Dissecting the BOV deal

It is the second time that stockbroker Paul Bonello – a former Air Malta director and one of Midi plc’s directors – launches a scathing, clinically precise dissection of Bank of Valletta, the banking giant which has spent nine months in the press in an unwieldy public relations battle to shrug off responsibility from the fracas of its La Valletta Sicav’s multi-manager property fund.

More ‘geeko’ than Gordon Gekko in appearance, perhaps for the immaculate precision in the way he expresses himself on the BOV saga, Bonello single-handedly crafted an academic onslaught on BOV’s practices and the way it managed the property fund – a fund that at its height was worth some €80 million in investments that were poured into real estate markets. Today it is worth less than €24 million.

At first Bonello was privately discredited by certain members of the bank. The term ‘nothing but a little stockbroke’ was floated about with liberty when between August and December 2010, he filed one judicial protest after another – in the name of some 400 investors – claiming that BOV had broken its own fund rules. It invested in real estate funds it actually bounds itself not to, in a nutshell.

Earlier this week, Bank of Valletta announced a conditional offer to acquire the shares held by the fund investors at a consideration of €0.75 per qualifying share.

Roderick Chalmers, the government-appointed Bank of Valletta chairman who at the start of the judicial protests told Bonello to “put up or shut up” and proceed with legal action, has had to temper his bullishness. But Bonello doesn’t like the terms of his conditions, and he thinks the price is not nice at all. And another thing, the people who did the math for BOV are the same people who audit the accounts of the fund. In short, it stinks and he is even raising questions about whether the bank had the “blessing” from the financial regulator for its “ruse”.

Ruse, because the offer is being made “without prejudice” and “without admission of liability”, meaning that investors must relinquish any right to legal action against the bank, should it be found liable of any misdemeanour by the Malta Financial Services Authority. But the latter, which conducted three investigations – the bank’s breach of the fund’s investment restrictions, misselling the fund to people who were not, legally speaking, ‘experienced investors’, and alleged insider trading – has published none of these reports.

“So if the investors don’t know what these reports, one of which – the breach of investment restrictions – has been completed and shown to the bank only, how can they judge for themselves of the bank’s 75c offer is indeed fair or not?” Bonello is asking.

“How can the MFSA permit such a morally dishonest and injust move to be committed by the economically strong institution against the general public?”

BOV told MaltaToday it is not imposing its will on or in any way compelling investors to accept the offer being made “in good faith, and in BOV's view, as has been carefully explained to investors, a fair and equitable basis. BOV fully respects the right of each and every investor not to take up the offer if they are so minded.”

“BOV has explained the differing points of view being taken thus far by the Authority and the Bank on the investigation of which it has knowledge. The offer made by BOV is not on a ‘take it or leave it’ basis, but has been carefully constructed so as to be fair or equitable, as has been explained in the letter sent to all investors. The offer has been freely made - and can be freely accepted or rejected by the investors according to their decision.”  

The bank also said the offer being made is entirely an initiative taken by the Bank of Valletta board, replying to questions of whether it conferred with the MFSA on a deal to the investors.

Bonello also has submitted evidence of improper use of price-sensitive information not in the public domain resulting in withdrawal by privileged investors of more than €16 million from the fund at a price ranging between €1.1345 and €1.071 per share at the same time that investors continued investing in the fund.

“The bank’s first step is positive,” he says, although he thinks investors deserve their capital back with legal interest. Bonello is even more contemptuous of the regulator – “state of the art in theory, but lacking in personality” to stand up to BOV. Because without the reports of its investigations (it has only released one of them to BOV), investors are left in the dark about the extent of BOV’s mismanagement of the property fund. “I sent some 20 emails to the MFSA… I had just one reply. They met BOV several times. They never met me,” says Bonello.

Fair deal?

But is this offer good news for the investor whom Bonello says are in their majority “aged, not experienced investors, some of them illiterate and working class people who hoped for a retirement package and even sold government bonds on advice of the bank to invest in the fund”?

Finco’s main contention, earlier on in the saga, was that BOV’s Valletta Fund Management and Insight Management had been pouring the investments in other property funds whose real estate was backed up by too much debt. They promised, according to their investment prospectus, to put the money in safe property investments. Instead, the funds did not have the necessary cash to weather a radical downturn in property prices.

“This is called gearing, which BOV said it would restrict investment in funds which had no more than 100% gearing.”

According to the property fund’s rules, investments could only be made in real estate funds with enough property to back up the loans taken out, just in case the value of the real estate goes down. BOV’s La Vallette Sicav said it would restrict itself to funds exposed to a gearing ratio of not more than 100%.

So by way of example: if the fund had €100,000 in property, and €50,000 in loans, then the net asset value was of €50,000 – a net value equal to the loans, or 100% gearing. Had the loans been €80,000, leaving a net asset value of €20,000, the gearing would be 400% (divide loans by net value, and multiply by 100).

But what happens when the price of property falls, and how does this affect funds with a high gearing?

