Keith Collister, Gleaner Writer
The Jamaica Public Service headquarters on Knutsford Boulevard, New Kingston. - Ricardo Makyn/Staff Photographer
ON JULY 11, 2006, at 8:00 a.m. New York time, it was reported that Mirant Corporation, which is the parent company of the Jamaica Public Service Company (JPS) and is listed on the New York Stock Exchange, had announced a tender offer for 43 million shares of its own stock at a price of between $25.75-$29 per share.
The total cost of this transaction, of up to US$1.25 billion, was to be financed from the following sources: Mirant's available cash; from a term loan to be raised by Mirant's Philippines business, the proceeds of which were to be paid over to Mirant; the proceeds of sale by auction of Mirant's Philippines business and, most importantly from the perspective of Jamaicans, the sale of its Caribbean businesses, including its 80 per cent majority holding in JPS.
In the early evening of that same day, following Mirant's conference call with the analysts, leading rating agency Standard and Poors (S&P) put Mirant on credit watch, with possible negative implications for Mirant's B+ corporate credit rating.
PORTFOLIO DIVERSIFICATION
Not surprisingly, given that Mirant had only recently come out of bankruptcy in the United States, S&P did not appear to be impressed by the transaction, as it commented: "The use of cash to buy back the company's common stock will reduce Mirant's liquidity position to levels below those established when the company emerged from bankruptcy in late 2005. The sale of the international assets will reduce future cash flow and, more importantly, reduce the company's portfolio diversification. The share repurchases and divestitures are both negative for credit quality and could lead to a downgrade of company ratings."
Standard and Poor's comment about international diversification is particularly interesting.
Mirant had originally been the international division of the huge Southern Company, and it was in fact this division of the Southern Company that had originally looked at the acquisition of JPS in 1995/1996. Subsequently, as Mirant, this division was spun off to concentrate on international expansion. However, after the proposed sales, Mirant will largely be simply a U.S. merchant power generator.
TIMING
What makes the timing of the share buy-back announcement so significant is the fact that, the previous week, Mirant's Jamaican subsidiary, JPS, had just raised US$180 million as a private placement, mainly in the U.S. through investment banking giant Credit Suisse. At their press conference of Friday July 7, JPS advised that the new financing, an unsecured international 10-year bond at an interest rate of 11 per cent, would replace approximately US$168 million of higher cost financing spread between four different maturities.
This appears to represent the unpaid principal of four separate secured loans made to Mirant by Trinidadian bank, RBTT, the majority of which were coming due for repayment. As a result of the transaction, these loans would apparently be completely paid out.
CONFLICTING INTERESTS
The following comments, which appeared on page 22 of the JPS Offering Memorandum (OM), make rather sobering reading: "We are controlled by Mirant, whose interests may not be aligned with the holders of the notes."
The OM goes on to give an example: "If we encounter financial difficulties, or are unable to repay our debts as they mature, Mirant might pursue strategies that favour equity investors over debt investors. Mirant may also have an interest in pursuing acquisitions, divestitures, financing or other transactions, that in its judgement, could enhance its equity investment, even though such transactions might involve risk to you as a holder of the notes."
The OM also advises that, in the event of a change in control, Mirant might need to refinance a large part of its indebtedness, including the recent bond offering which would have to be bought back at 101 per cent of face value. The OM goes on to say: "We may not have sufficient funds to make any required purchase of the notes upon a change of control."
BOND OFFER BADLY HANDLED
According to one U.S.-based investment banker familiar with Jamaica, while it is unlikely that Mirant would sell JPS to somebody who could not finance this "change of control," the fact that they announced the sale only five days after the bond issue closed, begs the question as to when Mirant knew that they were going to sell JPS.
It is also of interest that the bankers for the bond issue, Credit Suisse, are not going to be in charge of sale of the Caribbean assets, which will instead be undertaken by U.S. investment bank JP Morgan.
While JPS's assets should be worth substantially more than the debt the company has incurred, in this investment banker's view, the liquidity of the JPS bonds is likely to be extremely low for at least the next six months. Certainly, according to traders in the market, as a consequence of the uncertainty surrounding the future ownership of JPS, the local demand for the offering has almost disappeared since the JPS sale announcement.
U.S. INSTITUTIONAL INVESTORS
Perhaps it is fortunate for Jamaican investors that, according to JPS's senior vice-president and chief financial officer, Steven Gillis, less than 10 per cent of the money was raised in the Caribbean, the majority having been raised from U.S. institutional investors.
The sale also appears to have surprised the Jamaican Government which, apparently had been preparing to sell, during this fiscal year ended March 2007, three quarters of its near 20 per cent minority stake in JPS, or approximately 15 per cent, by way of an initial public offering on the Jamaica Stock Exchange.
