How Beximco bondholders' fears turn into reality

Beximco was allowed to raise Tk 15 billion by issuing zero-coupon bonds in March this year though its financial performance showed signs of high default risks.
Its profit in FY23 plunged 77 per cent year-on-year to Tk 7.1 billion and then in the nine months through March this year the earnings fell to a mere Tk 0.80 billion. Apart from the downward spiral of income, the operating cash flow turned negative.
Salman F. Rahman, vice-chairman of Beximco Group, leveraged his political connections while being the industry advisor to former prime minister Sheikh Hasina as the company raised money in breach of the securities rules.
Three years back when Beximco Green Sukuk Bonds worth Tk 30 billion were floated, institutional investors were reluctant to invest in the instrument, given their bitter experience with debentures issued by the same company in the 1990s.
Mr Rahman at the time bent the law in his favour and pressured institutional investors into investing in the sukuk bonds.
With Sheikh Hasina gone from the political landscape of Bangladesh since August 5, Mr Rahman finds himself behind bars. He was arrested in the capital city on August 13.
"Now we are worried if we will get the principal amount," said an executive of Sandhani Asset Management, requesting not to be named.
Similarly, the repayment against zero-coupon bonds becomes uncertain.
Sukuk subscription under duress
Beximco issued the country's largest and first-ever asset-backed securities in 2021 from Bangladesh's private sector to finance two solar power plants and for expansion of its textile division.
No banks and institutional investors were keen on subscribing the bonds.
Talking to the FE, several asset managers, merchant bankers, and bankers alleged that they had been forced to buy the Shariah-compliant bonds.
Professor Shibli Rubayat-Ul-Islam, immediate past chairman of the Bangladesh Securities and Exchange Commission (BSEC), extended his support by extending the subscription time at least twice.
Of the amount, bonds worth Tk 7.50 billion were offered through an IPO (initial public offering) but they remained undersubscribed too.
Later, Mr Rahman used his political influence to make the central bank issue a circular allowing banks to invest in Sukuk. Investments in Sukuk were excluded from banks' permissible capital market exposure.
Banks are allowed to invest 25 per cent of their capital into stock, as per the Bank Company Act.
Finally, banks subscribed 70 per cent of the Sukuk bonds and the rest mainly by corporate investors and mutual funds.
Risk involved in repayments against Sukuk bonds
Company secretary of Beximco Sukuk Md Shariqul Anam said Sukuk holders were receiving return against the bonds periodically and that there was no delayed payment as of now.
Of the Sukuk fund, Tk 18.82 billion was spent to build Teesta Solar Power Plant in Gaibandha, with a capacity of 200 MW. The plant began commercial operations in January 2023.
Mr Anam said the Teesta solar plant was supplying power to the national grid and the Bangladesh Power Development Board (BPDB) made payments to the trustee, Investment Corporation of Bangladesh directly.
The trustee pays interest to Sukuk holders from the money received from BPDB. "If the power projects run smoothly, there will be no problem in paying back interest," said Mr Anam.
However, if someone does not convert bonds into Beximco shares within the five-year maturity period, the principal amount will have to be paid by the issuer -- Beximco.
Mir Ariful Islam, managing director & CEO of Sandhani Asset Management, said they were a little bit concerned over the payback of the principal amount.
Since bonds were asset-backed, he added, principal amounts should be recoverable from selling assets.
However, Beximco's assets were not transferred officially to the trustee of the bonds, according to an official of the ICB. Only solar panels were transferred against the bonds.
Hence, banks and other institutional investors face high risk of defaults on the payment of the principal amounts.
Beximco Sukuk closed at Tk 57.5 each on the bourses on Sunday, a 42.5 per cent discount on the face value of Tk 100 each, as investors increasingly exerted selling pressure to liquidate the instrument since the fall of the Hasina-led government.
Beximco Sukuk conversion risk
Investors have the right to convert 20 per cent of the bond holdings into Beximco shares a year at a 25 per cent discount on the 20-day average closing price of the shares prior to the record date.
Unexecuted conversion rights can also be exercised in subsequent years. If someone does not convert, they should get the principal back after the completion of the fifth year.
But Beximco's stock has been stuck at the floor price of Tk 115.6 each share for two years. It is among the six companies that still have floor prices imposed on them.
Therefore, Sukuk holders would get Beximco shares at Tk 86.7 each. It is highly likely that the stock would plunge on the bourses once the floor price is withdrawn.
"The situation poses a liquidity risk as Beximco shares have already run out of buyers," said Mr Ariful Islam.
Uncertainty hovering over zero-coupon bonds
Beximco decided to raise Tk 15 billion by issuing zero-coupon bonds at a higher-than-market rate to invest in the sluggish housing business in March.
Beximco said the bonds would have an annual yield of 15 per cent, whereas the maximum lending rate of banks at the time ranged between 12-14 per cent.
Chief Financial Officer of the company Md Luthfor Rahman told the FE earlier that one-third of the fund would be spent on paying back bank loans while the rest would be invested in a new township project - 100-acre Sreepur Township Ltd in Gazipur.
But when the company's financial results were worrisome, it was unwise for the regulatory body to approve further loan instruments.
According to the balance sheet of the nine months until March this year, Beximco had assets worth Tk 188 billion, out of which equity was Tk 85 billion. That means it had Tk 1.21 as borrowed cash against equity of Tk 1.
If the zero-coupon bonds were fully subscribed, the company would have Tk 1.39 in loan for Tk 1 as equity. But the trustee of the bonds told The FE that the securities were partially subscribed.
Beximco took another short-term loan of Tk 12 billion in the nine months to March to carry out day to day activities, which indicates it was already struggling with a cash crunch.
Chief Financial Officer of Beximco Md.Luthfor Rahman told The FE that negative cash flow is not an unusual thing for the company.
Market of debentures ruined by Beximco
Mr Rahman is accused of ruining the debenture market in Bangladesh as he delayed the repayment of around Tk 1 billion that he raised in the 1990s.
A debenture is a type of debt instrument that is unsecured in terms of collateral. Investors rely on the creditworthiness and reputation of the issuer while corporations and governments issue debentures to raise capital or funds and pay interest against those.
Beximco issued four debentures in 1994-95 for 10-year tenure. Although the tenure ended in 2004 and 2005, the issuer did not repay investors until 2021. That year, Beximco was preparing to issue Sukuk to collect Tk 30 billion from the market. While facing criticism for defaulting on repayments against the debentures, Beximco cleared dues about 15 years after the cut-off time.

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