BARITA Investments, the Jamaican company in which a wholly owed subsidiary of majority State-owned FCB invested in last year, booked a gain of J$719.9 million (about US$5 million) from a foreign exchange transaction with its majority shareholder, Cornerstone Financial Holdings.
The J$719.9 million gain from the related-party transaction accounts for 23.2 per cent of the Barita’s profit before tax for its financial year ended September 30, 2020, of J$3.1 billion.
The transaction between Barita and its 74 per cent shareholder, Cornerstone, is disclosed in Barita’s 2020 annual report.
Barita entered into a non-deliverable forward (NDF) currency contract in which it “sold” US$63 million to Cornerstone. Investopedia defines a non-deliverable forward contract as a cash-settled, and usually short-term forward contract in which the notional amount is never exchanged, but “the counterparties settle the difference between contracted NDF price and the prevailing spot price.”
The contract between Barita and its majority shareholder Cornerstone had a trade date of August 24, 2020, and a settlement date of October 1, 2020, one day after the close of Barita’s financial year.
The Bank of Jamaica’s weighted average US dollar selling rate on August 24 was J$151.07, which means Barita would have “sold” the US$63 million to Cornerstone for more than $J9.51 billion, as financial intermediaries in Jamaica normally add on a few cents to their foreign exchange trading rates.
Instead of depreciating, as it normally does, the Jamaican dollar appreciated between August 24 and October 1, 2020, with the buying rate of the US dollar on the settlement date being J$141.82.
According to Barita’s 2020 annual report: “The settlement was duly executed and the company booked a gain of J$719,982,900 in these financial statements due to movement in the exchange rate.”
The annual report also stated that the transaction was executed “in the ordinary course of business.”
In emailed responses to Express Business last week, First Citizens Investments Services (FCIS) used the phrase “in the ordinary course of business,” to explain its disclosure, in one sentence in its annual report, of the acquisition of 5 per cent of Barita at its Additional Public Offering (APO) of shares in the third quarter of 2020.
FCIS is a wholly owned subsidiary of publicly listed First Citizens Bank Ltd, in which Corporation Sole owns a 64.43 per cent majority interest.
Lindi Ballah-Tull, FCB’s head of legal, compliance and governance unit, said last week Monday: “First Citizens Investment Services Limited (FCIS) is a broker dealer and a reporting issuer registered with the Trinidad and Tobago Securities and Exchange Commission. I do reiterate, however, that FCIS’ participation in the Additional Public Offering (APO) of Barita Investments Ltd (Barita) as indicated in our several emails was done in the ordinary course of business.
“This participation in Barita by FCIS was not an investment that would have required additional reporting as, for example, where a company is purchasing equity in another company or entity in order to obtain some level of control (possibly 10 per cent or more) in that company or entity.”
The Barita APO opened on August 26, 2020—two days after the trade date of the non-deliverable forward currency contract—and closed on September 16, 2020.
Identified in the category of either a client or key shareholder, FCIS purchased 54,280,000 shares in the Barita APO at J$52 a share, spending an estimated US$19.77 million (or J$2.82 billion) “on or about September 16, 2020,” according to Ballah-Tull.
Section 64 of T&T’s Securities Act requires all reporting issuers to file a material change report with the T&T Securities and Exchange Commission within three days of the occurrence of the material change. Reporting issuers are mandated to disclose the “nature and substance” of the material change to the Commission. Both FCB and FCIS are reporting issuers to the Commission.
The Securities Act defines a material change as a change in assets or ownership of a reporting issuer “the disclosure of which would be considered important to a reasonable investor in making an investment decision.”
FCIS made its first investment in Barita on September 16, 2020 at $52 a share. On September 30, 2020, the Barita stock closed at J$95.87 a share, handing FCIS an 84.36 per cent profit on paper in two weeks.
