By Shame Makoshori
TETRAD Investment Bank mired by a negative core capital to the tune of US$38 million, is facing collapse due to non-performing loans accounting for 99 percent of the loan book, the bulk of which were made to related parties with no security.
A related party transaction involves a business deal or arrangement between two parties who are joined by a special relationship prior to the deal, such as a transaction between a major shareholder and the corporation. The special relationship inherent between the involved parties creates potential conflicts of interest which can result in actions that benefit the people involved as opposed to the shareholders.
According to a provisional judicial management report seen by this newspaper, a significant percentage of the bank’s loan book is unsecured, with related party loan balances amounting to US$19,1 million or 76 percent of the unsecured loan balances of US$25 million by the end of 2014.
The fact that those loans have no security means that it would be impossible to recover the balances. Yet still, according to the report, security held against the secured portion of the loan book had already been used by the bank to further secure its own borrowings and customer investment deposits, making the case for recovery for the beleagured financial institution very difficult.
In his report to stakeholders, provisional judicial manager, Winsley Militala said the bank had ” failed to adequately protect its assets, earning capacity and its reputation, as evidenced by the high levels on non-performing loans”.
He said best practice would have seen strong internal control system and appropriate corporate behaviour form the basis for effective and prudent management of depositor funds. Instead, he said, 99 percent of the loan book had been compromised and was non-performing, with 40 percent of that loan book consisting of unsecured loans.
Tetrad ended up relying on only one percent of the loan book to generate income interest to fund the business that was failing to collect over US$60 million advanced to customers. In August last year, a scheme of arrangement giving Tetrad a moratorium of payments came into effect after embattled directors made last minute attempts to save the bank.
Directors resorted to the scheme after Tetrad had already plunged into insolvency, with its liquidity gap increasing by an astronomical US$51,7 million to US$52 108 279 as at September 30, 2014, from 436 751 in 2009. This marked the steepest erosions of working capital by a troubled bank.
Current liabilities climbed to US$83 million in 2014, from US$10 million in 2009, stifling growth and forcing directors to look for suitors, including Russian firm Horizon that expressed interest to pour in US$100 to revive the business.
The deal failed to materialise.
“(There was) an overall weak control environment characterised by lack of effective oversight of business functions,” said Militala.
“Normally the board of directors… perform the central role in management oversight. In the case of the bank, the situation obtaining on the ground was a case of overbearing owner-managers calling all operational shots, and by-passing control measures at times. Two of the owner-managers sit on almost all board committees, with most of the non-executive directors having resigned.”
Related party transactions as at January 31, 2015 included US$405 111 extended to Tetrad E-mali, US$2,8 million extended to E-mali Office; US$31 000 granted to Garikai Musonza; US$88 000 advanced to Ecclesia and a US$9,6 million exposure to the troubled Metbank.
Instead, he said, 99 percent of the loan book had been compromised and was non-performing, with 40 percent of that loan book consisting of unsecured loans.
Militala said these transactions had not been declared.
“The placement of cash with Metbank and Ecobank (US$4 million) were in fact cash cover required by the two banks in order for them to guarantee loans granted to Tetrad Holdings amounting to US$12,42 million. The bank at one point undertook an arrangement to cover the level of insider loans by taking off the Tapvice facility of US$3,79 million from the bank’s books to the holding company.
In a Tetrad Investment Bank board meeting held in December 2012, the board was advised that a facility to Tapvice had been transferred to Tetrad Holdings Limited. There was, however, no explanation sought or given on what the transfer actually involved and implications thereof.”
Tetrad’s group chief executive officer, Eugene Mlambo controls 27 572 848 shares in the business whose asset base was US$43 524 172 at the end of January, against total liabilities of US$69 866 841.
This represented 9,99 percent shareholding in Tetrad and translated to US$26 342 669, the amount of commitments the financial institution owed in excess of its assets.
Chief operating officer, Emmanuel Chikaka, controlled 27 572 694 shares in the bank that has made a cumulative US$54 million in losses since 2009.
Ecobank Zimbabwe Limited controlled 3,11 percent shareholding in Tetrad at the end of January.
When Militala presented his report to stakeholders in March, it courted sharp criticism from a section of Tetrad Holdings Limited (THL) shareholders who rejected its contents.
“The members of the board of Tetrad Holdings representing the shareholders, together with the previous management and directors of the bank object in the strongest terms the content, accuracy and conclusion of the report,” the board said in a statement.
It said Militala had jumped to recommend liquidation of the bank despite negotiations, ongoing then, with the Russian investor who had undertaken to pour in US$100 million to revive the business.
“The deal according to the members and a local representative is still on the cards…he (Militala) has been invited to physically inspect the financial instruments in Horizon’s possession that would provide the necessary injection of capital to enable the bank to survive… he has not done so and he has now indicated in writing that he is extremely reluctant to meet with any representative of Horizon.”
Militala fired back.
“THL is not a shareholder of the bank,” he said.
“THL, accordingly, has no right whatsoever to issue a statement on behalf of the bank, employees or any shareholder or creditor or other stakeholders in the banking institution.
“The statement is misleading and does not represent the sentiments of all shareholders of Tetrad Holdings but just a few misguided individuals who feel my report is damaging their reputation and their careers…it is also an attempt to draw attention away from some questionable transactions needing further and more detailed investigation, perhaps even by the involvement of the Zimbabwe Republic Police,” he said in a hard hitting statement on April 21, 2015, a day after Tetrad directors questioned his report.
Apparently, the judicial manager noted that Tetrad customers had lost confidence in the institution’s continued solvency as well as its ability to protect depositors against loss of their deposits.
He said there had been an under-provision for bad and doubtful debts on several occassions when a less stringent classification criteria was adopted.
“A case in point is in the Board Risk Compliance report as at 31 December 2012, management reported provisions of only US$1,91 million against US$3,59 million determined by Risk & Compliance department, Secondly, an inspection report by the RBZ revealed an under-provision of some US$3,92 million, under reporting on insider and related party loans of US$22,25 million, non-suspended interest amounting to US$0,29 million for the period ending 28th February 2013.
“The bank did not comply with the laws and regulations with regard to producing reliable business and financial reports, transparency, timely and appropriate disclosures of information.
“The provisional judicial manager noted the following; the bank understated the exposure by some US$12,9 million when it declared US$19,1 million instead of the US$32 million that became apparent. For instance, in the current loan classification report as at 31 January 2015, management reported provisions of only US$30 million understating by US$12,9 million being additional related parties discovered by the provisional judicial management.” Financial Gazette