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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » The Finance (TFC) Turns Round Or Merry Go Round ?

The Finance (TFC) Turns Round Or Merry Go Round ?

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Analytic

Analytic
Equity Analytic
Equity Analytic

The Finance Co. PLC (TFC), Sri Lanka’s oldest registered finance company has bounced back after a seemingly successful share issue.

The company which had a capital shortfall of Rs. 3.6 billion, raised Rs. 1.6 billion from a public share issue which closed on Friday (with the share issue being over-subscribed) and had raised a further Rs. 1.1 billion as at Tuesday morning from a target of Rs. two billion set, in an offer exclusively confined to its” loyal” customer base, on the basis, that, of the 10% of the 200,000 strong deposit base thus far tapped, having had consented to have a minimum 10% of their deposit value converted into non voting (NV) shares in the company.

The closing day of this option has been extended to Wednesday, from the original closing date which was last Tuesday. The extension was, due to the “post” not being able to reach some of its depositors to date (In Batticaloa for instance where TFC has a large client base, due to the recent floods and the rains, letters informing them of the share issue had not reached several of them thus far, ie as of Tuesday).

Stringent listing regulations by the Securities and Exchange Commission /Colombo Stock Exchange (CSE), where even utility bills have to be shown to open accounts with CSE’s Central Depository System, has made it necessary for TFC to make this offer not only by post, but also to follow it up by telephone calls and even physical visits to the depositors’ houses, to explain to them how they could apply for shares and open accounts with the CDS in connection with the same.

Some depositors have been doing business with TFC for three generations. It’s this depositor loyalty that has driven TFC to ensure that they too get a share of the pie. Pensioners, who form a large clientele base in TFC, are only keen on taking the interest payments due to them, rather than the capital.

As such shareholding per applicant has, initially being restricted to 10% of their deposit holding, while at the same time refusing deposit holders of deposits opened after September 21 of last year, from participating in the share issue.

Otherwise there would have had been instances of new depositors who had wanted to convert their deposits into shares, assuring the company of immediate fully subscription (an action that TFC could have resorted to, which however they desisted from doing). TFC has priced its voting shares at Rs. 40 a share and its non voting at Rs. 20.

TFC is a listed company and its share was trading at the Rs. 56 levels recently.
Among the strengths of TFC is its real estate stock, with one director of a top corporate to whom TFC had made a presentation, describing the company as being a gold mine. Most, if not all of its voting rights have had been subscribed by corporates.
Pawning is another lucrative area of business for TFC.

It’s TFC’s belief that depositors who subscribe to its share issue by buying NV shares at a discounted price vis-à-vis the price that had to be paid for its voting shares, could always exit at a premium, because of the demand for NV shares, with the carrot being the prospect of a dividend payout, the payout of which, prior to the troubles, having had been 18%.

With the new shareholders enjoying control of two thirds of TFC’s voting rights and 25% of its overall shares, there is a likelihood that those new shareholders would further wish to enhance their control in the company, by going after its NV shares as well, hence an opportunity for TFC’s NV shareholders, to dispose of their shares at a profit.

With a deposit base of Rs. 25 billion and an equivalent asset base, the company, which then was a Ceylinco Consolidated company, underwent a run on its deposits when Golden Key company, another Ceylinco company, crashed in 2008.

But with Central Bank of Sri Lanka intervention and the appointment of an advisory group, coupled with a Bank of Ceylon subsidiary-Merchant Bank of Sri Lanka taking over as it management agent, and further buttressed by its staff making sacrifices, was the beginning of the start of TFC’s turnaround.

Salary cuts, starting from the labourer and upwards, freezes in increments and rationalization of operations (the company which has the largest branch network for a finance company with 60 branches has centralized its credit operations, with plans to centralize its accounting and administrative operations as well), all helped TFC to pull through, during that difficult period.

Unlike most finance companies, TFC’s base is rural, with two thirds of its deposit strength coming from outside the Western Province. It was this clientele, which did not panic, when the going was bad. Aggressive debt collection, even during the bad times also helped the company to pull through. Further rationalization is also on the cards, thereby saving TFC of paying more expensive rent, whilst at the same time releasing lucrative properties, owned and occupied by it, for sale to the market. The company also minimized recruitment, with enhanced productivity compensating for unfilled vacancies, particularly caused by retirements and staff leaving for jobs elsewhere.

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