2 x Multiple Opportunity in BCBHF / CIHL, US Court Arbitration Award Enforcement

[Guest Allegheny]

Ladies & Gentleman:

 

I wrote an article on Friday about the US Enforcement of an Arbitration Award for Belize Bank. The Award alone is worth twice the market cap of the company, Caribbean Investment Holdings, Ticker BCBHF, and the company preserved book value year over year, currently trading at half of book value. I believe the skew alone is worth owning.

 

Full Details below......

 

http://seekingalpha.com/article/4019114-u-s-court-enforced-arbitration-award-bodes-well-caribbean-investment-holdings-shareholders

 

Summary

 

The U.S. District Court for the District of Columbia has enforced an arbitration award against Government of Belize worth ~$0.364 per share including prejudgement interest on the Final Award.

 

Only 1% of cases petitioned to the U.S. Supreme Court are reviewed, giving us confidence that the petition for review by Government of Belize will be dismissed.

 

The stock trades at between 10 to 15x EPS and less than half of book value; a special dividend of the financial award would double an investment.

 

The U.S. Court enforcement stems from an unfulfilled Government of Belize guarantee on a loan made by Belize Bank over 10 years ago.

 

The foreign arbitration enforcement follows the New York Convention, and the London Court of International Arbitration's decision to force Belize to pay the loan plus interest worth $37mm.

 

"You can observe a lot by just watching." - Yogi Berra

 

Under the New York Convention, which allows the U.S. courts to enforce foreign arbitration awards, the U.S. District Court for the District of Columbia, a federal circuit court of appeals, has enforced a Final Award payment of the equivalent of $37.7mm, including compounded monthly interest of 17% on the Final Award of $18.5mm, equating to $0.364 per share in cash windfall to Caribbean Investment Holdings (OTCPK:BCBHF) shareholders, which could be paid out as either a special dividend, more than doubling shareholders' current basis or used by the company to repurchase stock, which trades at a Price-to-Book Ratio of .47 excluding the government receivable.

 

The case is pending review by the U.S. Supreme Court, where the Government of Belize has petitioned for a "Writ of Certiorari," but with only 100 out of about 7,000 cases a year reviewed by the U.S. Supreme Court, the court of last resort, we view the decision of the U.S. District Court for the District of Columbia to confirm and enforce the award as promising, and given the large discount between the current share price and the award, the current levels provide sufficient risk reward. The below table highlights that at an 80% probability of the full award being paid, investors purchase stock with a 101% probability adjusted return, e.g., one doubles their money. We view this skew as compelling on its own.

 

Or simply put, as Seth Klarman stated in Margin of Safety:

 

"Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate."

 

We believe the high prospects for collecting the financial award and the potential for corporate action via special dividend is a form of liquidation which will demonstrate value at Caribbean Investment Holdings Limited.

 

Caribbean Investment Holdings Limited (also known legally as BCB Holdings, the name was recently changed to effectuate more of its broad business model as a holding company in the region) is a holding company including its subsidiary, Belize Bank Limited, the largest depository bank in Belize, with over $475mm in deposits. The company's largest shareholder is Lord Michael Ashcroft, the billionaire British businessman, controlling approximately 80% of the stock.

 

The stock is traded on both the OTC markets under ticker BCBHF and trades on the London Stock Exchange under ticker CIHL. For reference, the Belize Dollars are denoted as BZ$, and any references to US Dollars are denoted as $. The exchange rate between BZ$ and $ is 2.0, and is a fixed exchange rate (pegged), therefore it takes two Belize Dollars to purchase one US Dollar.

 

A protracted legal case stemming from a Government of Belize guarantee on a Belize Bank loan from 2004 is finally reaching a close in our opinion, as honorable Judge Amit Mehta of U.S. District Court for the District of Columbia in The Belize Bank Limited v. Government of Belize, No. 114-CV-00659, ruled on June 8, 2016, that "for the foregoing reasons, the Bank's Petition to Confirm Foreign Arbitration Award and to Enter Judgment is granted, and Belize's Motion to Dismiss is denied." Judge Mehta also confirmed that the payment of the Final Award will be in U.S. dollars, along with awarding the Bank predjudgment interest consistent with the Final Award, which includes from September 7, 2012, at a rate of 17% per annum, compounded monthly, until the date of payment.

