Papal infallibility in Cypriot companies

Pavlos Loizou MRICS VRS
-
9

IN JULY 2009, I approached a leading accounting firm with the following concept: I suggested to the accountants that in my view, Cypriot banks have the following dilemma when faced with large corporate clients:

  • When a client starts having problems servicing their loans, the bank has two choices; either to continue giving them money/ extending credit, or to push them towards administration/ recoveries.
  • In the first case, the bank is simply taking a “one way bet” with the particular client, as they are increasing their exposure to what is now a more “risky” client.In the second case, the bank is choosing to enter into a long-winded and costly legal process, whereby it hopes to recover its money.
  • There is a third way, I felt; banks could send a team of experts to audit the client and suggest ways to improve the way their business is run so as to improve their ability of servicing their loans. In this way the bank would take a calculated risk/ choice and the client stood a better chance of “surviving”.
  • The accountants agreed. We duly organised a team and went out to approach various banks and large corporations with our “new service”. We failed miserably. We didn’t get even one client.

Three years later we all find ourselves in the middle of the crisis, with banks having (even larger) exposures to corporates and yet stubbornly refusing to take advice. The way I rationalised it in 2009 was that the economy was (at the time) still doing “OK” hence the potential clients couldn’t see the benefit of what we were offering. Now however this is not applicable as the economy is not doing well but they are still refusing to take advice, which means that clearly my deduction was wrong.

I think I finally cracked it. Let’s say you are a 25 year old Cypriot who has finished university and who has worked overseas (probably in London) for a couple of years. You decide to come back to Cyprus and enter the private sector.

The year is 1976 and Cyprus is still in a state of shock from the 1974 invasion; 200,000 people are living in makeshift refugee camps (tents), the main commercial port is gone and there is no international airport. You decide to start your own business with help from your family and friends.

Over the next 34 years, until 2008, Cyprus’ economy (GDP) grew from $490m to $25.3bn; a staggering 5,000%. Over the same period, the UK’s grew from $236bn to $2.6tln; an increase of 1,000%.

Your choices as a young man were all profitable; land and property values kept rising throughout that period, share prices rose and banks gave handsome dividends annually, tourism had consecutive record years, and “anything you touched turned to gold.”

The year is 2009 and you are 58. You are now running a major corporation or are in senior management of an organisation. A “kid” walks into your office and suggests that you should be more prudent with how you manage your clients and that you need to consider issues like procedures, productivity levels, liquidity of collateral, downside risk, etc.

Obviously, you laugh at them because nothing like that ever happens (or, to be exact, has never happened during your working life). Of course, even if the “kid” happened to be right, you would know what to do as you have successfully steered the company for more than three decades.

Think about the above. Pause. Think of the people you deal with on a day to day basis. Pause. Smile.

The attitude outlined above stems from a great economic environment and from a general lack of risk taking by Cypriots. The latter is mainly due to societal reasons (think of how many people who know who they and their kids are in government or work for a bank) and the general ‘fear of failure’ (or rather, of what people will say if you fail). Low risk taking means a low chance of failure, which also means low chance of knowing what to do if you do fail. Americans have a saying that a business person who hasn’t gone bankrupt at least three times hasn’t taken on enough risk.

So, what actions and mistakes have I done and what business lessons have I learned?

  • In 2007 I quit my fund analyst job in the City (London) to start a niche real estate consulting (brokerage) firm in Bucharest. My partner and I knew nothing about Romania, but we worked like crazy and within a year we made the company a success. When the downturn came, we switched our focus to rentals and then closed down the office. This experience taught me to have low fixed overheads and to be able to enter and exit a particular market/ business quickly and easily.
  • In 2009, I moved to Nicosia and used my savings to buy a small plot in Ayios Dometios. The idea was to build a small three storey building and rent out the units. Being naïve, I did a thorough due diligence only after I bought the plot. I then found out that architecturally the building could accommodate no more than two large units (the plot had a narrow “face” abutting the road which made parking for more units a mess). This affected significantly the value of the land.
     
    When the bank decided to raise the interest rate on the development loan by increasing its spread, I decided to sell at a loss as they had shifted the playing field midway through the same. No level playing field meant that I would end up being a bigger looser (and soon). This experience taught me to take the time and to pay to do thorough due diligence. Also, to be willing to “take my losses” rather than stubbornly wish that things were different than they actually are.
     
