A 100% margin loan
18 September 2009
Here's a classic bit of non-disclosure that caught the eye of Webb-site.com this morning. Byford International Ltd (8272), which we warned readers about in June, announced that it is lending HK$24m to a BVI company called Dragoncom Holdings Limited (Dragoncom), secured only by Dragoncom's portfolio of...
"locally-listed shares and/or securities with a collective value of no less than the Loan".
Now we'll assume that by "locally-listed" they mean listed in HK, not the BVI (which lacks a stock exchange). But that isn't the problem. No broker or bank would provide a loan of 100% of the value of shares, because that would leave them exposed the moment the portfolio value went down. Given that Dragoncom might be buying risky small-caps with this money, the most it could reasonably expect to borrow from a bank or broker would be 30-50% of the portfolio value. These are not commercial terms. Naïvely or disingenuously (take your pick) the announcement says:
"The Directors are of the view that given the Loan has security and hence the repayment of Loan will be guaranteed...The Directors (including the independent non-executive directors) consider that the Loan is made on normal commercial terms... "
How can the directors possibly regard this security as adequate to guarantee repayment?
Secondly, the announcement does not disclose who owns Dragoncom. The owner of Dragoncom in effect gets a free call option on the portfolio - if the value goes up (by more than the 8% annual interest), the owner makes a gain, and if the value goes down, the owner walks away. We assume that Dragoncom has no other assets to back up its loan, since none were disclosed.
This level of disclosure is permitted by Hong Kong's lax Listing Rules, which still leave much to the imagination. When a listed company deals with a company, the owners of that company should be disclosed, and so on up the tree until we get to human owners, and if there is more than one owner, then anyone with a 10% interest at any level of the ownership tree should be disclosed.
© Webb-site.com, 2009