 

On January 15, 2013, the London Court of International Arbitration entered a Final Arbitration Award in favor of the Bank, ordering Belize to pay the Bank the sum of BZ$36,895,509.46, plus interest at 17%, compounded on a monthly basis from September 8, 2012, until the date of payment.

 

In a last effort to prevent payment, the Government of Belize has filed in the Supreme Court of the United States, a petition "for a Writ of Certiorari," to have the U.S. Supreme Court review the federal court's decision and case.

 

Unfortunately for the Government of Belize, only about 100 cases out of 7,000 a year, ~1%, are ever even reviewed by the U.S. Supreme Court, and even if the case is reviewed, the U.S. District Court for the District of Columbia's decision to confirm the award is strong, and we view the Government of Belize's arguments to the U.S. Supreme Court as weak at best, as the U.S. Court of Appeals already favored a lower court's decision, marking this stop at the U.S. Supreme Court, a last-ditch effort. Lawyers representing Belize Bank agree.

 

We also believe that a decision by the U.S. Supreme Court on whether it will even review the case is imminent making the enforcement and payment of the Final Award, plus interest imminent, a near-term catalyst for shareholders, per the below docket.

 

With the company recently earning a profit, and trading at between 10 to 15 times earnings and less than half its book value excluding the government receivable, the prospects for the business paying out a special dividend worth two times the current share price is imminently on the horizon. We believe the company is likely trying to keep this information under wraps given the sensitive nature of the situation with the government. The company even issued a press release in the recent days indicating it knew of no reason for the share price increase in its stock, which makes us believe the company likely wants to keep the story under wraps, and even more lucrative, purchase shares back on the open market to retire shares at a steep discount.

 

Regarding downside, the company repurchased shares in the open market last November, defending five pence per share, which, at the then FX rate, equates to ~.075 for BCBHF shareholders, and this was without more certainty of the Final Arbitration Award. There are few opportunities to own this risk/reward skew in markets; therefore, we at Allegheny believe that the situation at current levels warrants an investment.

[constala]

interesting case. A few thoughts:

 

1) I worked out the true free float (excluding insiders, and Royce funds, and treasury shares) is 16.4m shares so US$2.6m! Talk about microcap for retail punters?

 

2) upside is not great at all: 50%ish ! that is very poor for such an illiquid, dicey and complex situation. Current BV excluding award in GBP=0.26, last price 0.15 so last p/bv=0.58. that is totally fair for such a small Carribbean bank. Now assume award is fully paid,  new bv (assuming no tax) will be 0.41. Should discount to book stay equal, price target is 0.23 : that is only a 57% upside whereas stock was trading at 0.08 a few days ago...

: recap +8 upside /-7 downside..... absence of positive convexity, sorry I pass!

 

3) you view the Government of Belize's arguments to the U.S. Supreme Court as "weak at best". Could you please elaborate? reading : www.law360.com/articles/823464/after-dc-circ-loss-belize-wants-justices-to-kill-25m-awards, one learns that:

 

(i) the questions presented in the cases mirror those raised in a case the Supreme Court had accepted earlier this year, Belize v Belize Social Development Ltd. So your assumption of 99% dismissal probability at Supreme Court sounds very optimistic?

 

(ii) "the BCB holdings award came from a secret, illegal tax deal that Belize top court, the Carribean court of justice, has already rejected"....

is the moral high ground for Belize?

 

(iii)  "enforcement of the award in the US would have serious consequences not only for Belize but would be an attack on the rule of law for young democracies in the Carribean... and an attack of Carribean Court of Justice credibility, with potentially damaging consequences to United States interests in the region....the suits raised questions about how the US ought to weigh its policy in favour of arbitration and about the US governementt opposition to corruption"

 

Please comment

 

[Guest Allegheny]

Thanks for the reply, and below are some comments per your note.