    [NB: Interest is typically calculated as the sum of a base rate plus a spread you agree with the bank. In 2009, the base (euribor) was decreasing which meant that my interest rate was also increasing down. The bank decided to increase my spread (even though this was not in the contract) in order to ensure that it received the same income from me.]
  • In 2010, I made two choices.
  • The first was that I bought a small number of bank shares, even though I had repeatedly said to myself never to deal with anything I do not understand. It’s needless to say where share prices are now and what I learned.
  • As the economic, banking and later sovereign crisis started unravelling the property market in Cyprus started feeling the brunt of its implications. Many people started to pay more attention to the market but few had the tools and expertise to examine and analyse it.
     
    When I noted this gap in the market, I was duly told that “we have been fine all this time. No one wants to examine the property market or pay someone to undertake cash flow modelling for their investments”. Taking heart from my experience with the accountants, I teamed up with an economist who has banking experience and set up a niche real estate and financial modelling consulting firm – Leaf Research. Best thing I ever did. I learned that sometimes, you have to listen to your gut feeling despite of what people say.

I hope to be able to make more mistakes in the future and to keep learning from them. If I ever stop making them, it means that I am not trying hard enough.

In the mean time, I have at least found a way to rationalise how and why some of the people around me think the way they do. Time will tell if they see the error of their ways, or if they go down with their sinking ships.

Pavlos Loizou MRCIS
Lead Consultant, Leaf Research

Cyprus bids for EU bank bailout

Editorial
-
13

CYPRUS said on Monday it was applying to Brussels for a bailout, both for its banking sector hit by exposure to Greece and for its budget deficit, making it the fifth euro zone country to turn to the bloc’s rescue funds for help.

Tiny Cyprus has just four days left to raise at least 1.8 billion euros – equivalent to about 10 percent of its domestic output – to meet a deadline set by European regulators to recapitalize Cyprus Popular Bank, its second largest lender which saw its balance sheet hurt by bad Greek debt.

Finance Minister Vassos Shiarly said the country would also seek enough money to help with its budget deficit. The full amount would be decided over the course of weeks.

“The amount will be as much as it may be needed to cover the recapitalization and fiscal requirements,” he told Reuters. “These will be established after careful review during the next few weeks.”

The announcement means Cyprus would follow Greece, Ireland, Portugal and Spain into the arms of the emergency rescue funds set up for the 17-member euro currency zone.

Jean-Claude Juncker, head of the Eurogroup of euro zone leaders, said Cyprus would have to negotiate aid conditions with the EU and European Central Bank.

“This will include measures that will address the main challenges of the Cyprus economy, primarily those of the financial sector, and I expect that Cyprus will engage with strong determination in the required policy actions,” he said.

With its coffers emptying rapidly and hurtling towards an immovable deadline, the island suffered a further sovereign credit rating cut on Monday by Fitch, to the non-investment, or junk, BB+ grade. Cyprus has already been shut out from raising new funds on capital markets, with yields on its existing bonds well into double digits.

Cypriot officials said the bailout request did not specify how much they need from their EU partners.

An island with just 1 million residents, Cyprus has a disproportionately large financial sector that is heavily exposed to Greece, a neighbour more than 10 times the size with which it shares a language, culture and close political links.

A government statement said: “The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure in the Greek economy.”

Russia & China?

With a bailout widely viewed as all but inevitable, Cyprus has for weeks been trying to juggle its options between a bailout from Europe’s rescue funds – the temporary EFSF and the permanent ESM – or a bilateral loan from either Russia or China.

Cypriot President Demetris Christofias was scheduled to brief political leaders on Tuesday afternoon, a statement from the presidency said. The EU’s only Communist leader, Christofias has been reluctant to accept the fiscal and regulatory conditions that might be attached to a European rescue.

As late as this weekend, trips by government officials to China suggested Cyprus was still holding out hope for a bilateral loan from a third country. On Friday night Christofias spoke of “trying to avoid” the mechanism.

Commerce, Industry and Tourism Minister Neoklis Sylikiotis was dispatched to China, where talks were focused on a loan or a Chinese investment in the troubled Cyprus Popular Bank.