FCIS acquired an additional 12 million Barita shares (equal to 1.1 per cent of the company) on December 4, 2020. The T&T investment company paid an estimated $90 a share for its second stake in the Jamaican company, spending an estimated US$7.44 million (J$1.08 billion).
For a 6.1 per cent stake in Barita, which made it the second largest shareholder in the Jamaican company, FCIS spent over US$27 million.
Barita’s net operating revenue in 2020 was J$5.21 billion, a 31 per cent increase over J$3.97 billion the company generated in 2019, according to its annual report.
The largest component of the company’s net operating revenue in 2020 was fees and commission income, which generated J$1.82 billion, accounting for 35 per cent of net operating revenue in its last financial year. Barita’s fees and commission income in 2020 of J$1.82 billion was 163.6 per cent more than the J$693.3 million it generated in 2019.
The investment company’s second largest earner of net operating revenue in 2020 was ‘Gain on sale of investments and trading profits.’ That category generated J$1.41 billion for Barita in 2020, which accounted for 27 per cent of the company’s net operating revenue. Barita’s ‘Gain on sale of investments and trading profits’ in 2020 was 24.5 per cent less than that category’s J$1.87 billion revenue in 2019.
The company’s third largest generator of net operating revenue in 2020 was ‘Foreign exchange trading and translation gains’. That category, which most likely includes the non-deliverable forward foreign currency contract, generated J$978.45 million, accounting for 18.76 per cent of Barita’s net operating revenue in 2020. Barita’s ‘Foreign exchange trading and translation gains’ in 2020 were 177 per cent more than the J$353.5 million the company earned from the category in 2019.
The Jamaican company’s net interest income in 2020 was its fourth largest revenue generator. Net interest income in 2020 was J$882.58 million, which made it responsible for 16.92 per cent of the company’s net operating revenues. Barita’s net interest income in 2020 was 35.5 per cent more than the J$650.9 million the company generated from the category in 2019.
The Bank of Jamaica’s US dollar selling rate on September 30, 2020 was J$142.10
Barita’s APO was over-subscribed and the company exercised the option to upsize the invitation by 50 per cent to 260,599,830 new ordinary shares. The APO raised J$13.54 billion (about US$94 million) in additional equity capital for the company.
Cornerstone held 631,013,778 shares in Barita in June 2020, equal to 76.48 per cent of the company. In September 2020, after the APO, Cornerstone held 803,346,289 shares in Barita, equal to 74 per cent of the company. This suggests that Cornerstone purchased 172,332,551 Barita shares in the APO at the same $52 per share price as FCIS, paying a total consideration of J$8.96 billion (or about US$62.77 million) at the Bank of Jamaica’s September 16, 2020 US-dollar selling price. The APO closed on September16.
For its financial year ended September 30, 2020, Barita paid J$347.4 million in taxes, on profit before tax of J$3.1 billion. That is an effective tax rate of 11.2 per cent for its 2020 financial year, which was down from 30.2 per cent in its 2019 financial year. Jamaica’s corporate tax rate is 33.3 per cent. Barita’s deferred tax assets as at its September 30, 2020 year end, amounted to J$883.4 million, of which $594.3 million was “charged to other comprehensive income.”
Partly as a result of its low effective tax rate and the J$719.9 million gain from the non-deliverable forward currency transaction, Barita’s 2020 after-tax profit increased by 61 per cent to J$2.75 billion in 2020 from J$1.71 billion in 2019.
Barita is a Jamaican investment company that provides equities trading, foreign currency trading, unit trusts fund management, fixed income securities and asset management to Jamaicans.
In August 2018, it was the subject of a friendly takeover by Cornerstone Financial Holdings, a privately held investment company whose “principal focus is creating shareholder value through investing in high growth and undervalued companies, mergers and acquisitions.” Under Cornerstone’s majority ownership, Barita’s after-tax profit jumped to $2.75 billion as at September 2020, from J$363.2 million as at September 2018, two weeks after the takeover closed.