 

1) I agree the float is very small, indeed this is one of the reasons I cite for this opportunity existing in the first place, due to a simple lack of oversight by investors. Regarding Royce, I actually discovered the name in 2014 as I was digging through their micro-cap fund, and was applying some statistics to their book. This name came out and I have actually been following and owning this name since 2014. I also used to trade and invest in emerging market bonds professionally; therefore, I had done work on Belize and their sovereign issue.

 

2) Regarding your calculations, I use the US listing for the math purposes. BV excluding the award is .31, implying a .47 price to book ratio, or ~50%. The award itself is worth .3637, which added to .3136 yields .6905, applying a "50% discount" to the "New Book Value" yields a share price of $0.35, so relative to the current trading price of .15, this actually implies a multiple of 2.3x. If you look at my first table in the article the second column shows the various Book Values per share plus the award. I think your application of a constant discount to book could be sensible, but even under this logic the trade is compelling, offering 2.3 times money at .15 per share. Furthermore, the chance of a pass through liquidation event for shareholders, implies that the award should probably trade at less of a discount then the actual bank as it could be passed on to investors.

 

3) The case regarding Government of Belize v. Belize Social Development Limited is referenced in the legal response by BCB Holdings, and the two cases are different. What I would point out is that in June 2016, Amit Mehta would have been fully aware of the invitation of the Solicitor General to file a brief in the case expressing the views of the United States. One of the primary sources of difference is regrading an alternative forum, which is not available in the BCB Holdings Case, e.g., a Belizian court is not an alternative forum, given the background of the case. I would cite the below language as referencing the Belize Social Development Case.

 

"Moreover, the lower courts’ decisions do not conflict with or otherwise denigrate the CCJ’s decision. The CCJ recognized that the arbitral award was valid, but decided, under Article V(2)(b) of the New York Convention, that it violated a public policy of Belize. In this case, the Belizean Government has never identified an explicit or well-defined policy of the United States that would be violated by the arbitral award. Nor is there any basis to consolidate this case with the petition in Belize v. Belize Social Development Ltd., No. 15-830 (U.S. filed Dec. 22, 2015). The Belizean Government’s petition here is completely foreclosed by this Court’s precedent and fails to raise any issue that could merit review. In fact, the Government of Belize has recognized that Holdings cannot obtain any possible relief in a Belizean forum. In these circumstances, the petition is essentially seeking nothing more than error correction in the context of an arbitral award that was rendered more than seven years ago. The petition should be denied."

 

I like to lean on Judge Mehta's decision, and I do not believe that the issues regarding the morality of secret deals are anything new to the courts.

 

"Lastly, the district court rejected the Government’s public policy defense under Article V(2)(b) of the New York Convention. The court found that the Government of Belize failed to meet its burden to identify “an explicit or well-defined U.S. public policy that, if violated, would offend the most basic notions of morality and justice.” Pet. App. 38. The court also observed that the anti-corruption policy relied upon by the Belizean Government “implicates the politics of a foreign nation” and explained that “Article V(2)(b) was not meant to enshrine the vagaries of international politics under the rubric of ‘public policy.’” Id. (quoting Parsons v. Whittemore Overseas Co. v. Societe Generale De L’Industrie Du Papier (RAKTA), 508 F.2d 969, 974 (2d Cir. 1974))."

 

The public policy defense is the most difficult defense under the New York Convention, and therefore its use as a means to circumvent foreign arbitration enforcement is weak. Whilst the case is being reviewed in the Social Development case, I am arguing that whilst it may not be 99%, regarding the probability of review, the cases are different, and the security price as shown in my first table in the article even at a 50% probability of success would imply a security price of $.0.50. I also argue that "cash awards" should not be discounted to the same effect as a book of loans on a portfolio. Furthermore, the decision by the US Court to have the Solicitor General express the views of the United States also does not imply the case will be favorable for the Government of Belize. Given the differences between the cases and reference to them by Amit Mehta and the legal team at BCB Holdings, the security remains well undervalued under a probabilistic view of expected value.

 

Thanks for the comments and I appreciate you conducting some further research.

 

For BCB Holdings Legal Reply find below....

 

http://www.scotusblog.com/wp-content/uploads/2016/09/16-136-BIO.pdf

 

 

[constala]

Thank you Allegheny for your prompt and thorough comments-now let me take some time to digest them. I have to say, it is such a delight to be able to debate like this between gentlemen; the whole Corner of Berkshire and Fairfax experience is so much more pleasant, civilized and constructive than the other forums!