“We have had some contacts… We have requested an answer in coming days,” Sylikiotis said in comments to the state broadcaster hours before the government said it would be applying to the EU.

Moscow already provided Cyprus with 2.5 billion euros in a bilateral loan last year and has an interest in maintaining Cyprus as an offshore financial centre with low tax rates for Russian businessmen, who use it as a base to reinvest in Russia.

However, seeking such large sums from Moscow or Beijing is controversial in Cyprus, where EU membership is a matter of national pride. It could be embarrassing for Brussels as well, as Cyprus assumes the bloc’s rotating presidency on July 1.

Protective of tax

Cyprus is fiercely protective of a corporate tax rate that is one of the lowest in the EU, and eight months before a general election shows no appetite for the stringent spending cuts likely to be demanded in return for EU funding.

Christofias has repeatedly said any economic measures would not further impact “the workers”.

The European Commission has repeatedly urged Cyprus to take measures to cut its deficit below 3.0 percent and increase the competitiveness of the economy. The government says it is in the process of implementing such steps and targets a deficit of about 2.5 percent of GDP this year.

“The main source of concern is the bank recapitalization, but given that the European Commission is coming out quite strongly about excessive imbalances in the Cypriot economy one would expect them to look at that too,” said Michalis Florentiades, head of economic research at Hellenic Bank.

Cyprus Popular needs a capital infusion urgently to satisfy regulators after writing off the value of Greek government bonds in a sovereign debt swap earlier this year.

In its report, Fitch said the recapitalization bill for Cypriot banks could potentially reach 4 billion euros. That amount, equivalent to 23 percent of GDP, would also take into account rising non-performing loans from the domestic market.

Reuters

Venus rock resort under construction

Editorial
-
15


DEVELOPED by Aristo Developers from Paphos, Venus Rock will be one of Europe’s largest luxury beach-front residential developments. Nestled in the spectacular Cypriot coastline, this unique resort will radiate serenity and natural beauty. Set in a stunning valley setting next to neighbouring Aphrodite Hills, the golf course can be reached within 20 minutes from Paphos.

Home eventually to some 3000 properties, the resort aims is to create a vibrant, exclusive community that provides residents with facilities and service second to none. In addition to the two golf courses with a new luxurious clubhouse, the Masterplan includes a retail and leisure area with over 15,000 square metres of seafront commercial space, property development and a beach hotel with spa. Visitors and residents will be offered the highest standards of comfort, convenience, exclusivity and opulence.

Tony Jacklin, four times Ryder Cup captain and winner of the British Open and US open, is providing his signature for the two Secret Valley golf courses and lends even further proof of exclusivity. Golf & Land Design have a successful and ongoing design cooperation with the Jacklin Design Group on other international projects.

Due to the mature vegetation in the valley, the golf course can take advantage of a unique setting within Cyprus. Golf & Land Design architects Hans-Georg Erhardt and Snorri Vilhjalmsson have carefully laid out the holes in the natural landscape, utilising the steep hillside terrain for spectacular tee locations and long views towards valley and ocean.

Aided by GPS technology and detailed grading plans, French construction company Benedetti are moving fast and on schedule. Rough earthworks are completed, fine shaping is in full motion, irrigation lakes have been lined, pumps are installed and the first set of holes are being grassed. Completion of the first course is scheduled for year end. Already now, the course is beginning to take shape, including some stunning stone walls and water features around the main reservoir lake. The narrow but fair Bermuda fairways are highly shaped and rolling, each with 6 set of tees, large Bent grassed green and strategically placed bunkers to allow both competitive professional play and a relaxed friendly game. Overall, the golf course gives prominence to local landscaping and blends harmoniously into the natural beauty of the site.

The offering will include high end golf academy facilities. The driving range is located close to clubhouse and starting hole and provides grassed tees as well as sheltered bays. Large putting, chipping, and pitching greens as well as indoor solutions with golf simulator and swing studios complete the modern practice areas.

The existing Secret Valley Clubhouse will serve the first new course while a new and larger clubhouse will add luxury to the second course. And to add more golfing excitement, a floodlight 3-hole loop for evening play will be conveniently located at the lower end of the golf course where the beach development links with the golf course.

