vanik also negotiated with USAID to guarantee a Rs.400 million debenture. Half of that was guaranteed by USAID with the other Rs.200 million guaranteed by People's Bank.
Mr. Meegoda said that depending on the outcome of the winding up case, Vanik originally established a name as a merchant bank.
"That is also my forte. It is fee based. That is where I want to get back to. I want to do new things and go into new areas that no one has touched in the fee based area including restructuring troubled companies. That is one thing we have first hand experience in by doing our own."
Mr. Meegoda also wants to focus on other subsidiaries such as it’s corporate services and its software development company which he wants to capitalize further.
"The software development company was earlier my IT department.
Now they are slowly getting into positive cash flows," he said. Then there is Vanik Insurance Brokers which also needs some small capital infusion. There is another subsidiary which provides legal services which is showing a lot of potential. Mr. Meegoda also said Vanik has developed a 100 acre teak plantation in the Puttalam district, parts of which have been sold to companies such as Touchwood. "We want to expand that activity. It is a profitable venture and a worthy cause."