 

If I may be very blunt, this trade's reward/risk/brain damage/timespent  profile still does not strike me as remarkable.

I sense somehow that you are able and keen to conduct deep research and have some litigation appetite so I suggest you have a look at FWP US, CRDS US, and maybe RVP US. As far as litigation/patent law are concerned, those 3 cases (biopharma, tech, pharma...) offer multibagger upside with some Margin of Safety. FWP US in particular looks like x5 upside/-50% downside and a short term horizon...

 

[rukawa]

So basically a 25m receivable turns into 37m in Cash. Book value goes from 57 to 70. I don't see a huge catalyst here. The whole argument is that basically now they have a power to do a special dividend since they have cash but I am not sure if they will do that.

[Guest Allegheny]

It comes down to what you think is a sensible discount to book value and the prospects for return of capital.

 

Excluding the government receivable the company trades at .47 price to book, and with book value preserved year over year, one has to think whether that is an appropriate discount. Regarding the prospective inflow of cash, the company has a variety of things they can do with it, all things equal a constant discount to book would imply a higher share price. Under your world, the discount to book value would increase as the company accumulates cash worth 2.3 x the market cap of the stock? Furthermore, the longer this "lingers" around, I am earning a 17% monthly compounded coupon on my receivable.

 

As referenced, the control shareholder is stand-up with high integrity. One aspect of this investment, I haven't explained which is further bullish to the thesis is that the bank in many ways was designed to make loans against collateral which they would ultimately own. There are prospectively some underlying valuable assets, serving as collateral on the loan book.

 

Again, the risk / reward is compelling on its own; markets price securities based on a probabilistic view of expected value. Whilst your outcome may be a node on the probability tree, one must weight the different probabilities, which my first table does in the article. I think reasonable views of value show that the share price should be considerably higher then where it is today, particularly given the financial results last year (a marked improvement). Thanks for your note and interest.

[constala]

Found this article with a lot of background on the litigation and on Lord Michael Ashcroft's antics.

 

Belize Bank : A $10m mystery; What connects the deputy-chairman of the Conservative Party with Hugo Chávez?

http://www.economist.com/node/11377008

 

 

[skanjete]

Found this article with a lot of background on the litigation and on Lord Michael Ashcroft's antics.

 

Belize Bank : A $10m mystery; What connects the deputy-chairman of the Conservative Party with Hugo Chávez?

http://www.economist.com/node/11377008

 

I have been following the belize bank and Lord Ashcroft since 2007-2008.

 

The main attraction here for me is not so much the possible litigation award. I can't imagine that Dean Barrow will ever prepared to pay the award. Previously he used to work as a lawyer for ashcroft, but rose to power on the back of an enormous anti-Ashcroft campaign.

 

If you study his traject since he rose to power in 2008, he implemented a lot of populist anti-Ashcroft measures, including some nationalisations (without proper compensation of course). He also nationalised some companies from the spun-off Waterloo Holdings from BCB holdings. Belize bank can hope only to receive the awards if another government gets to power in Belize.

 

For me, the main attraction is when/if the bank can work through his post-crisis problems. The bank is very profitable, but for now is still working through his past problems by write-offs and provisions.

If you exclude the provisions from the financial business, the bank is priced at a P/E of 1!

 

The intrest margin is incredible : 10,72%

Previously to their unsuccessfull expansion to T&C, their Belize Bank with a market share of about 40-50% (this is still the case) had a ROA of 7-9%!!

 

Assets are about 550m$ now, and the bank itself apparently isn't impaired.

 

So if they can work off their unperforming loans from the past and can return to this kind of profitability, they could even produce earnings of about 35p/sh.

 

So the real potential is a lot more than the possible litigation award.

By the way : the money won't be returned to shareholders, but will be used to expand in the Caribbean market. A few years ago, there was talk of an acquisition in Trinidad & Tobago.

 

regards,

 

[Guest Allegheny]

Thanks for the note. I agree with your analysis on the bank. I got involved in the bank as well based on a thesis that the loan write-offs would subside and I would be left with a quite profitable bank at a discounted level.