With two of the island’s most challenging 18 hole golf courses and a breathtaking clubhouse, you needn’t go anywhere else – Venus Rock will have everything at hand for a lifestyle yet to be experienced on the island.

Press release issued by Golf & Land Design (Austria)

Fitch cuts Cyprus credit rating to junk

Alan Lawton
-
0

FITCH Ratings has downgraded the Republic of Cyprus’ Long-term foreign and local currency Issuer Default Rating (IDRs) to ‘BB+’ from ‘BBB-‘. The Short-term IDR has also been downgraded to ‘B’ from ‘F3’. The Outlook on the Long-term IDRs is Negative.

Fitch has simultaneously affirmed the eurozone Country Ceiling for Cyprus at ‘AAA’.

The move brings Fitch into line with the other major ratings agencies, Moody’s and Standard & Poor’s, in pushing the Island’s credit rating into junk territory.

Cyprus is scrambling to find around €1.8 billion (about 10% of its GDP) by the end of the month to recapitalize the Island’s second largest lender, Cyprus Popular Bank.

In its statement the agency said that “Fitch acknowledges that its estimates of the losses and capital needs of Cypriot banks are subject to considerable uncertainty and are conservative. Nonetheless, in Fitch’s opinion, Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability”.

“Fitch judges that the scope for further capital-raising from the private sector is limited and thus assumes that the capital will have to be provided by the government”.

With the fiscal cost of bank support potentially as high as €6 billion, general government debt is likely to exceed 100% of GDP compared to the agency’s previous forecast of 88%.

Fitch expects the economy to stagnate this year and next and thereafter to recover only slowly as macroeconomic imbalances unwind and the headwinds from the on-going Eurozone and Greek crises persist.

The Negative Outlook primarily reflects the risks associated with a further worsening of the Eurozone crisis, notably further contagion from Greece.

“In the event of a Greek exit from the Eurozone, Fitch would review Cyprus’ sovereign ratings”, the agency said.

Adding that “Progress on deficit reduction, recapitalisation of the banking sector and reform to address medium-term challenges arising from an aging population and low productivity growth would support a stabilisation of the rating”.

Cypriot officials have said that they would seek foreign aid from fellow Eurozone nations or from Russia, or a combination of the two.

(According to a report by Bloomberg Neoklis Sylikiotis, the Island’s minister of commerce, industry and tourism, is visiting China to “explore the ground” for receiving a loan. The minister is in China with Dr Michael Sarris, chairman of Cyprus Popular Bank.)

Banks and government destroying property market

Nigel Howarth
-
20

LAST year the government introduced legislation designed to improve the protection afforded to those buying property on the Island.

One provision of the new law entitled ‘The Sale of Immovable Property (Specific Performance)’, N81(I)/2011, enables someone who is buying a property that is already mortgaged to pay a proportion of that mortgage to the mortgagee (usually a bank).

The mortgagee is required to accept this arrangement – and the buyer’s contract of sale, having been duly lodged at the Land Registry, will take precedence over that mortgage regardless of whether the whole amount of the mortgage has been repaid. Furthermore, the vendor cannot intervene in this arrangement.

Although this arrangement does not guarantee the eventual issue of Title Deeds and transfer of ownership to the purchaser, it does provide purchasers with a degree of added protection against the cowboys who plague the Island’s property industry.

However, cash-strapped banks appear to be exploiting this legislation to improve their cash flow to the detriment of both property developers and purchasers.

One case reported in the local press by Antonis Loizou involved the sale of a property valued at €2.5 million. The mortgagee demanded 70% of the sales price to release the property from the mortgage. Needless to say, as the developer needed 50% of the sales price to build the property and cover his other expenses, the deal fell through.

Cyprus government demands its pound of flesh

THE cash-strapped government has also joined the merry band of those demanding their pound of flesh.

It has always been the case that Title Deeds could not be issued to a purchaser unless the vendor provided a Tax Clearance Certificate to the Land Registry proving that he had paid his outstanding tax liabilities.

This condition is obviously detrimental to the interests of those who have bought property. Why should the government of Cyprus deny their rights to owning a property because the vendor has failed to pay his taxes? (In some cases purchasers desperate to secure ownership of their home have paid taxes owed by the vendor to the Inland Revenue department).

