Investors at risk of losing out of Sea Pearl bond conversion

Investors of Sea Pearl Beach Resort & Spa may lose their profit partially, as the company is going to convert 20 per cent of its bonds worth Tk 3.25 billion into ordinary shares.
The Investment Corporation of Bangladesh (ICB), which had fully subscribed the bonds, wrote a letter to the Sea Pearl last month, asking for conversion of debt securities into equity. It also laid out some conditions to be met, according to a stock exchange filing on Thursday.
The board of the Sea Pearl has already approved the conversion, as outlined in the letter.
In an equity analysis, EBL Securities said the transformation of bonds into shares would expand paid-up capital, which would in turn shrink shareholders' return on their investment in the stock.
From the trend of the company's profitability, the EPS (earnings per share) seems to go down in future, said Prof Subarna Barua, of the international business department of the University of Dhaka.
The ICB that has not been receiving interest regularly against the bonds since April 2020 is, however, likely to have gains out of this asset conversion. Though it will no longer be entitled to fixed return anymore on the converted assets, it will get dividends.

The ICB will also have opportunities to generate capital gains by trading in Sea Pearl shares, Prof Barua added.
Company secretary Md Azaharul Mamun said the conversion would bring down Sea Pearl's debt burden by Tk 1.20 billion, which would help cut finance expenses by Tk 120 million a year.
That will strengthen Sea Pearl's financial position, supporting a boost to its overall performance in the long run, Mr Mamun added.
Md Sajedul Islam, senior vice president of the DSE Brokers Association of Bangladesh, echoed Prof Barua's view.
He said, "Ultimately, investors will be the losers, as the company will transfer its debt burden to the existing shareholders."
The Sea Pearl traded at around Tk 190 per share on Thursday.
If the company changes bonds into shares at higher than the market price, the paid-up capital will be much higher and general investors will lose more, said Mr Islam.
The company secretary refused to disclose the share price at which the conversion is set to be done before the regulatory approval.
Sea Pearl Beach Resort, which began operation in 2015, was built with a bank loan. The owner then issued bonds worth Tk 3.25 billion at 10 per cent interest rate to pay off the bank loan.
The company now owes more than Tk 4 billion to the ICB that subscribed bonds in October 2017, the tenure of which was eight years with a two-year moratorium period.
The Sea Pearl sought nearly Tk 1 billion equivalent of interest waiver when tourists disappeared from the beach town at the onset of Covid-19.
It went to the court last year to protect itself from being labelled as defaulter. In the pursuit, it presented the pandemic as the sole reason behind a decline in business and non-payment to the ICB.
This is the backdrop to the ICB demanding conversion of a 20 per cent of the bonds it subscribed at the strike price, which is subject to regulatory approval from the Bangladesh Securities and Exchange Commission and approval from shareholders in the upcoming annual general meeting on December 26.
Financial Performance of Sea Pearl
Sea Pearl's revenue jumped more than 113 per cent year-on-year to Tk 1.98 billion in FY23. The growth is attributed to optimum utilisation of rooms, operation of a fully-fledged water park, running of cruise ships, and other activities.
The profit growth was even more impressive at 335 per cent year-on-year to Tk 701 million in FY23.
Mr Mamun said this stellar profit growth was possible as the pandemic situation eased.
Based on the profit growth, the company declared 17 per cent cash dividend only for general shareholders for FY23, the highest since its listing in 2019.
How is ICB doing?
The ICB reported a 46 per cent year-on-year decline in profit to Tk 775.8 million for FY23, owing to a fall in capital gains, fees, commission and service charges.
The capital market has been passing through gloomy phases, leading to erosion of ICB's profit, as the market is its sole income source.
ICB Securities Trading Company, the subsidiary of ICB, buys and sells shares of investors along with managing its own portfolio and earns in the form of commission charges apart from capital gains. The scope of earning in commission charges shrank as well.
Market insiders, however, say bad investment choices made by the state-run investment bank has been affecting its earnings growth.
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