 

Regarding the court case, I have done more work on this and the US government can "attach" assets, so when you say the payment is dependent on the PM or the government regime complying, the whole allure of a US enforcement is that foreign assets can be attached. Belize accesses the US capital markets regularly, with their $1bn of foreign US bonds, which are held in Trust by a US bank...sound like Argentina? Yes....

 

Furthermore, if this gives some solace, the Central Bank is already paying some of Ashcroft's other businesses payments for similar enforcements, per the below article. I expect this payment to be similar in line.

 

http://amandala.com.bz/news/gob-pays-ashcroft-us67-3-mil/

 

The government is actually facing a bit of an FX crunch because of the rapid drain on FX reserves ($400mm). Either way, I see this as another example of courts forcing payment, with a US court enforcement able to attach assets held in the US. The current status of the case is waiting for "review" by the US Supreme Court, the case has currently been rescheduled, so the timeline on this is fairly imminent.

[rukawa]

Thank you Allegheny for your prompt and thorough comments-now let me take some time to digest them. I have to say, it is such a delight to be able to debate like this between gentlemen; the whole Corner of Berkshire and Fairfax experience is so much more pleasant, civilized and constructive than the other forums!

 

 

I agree. Even on CofBF I find there tends to be nasty statements by bullish posters when their theses are criticized (see Valeant thread) and even anger at bears when the bears are proven right. So I have been pleasantly surprised by the way Allegheny handles criticism.

[rukawa]

So if they can work off their unperforming loans from the past and can return to this kind of profitability, they could even produce earnings of about 35p/sh.

 

Do you have an idea as to why the had so many underperforming loans before?

[constala]

"LONDON 29 dec16 - Caribbean Investment Holdings Ltd on Thursday said it swung to a loss in the first half of its financial year.

 

The holding company said it made a net pretax loss of USD2.0 million in the six months to the end of September, having made pretax income of GBP3.8 million the year before.

This came due to a higher provision for loan losses - which increased to USD12.6 million from USD4.9 million - offsetting a rise in interest income to USD21.3 million from USD17.1 million."

 

why the big rise in loan provisions?

 

 

[misterkrusty]

this bank was written up on VIC many years ago.  I took a look and concluded they were most likely laundering drug money. 

[Guest Allegheny]

In a lengthy ten year legal battle with the Government of Belize, Caribbean Investment Holdings Limited, (Formerly named BCB Holdings Limited), owner of Belize Bank, won a $27.5mm US Court Enforced judgement, which is worth about $0.27 per share in proceeds, after the US Supreme Court denied the writ of cetori from Government of Belize.

 

http://www.cihltd.co/assets/pdf/press-releases/2009/Press%20Release%20re%20US%20Supreme%20Court%20cert%20denied%20January%209%202017.FINAL.pdf

 

https://www.supremecourt.gov/Search.aspx?FileName=/docketfiles/16-136.htm

 

Happy New Year.

 

Allegheny

[constala]

Fantastic job Allegheny!

Congratulations, what a way to start 2017!

 

[Guest Allegheny]

Thanks.

 

Let's see what they do with the funds-- maybe a share re-purchase or a special dividend.

 

Hopefully some folks picked some of this up on the cheap....it's still offered at a very attractive level given the proceeds coming in.

[rukawa]

Wow. You nailed it. I am surprised at the large jump in share price.

[skanjete]

Last quarter (12/31/16) seems to have been quite good.

 

Non performing loans down to less than 3%. This bodes well...

[rukawa]

So is that it for the litigation? Because my vague impression looking at their financial statements was that legal costs had substantially increased non-interest expenses. So if this is it for litigation I would expect those costs to decline.

[writser]

Looks like the government is not giving up that easily: http://www.cihltd.co/assets/pdf/press-releases/2009/Press%20Release%20re%20US%20Supreme%20Court%20Feb%2022%202017%20Final.pdf .

[writser]

Any thoughts on the dividend in specie? Have been a bit lazy with this name but always looked interesting.