This situation was exacerbated recently when the government started lodging ‘memos’ for unpaid taxes against developments registered to property developers who have failed to pay their taxes.

A ‘memo’ is a charge against a property or properties resulting from a successful court action brought by a creditor (in this case, the government) for the payment of a debt (in this case, unpaid taxes).

This memo (more correctly a memorandum) effectively prevents the transfer of ownership from the vendor to the purchaser or the sale of a property until that memo is cancelled.

So we are now in the ridiculous situation where buyers’ rights to owning a property are being denied through no fault of their own and are being placed in a position where they cannot sell the property until the vendor (or they) pay the vendor’s tax liabilities.

I hope that some intelligent life form in Government (or is that an oxymoron) manages to resolve this situation before the European Court of Human Rights gets involved.

Until such time as a secure and reliable means of purchasing off-plan properties and a reliable means of transferring those properties to their purchasers is put in place by the government, you are advised not buy property in Cyprus unless it has a full Title Deed.

Chinese investors eyeing Malta

Jacqueline Agathocleous
-
1

DESPITE government assurances that a proposal to clinch the Chinese deal for the old Larnaca airport will be ready by the end of the month, fears are growing that the investors may turn to competitive Malta instead.

On Wednesday Communications Minister Efthymios Flourentzos said the government was in the final stages of completing a proposal with the terms and conditions for the €600 million investment by Chinese company Far Eastern Phoenix (FEP). He said it would be handed over to the investors by the end of the month, saying it would then be up to FEP to decide whether to accept it or not.

But opposition DISY’s parliamentary spokesman Tasos Mitsopoulos echoed the concerns of the Hermes Airports’ spokesman that the government could be too late, saying he had information that FEP was in talks with Malta to invest there instead.

“I am in a position to know that the Chinese are in contact with Malta in the event that this investment sinks, to transfer it to a competitive country and economy,” said Mitsopoulos.

He added, “Two weeks ago I was in Brussels and had a conversation with an Irish colleague, who said they had a similar Chinese investment in Ireland, which under the orders of the prime minister of the country, was completed in three months. The entire procedure to examine, assess the terms, survey and sign the contract took three months, and this is because this country, like Malta and others want to show they are ready to host foreign investments and contribute to growth during this difficult crisis period.”

Mitsopoulos wondered “how will we have growth and new job positions if we don’t have foreign investments?”

Hermes Airports’ PR and communications manager, Adamos Aspris, was equally concerned, saying the government’s delay in presenting FEP with a final proposal could lead to Cyprus missing out on the investment altogether.

He blamed the delays on red tape, adding that the economy was in dire need of the investment – a plan to transform the old airport into a commercial centre with a showroom and bonded facilities for Chinese factories to display products for a 50-year period.

“I think it is important that all of us attempt to avoid entering what I would describe as ‘roundabout’ reasoning; meaning we can’t decide what direction to take and so we keep going around in circles,” said Aspris.

He added, “I think we should take the correct turn, otherwise allow me to say that we are in danger of running out of fuel”.

Aspris said time wasn’t unlimited, as no investor was interested in entering exhausting bureaucratic procedures, nor did the state have the luxury to turn down such an important investment at times of economic crisis.

But minister Flourentzos denied there was a problem with bureaucracy, claiming instead that the government was moving ahead “very swiftly” with finalising its proposal – “so that it can conclude as soon as possible on specific results”.

He said FEP would be presented with the proposal by the end of the month. “The reply will be in the hands of the investor,” said Flourentzos.

Speaking after yesterday’s cabinet meeting, Government Spokesman Stefanos Stefanou said the government’s main goal was to finalise the procedures as soon as possible “so all the problems can be overcome so that the investment can be implemented”.

A deal was first reached between FEP and Hermes a year and a half ago for a 19-year period, when the latter’s concession agreement on the old airport expires. The Chinese company sought to extend that deal for a further 31 years to justify the large investment.

However, finalisation of the 50-year agreement has hit a number of snags, with the state remaining unsure as to whether to approve the deal or not.

Chinese Investors Eyeing Malta

1...483484485...695Page 484 of 695