Cohen financing mess revealed

A lengthy audit that has been leaked to the Cayman Islands news media reveals the depths of the mess government became embroiled in with a long-term financing arrangement last year. 

Starting in October 2010, the government went through two separate bidding processes for the arrangement of long-term financing needed to pay for recurring expenses as well as certain government projects.

A long and convoluted process led eventually to the rejection of a recommendation for the financing contract made by the government’s Central Tenders Committee and a decision – made by Premier McKeeva Bush who is also the minister of finance – to go with a New York-based financing firm, Cohen & Company. That decision, according to the auditor general, was not in compliance with the financial regulations of the country’s Public Management and Finance Law. Premier Bush has admitted as much on previous occasions.

Auditors noted Mr. Bush said at the time that his decision to go with the Cohen firm would save Cayman $24 million dollars over the life of the 15-year loan.

However, the audit revealed that the savings were essentially based on a “cap” on a variable interest rate for the loan based on how much the Cayman Islands government was willing to pay up front. Moreover, the report stated government had no guarantees as to the borrowing terms in the long-term financing deal that was signed with Cohen.

“The signed contract only provided the terms for how Cohen & Company would arrange loans but with no specific timelines, interest rates or other borrowing terms,” Mr. Swarbrick’s report found.

Once government learned that Cohen could not provide a 4.5 per cent interest rate cap on the long-term loan and also required the up front payment to secure that rate to jump from $4.83 million to $21 million. In addition, the company offered only a seven year bond to the government, as opposed to the 15-year deal offered previously.

The government dropped Cohen as its long-term financier, but the New York company did arrange two short-term loans to meet the government’s needs during its last budget year.

According to the auditor general’s report, the arrangement of those short-term financing fees cost $854,775 through Cohen & Company.

A previous proposal for short-term financing negotiated through two locally operating banks cost $404,779 – which means the government paid $449,996 more with the Cohen financing agreement.

Also, financing arrangement costs for the long-term loan – had the Cayman Islands government actually chosen to go with Cohen for that arrangement – would have cost approximately $854,153 more when compared with the deal offered by Royal Bank of Canada and FirstCaribbean.

In addition to what auditors terms ‘extra’ expenditures, there were a number of issues identified by the report where government’s decision-making with regard to the financing arrangements were called into question.

*Advice from ministry officials regarding Cohen & Company’s proposals was not presented to Cabinet members when they first reviewed the arrangement made by the Premier for long-term financing. Among that advice was the following statement from a top ministry official: “I find it quite difficult to believe that Cohen & Company has the ability to deliver what it says”.

*A top-ranking official of the United Democratic Party, treasurer Peter Young, “pointed the Premier in the direction of Cohen & company based on his knowledge of the industry”. Mr. Young was providing a service to government but was not under contract at the time.

“As he is not a public servant, or under contract, Mr. Young is not subject to the same contractual obligations as a public servant or contractor,” Mr. Swarbrick said. “We have concerns when this occurs.”

*The departmental tendering committee organised to negotiate and obtain the loan did not have detailed knowledge of the financial markets.

*Auditors were concerned the international community, particularly major lending companies, would notice Cayman “stumbling” on three occasions to obtain a loan for the government’s 2010/11 budget year.

Please see the full story in Wednesday’s Caymanian Compass…

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