Say the value of property went down from €100,000 to €80,000. With loans of €50,000, that leaves a net asset value of €30,000. That €20,000 loss cost 40% of the net asset value. On the other hand, in the 400% gearing situation, with loans of €80,000 such a downturn would have wiped out the entire net asset value.

This is what effectively sent the property fund belly-up, according to Finco. One of the funds, Belgravia European fund, had a 208% gearing when BOV was investing money in it, but this was a fact only made public in January 2008, when Belgravia published its 2006 accounts – a full seven months before BOV decided to suspend trading in the property fund in August 2008.

Bonello identified at least nine material and continuous breaches of the investment restrictions, which he gave to MFSA. On the completion of this report, BOV decided to go ahead and make its 75c share offer.

“The wording of the prospectus is unequivocal, clear and objective,” Bonello says of the investment restrictions, which BOV claimed this week was an issue upon which “reasonable people may form differing views and opinions”, claiming there were different definitions on gearing. “The prospectus says the limit on the level of gearing that the fund’s underlying real estate property funds may be exposed to, is of a maximum of 100% of their respective net assets. It does not make sense to infer that the gearing restriction of “100% of net assets” should be interpreted to read as “100% of gross assets”. Such a construction would be a gross legal and technical misinterpretation of the investment restriction,” Bonello says.

Additionally he finds fault with the involvement of PricewaterhouseCoopers to work out the compensation exercise. “PwC are the Sicav’s auditors… has PwC submitted a report of material breaches to the MFSA such as the breach of Investment Restrictions, now confirmed by the MFSA? If PwC have not raised the flag for breaches in investment restrictions – a question we would like them to answer – they too are potentially liable towards investors or towards the fund or the other functionaries and accordingly may have a conflict of interest. If this is the case, it is not in keeping with proper corporate governance for the Bank to have appointed PwC. For this reason, the workings on compensation in this offer prepared by PwC are impaired.”

Bonello said that the bank’s offer would have been much more credible if it had taken the bell-weather fund for European Property, the FTSE EPRA Property Index for Europe, that assessed the general trend of European property and is a “fund investing in underlying European property funds”  - “how come it escaped PwC’s attention?”

BOV told MaltaToday that PwC only accessed data and information that was publicly available – “they did nothing that required forming ‘an opinion’ or the exercising of judgement and therefore, in BOV’s view, no question of conflict of interest arises.”

Institutional weight

Bonello also claims there is “another hidden ploy” in the offer made that needs explanation, since the bank will be entitled to withdraw the offer in the event of acceptances below 70% of the outstanding shares.

The number of shareholders in the La Valette Property Fund as of September 2010 was around 2,150. Bonello’s Finco Treasury Management represents about 400 of these shareholders “and that is why Mr Chalmers keeps referring to our group as ‘small minority of the shareholders’... however, we estimate that the larger part of the shareholders in this fund consist of investors most of whom may not even be aware that they are shareholders of this fund.”

These shareholders come in the form of depositors in the BOV Multi-Asset Class Deposit Account and the BOV Property Linked Deposit Account maturing in 2012 and 2013 respectively, the interest on which depends on the performance of the underlying fund, and the return on these deposits has been very adversely affected by the La Valette Multi Manager Property Fund. Bonello says the result in all probability is that the deposit will not pay any return linked to performance of securities.

“The votes of these depositors would be vested in the name of Bank of Valletta or their proxies.  Likewise, there are many shareholders in the property fund in the form of Middle Sea Valletta Life Policies, a BOV group company; again the votes pertaining to these shares are exercised, directly or indirectly, by companies affiliated to Bank of Valletta.”

So when in the last AGM of the La Valette Sicav in February 2011 some 1,000 shareholders present voted unanimously against all the resolutions, the motions were still carried with a majority of the institutional investors linked to BOV. “Considering this manifest conflict of interest, one should question whether Bank of Valletta plc will be exercising its vote in the interest of the SICAV as a whole…” Bonello said.

When asked by MaltaToday, BOV said: “All investors in the fund will be free to vote as they think is appropriate.”

Bonello says BOV should assign these votes to a blind trust, in order to show their transparency. “Who will be defending the underlying investors in the Multi-Asset Class Deposit Account and the Property Linked Deposit Account who had or have an indirect holding in the La Valette property fund? These are shareholders without a vote.”

It is yet to be seen how the MFSA will carry on in the regard of BOV. Bonello says they should look at the way their UK counterparts act with giants like RBS and NatWest, find billions of sterling for poor complaint handling, and refunds from misselling products.

“I think BOV has failed in its legal duties towards investors and are liable to pay compensation in order to restore investors to the position they would have been had it not been for the failures of Bank of Valletta and other functionaries.

“I hope MFSA is not privy to this compensation offer and that it will deliver justice in line with investor protection principles. BOV’s offer must be approved by the MFSA on the basis of ensuring that the principle of ‘treating your customers fairly’ and to ensure that the principles of natural justice are observed."