[rukawa]

Looks like the government is not giving up that easily: http://www.cihltd.co/assets/pdf/press-releases/2009/Press%20Release%20re%20US%20Supreme%20Court%20Feb%2022%202017%20Final.pdf .

 

Wow the government of Belize sucks.

[skanjete]

 

For me, the main attraction is when/if the bank can work through his post-crisis problems. The bank is very profitable, but for now is still working through his past problems by write-offs and provisions.

If you exclude the provisions from the financial business, the bank is priced at a P/E of 1!

 

The intrest margin is incredible : 10,72%

Previously to their unsuccessfull expansion to T&C, their Belize Bank with a market share of about 40-50% (this is still the case) had a ROA of 7-9%!!

 

Assets are about 550m$ now, and the bank itself apparently isn't impaired.

 

So if they can work off their unperforming loans from the past and can return to this kind of profitability, they could even produce earnings of about 35p/sh.

 

So the real potential is a lot more than the possible litigation award.

By the way : the money won't be returned to shareholders, but will be used to expand in the Caribbean market. A few years ago, there was talk of an acquisition in Trinidad & Tobago.

 

regards,

 

They published half year results yesterday. A half year profit of 6p/sh!

 

Last year when we discussed the shares and I highlighted the potential P/E of 1, they were at 8p/sh.

 

Since then Midway Investments has been spun of. These contain the rights for a payout from the Belizean government of 33p/sh, (if they ever pay of course).

 

The stub quotes today at 21p/sh, still at a non-demanding P/E of 1,75!!

So we're looking at a 6-bagger over the course of 1 year which still trades at a P/E of 1,75 today!

 

This must have been the cheapest name I ever saw...

[JanSvenda]

They published half year results yesterday. A half year profit of 6p/sh!

 

Last year when we discussed the shares and I highlighted the potential P/E of 1, they were at 8p/sh.

 

Since then Midway Investments has been spun of. These contain the rights for a payout from the Belizean government of 33p/sh, (if they ever pay of course).

 

The stub quotes today at 21p/sh, still at a non-demanding P/E of 1,75!!

So we're looking at a 6-bagger over the course of 1 year which still trades at a P/E of 1,75 today!

 

This must have been the cheapest name I ever saw...

 

Hey,

 

why do they still have the Govt. claim on their book (as at September of 2017), when Midway is no longer wholly owned by CIHL? The dividend happened in June right?

[skanjete]

 

For me, the main attraction is when/if the bank can work through his post-crisis problems. The bank is very profitable, but for now is still working through his past problems by write-offs and provisions.

If you exclude the provisions from the financial business, the bank is priced at a P/E of 1!

 

The intrest margin is incredible : 10,72%

Previously to their unsuccessfull expansion to T&C, their Belize Bank with a market share of about 40-50% (this is still the case) had a ROA of 7-9%!!

 

Assets are about 550m$ now, and the bank itself apparently isn't impaired.

 

So if they can work off their unperforming loans from the past and can return to this kind of profitability, they could even produce earnings of about 35p/sh.

 

So the real potential is a lot more than the possible litigation award.

By the way : the money won't be returned to shareholders, but will be used to expand in the Caribbean market. A few years ago, there was talk of an acquisition in Trinidad & Tobago.

 

regards,

 

They published half year results yesterday. A half year profit of 6p/sh!

 

Last year when we discussed the shares and I highlighted the potential P/E of 1, they were at 8p/sh.

 

Since then Midway Investments has been spun of. These contain the rights for a payout from the Belizean government of 33p/sh, (if they ever pay of course).

 

The stub quotes today at 21p/sh, still at a non-demanding P/E of 1,75!!

So we're looking at a 6-bagger over the course of 1 year which still trades at a P/E of 1,75 today!

 

This must have been the cheapest name I ever saw...

 

Yesterday, CIHL published interim results : a half year profit of 9,2p/share! Over the last 12 months about 15p/sh of net profit.

They also declared an interim divident of about 5,4p/sh, or about 33% on the last share price before the announcement.

 

Non surprisingly, the share price doubled on the news.

 

I don't think I'll ever see such a huge difference between price and value again...

 

Some people ask themselves if value investing is still relevant these days : I do think so! This was/is a great example.