DR HAMID GHANY...
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Financial lessons from Petrotrin’s demise
Many were in tears, some were walking out with cardboard boxes full with their personal belongings. Others were exchanging personal contacts and some knew that they would be seeing each other for the last time. Everyone was in shock, dazed and confused.
No, it’s not Petrotrin. That was a scene 10 years ago almost to the day. On September 15, 2008, the financial firm Lehman Brothers filed for what is still the largest ever bankruptcy in the US. The collapse of Lehman came during a month of intense crisis that saw firms like Bear Sterns and Washington Mutual subsumed by other financial entities.
In my years of following the local financial landscape I often say that our market is subjected to the same rules as larger more developed markets. Even though we may like to think we are, we are not immune to the dictates of Mr Market and will have to dance to his tune. The difference between here and other places is that our version of the song is slower, so much so that our dancing seems devoid of motion. Yet if you wait long enough and look closely enough over time you will see the movements.
It took effectively ten years to play out but our Lehman moment is here in the form of the impending closure of Petrotrin. At the time financial services accounted for 25 per cent of US gross domestic product. Locally we know the contribution of oil and gas to our well-being.
The scene described in the opening paragraph has since a couple of weeks ago been dramatised in real life in the offices and fields that falls under the Petrotrin flag. In the case of Lehman it happened in one day. Here consistent with the slow drip Chinese water torture method, the workers of Petrotrin may go through their Lehman experience over a period of months. It matters not because the emotions are the same.
Back in September 2008 other firms had problems. Everyone, including the employees of Lehman knew that there was a problem with their firm going into that September weekend. Yet they generally expected that their route would follow the same path as other firms that were propped up and allowed to become part of other more stable entities. Hardly anyone expected when they left work on Friday 12 that they would have spent their last day working at Lehman.
Ten years later the movie is showing in slow motion. We all knew of the US$850 million bond taken out in 2009 with a bullet (full lump sum) payment at maturity. We all knew the collapse of oil prices in 2014 - 2015 would make this a difficult situation. We all knew that in the aftermath of the collapse of oil prices almost every other oil company in the world reviewed its cost structure in order to stay relevant and if we didn’t immediately know that, well I pointed it out here many times. We all knew the maturity date for the bond is August 2019, we all knew the clock was ticking and something had to be done.
In this slow motion movie everyone felt things would just work itself out but instead the clock was run down. Time has run out.
The more you read the script the more you realise how history rhymes. The more you realise that the same mistakes are made over and over.
Few will recall that in the week/weeks prior to Lehman filing for bankruptcy there was an offer from the Korean Development Bank to take an equity position in the company. Lehman could have been saved but the deal fell through because what turned out to be a company heading for bankruptcy could not agree on a price for the company’s shares.
See the similarities between the Government of the Republic of T&T acting through the Board of Petrotrin and the company’s union. Oblivious to the realities they ended up agreeing to disagree. One felt it would not have been allowed to fail, the other that there was no choice but to let the close down the current incarnation and so what took a few days in the case of Lehman will be settled over the next few months here in T&T.
In the case of the Global Financial Crisis the stories began to be told a year before when a hedge fund run by Bear Stearns and products offered by the French bank BNP Paribas experienced liquidity challenges. No one listened to the canary in the coal mine. Here at home the collapse of oil prices generated lots of talk in the form of addresses, committees and meetings but there is little to show in terms of tangible actions taken to avert or materially change the Petrotrin course.
The first issue now is to deal with the law of unintended consequences. In the context of our slow motion dance routine this is a sudden stop. When your car suddenly stops things get thrown around and people sometimes get hurt. The stop that we are experiencing here can significantly impact employment, trade and investment and this need to be mitigated.
The plans that we are seeing coming forward are not shovel ready and the gap represents a vacuum of economic activity. My knowledge of physics tells me that nature abhors a vacuum and if what is to replace is not properly managed this vacuum will be filled by many different (uncontrolled) scenarios.
The affected workers and, in fact, all citizens need to also take lessons from these two events ten years apart. I will offer three for your consideration. Each one is worth a separate column but they are being introduced here for the time being.
1 The first lesson is to understand leverage. Petrotrin borrowed to fund various projects. Those projects were largely unsuccessful but the debt needs to be repaid regardless. Petrotrin borrowed US$850 million just eight months after CL Financial failed and when the effects of the global financial crisis was still relevant and global demand had fallen significantly. More importantly that bond came in August 2009 and both S&P and Moodys, in July, had just lowered Petrotrin’s credit rating.
As a consequence the interest rate at which the bond was secured was abnormally high. The “make whole” provisions of the bond made that clear. The arrangers for the bond, Credit Suisse and JP Morgan, had an investor friendly provision where if Petrotrin tried to refinance the bond at better terms before the maturity date investors had to be “made whole” in that the outstanding interest payments would have to be paid for the remaining years on the bond. A 9.75 per cent interest only, bullet at maturity bond with a “make whole” provision is very expensive for the issuer (Petrotrin).
Your lesson here is to know when to borrow, know why you are borrowing and understand the terms and conditions that you are subjected to so that if something were to go wrong you would have some wiggle room to develop a contingency plan.
2 The second lesson is simple and obvious but often times fear makes us do otherwise. The lesson, don’t procrastinate with your financial affairs. If you have a debt, lets say a mortgage and you run into financial difficulties then the longer you wait to address those issues with the lender the less flexibility you will have. If you wait too long you could end up losing your house. That’s what is playing out here with Petrotrin. The quicker you decide to deal with a financial challenge the more options you would tend to have.
3 The third lesson is manage your risks or put another way never put your eggs in one basket. When Lehman failed the workers lost their salaries, their pensions, their stock options and some their life savings. Their wealth was too concentrated in the company that they worked for. Petrotrin employees may experience something similar. Their salary, benefits, savings, health care and even their children’s schooling is integrated with the company.
If benefits such as these are made available to you, don’t refuse them. But also don’t take them for granted. Separate your earnings from your savings. Establish a market rate for your health care and other benefits and set aside an amount to cater to a time if those benefits are not available. That will allow you to better maintain your lifestyle regardless of the job you are in. Life can change and you have to give yourself a mechanism to cope.
Learn from the lessons of the past to have a more stable future.
Ian Narine can be contacted via the website - iannarine.com
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