[OPINION] Malampaya’s crony financing 1

[OPINION] Malampaya’s crony financing

Dean Dela Paz

Posted at Nov 24 2021 01:16 AM

The sale and transfer of service contract rights and obligations of from 45% to 90% of the Malampaya gas fields to a negatively capitalized, zero-experienced and technically unqualified start-up a mere seven months after the company’s incorporation bears all the elements of crony capitalism and financing.

The company was not vetted when required. Its parent organization was granted contracts under this administration despite being over-leveraged. Directorships across its subsidiaries and affiliates spanned a web of key government officials, political operators, dummies and even daughters. 

Unfolding as the biggest crony deal in history, see where inherent flaws should have raised the reddest flags and sounded the loudest klaxons ab initio. Had the Department of Energy been circumspect, followed prior approval protocols and applied the most basic standards against an unknown start-up, we would not have been sold down the river. But we were.

Where an unknown displaces a pedigreed deep-water hydrocarbon exploration and processing company was “awarded based on the depth of (their) understanding of the business”’ as claimed, the law requires infinitely more.

Beyond falsehoods ferreted out by lawmakers protecting the national interest against bureaucratic factotums enmeshed in gordian knots of incompetence that hide and protect officials and presidential cronies looms the ultimate betrayal of our sovereignty and patrimony.

Unfortunately, under crony capitalism, prudence and the public welfare quickly exit as complicit officials usher-in, lavish and enrich the politically entitled.

For precedents, recall the Pharmally scandal involving a Chinese national as presidential adviser, a shadow staffer of the president’s hand, and an auxiliary purchasing office manipulating billions. Note another undercapitalized fly-by-night earning quintuple-digit returns to enrich Chinese peddlers and fugitives wanted for fraud.

Consider the financial engineering employed in the $565 million take-over price of 45% of Malampaya by a start-up subsidiary of the Udenna Corporation. About 5.8% or $33 million was from capital raising activities, 27.8% or $157 million from an entitlement of Chevron receivables, and 66.4% or $375 million from debt fully secured by accounts receivables from sovereign sources.

Let us analyze each.

Capital raising for $33 million need not risk existing internal sources, especially a highly leveraged insolvent balance sheet. This need not entail a cash outflow. Fresh and external capital can proceed from an underwritten follow-on offering.

The borrowed $375 million is understandable where the creditor’s exposure is based on an abbreviated payback period of a sliver over a year. Thus the short term debt decision is simple. The difference between future and present values in cashflows using at most a 1.2 year discount period and a prime rate of 6% or less is insignificant. Add effective sovereign guarantees on the revenues of a cash remunerated debtor and credit risk is virtually nil.

Do the math. Compute net present value and payback from the perspective of creditors and the external providers of the $33 million equity capital. Where revenues accruing to 45% share amount to $360 million per year at P50 to the dollar, creditor payback occurs within 1.08 years when inflows would have amounted to $390 million.

Add the payback for the $33 million (unissued as of July 2021) in raised equity via cash dividends, then full payback would have occurred within 1.16 years. For both debt and equity financing, risk is virtually non-existent and any cash out from the company, totally unnecessary. Technically, the purchasing company is not an investor. It invested nothing. It risked nothing.

The oddest part involves an inexplicable $157 to $187 million paid to Chevron prior to sale approvals, much less its consummation or any transfer of rights and obligations. Because monthly revenues accruing to a contractor amount to $26 million, a minimum net $157 million represents a six-month entitlement from April 2019 granted to the purchaser which it could flip back as part of the $565 million. Note the timeline. The entitlements accrued from Chevron’s receivables prior to January 2020 when the deal was consummated. Prior to January 2020 those were part of Chevron’s balance sheet. As the sale had yet to be completed in 2019, what entitles the purchaser to those?

The $157 million roundabout might fall under the Foreign Corrupt Practices Act. It represents an illusory over-price, thus deterring second and third party investments and erecting artificial barriers for entry. This is important where rights of first refusal exist should similar terms be offered others since a 10% stakeholder cannot cede entitlements based on 45% as had Chevron. Net out $157 million from $565 million, and $428 million should have been Chevron’s value for 45% of Malampaya.

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(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor.)

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.