SEC asks EAP to get another rating from independent agency

Wednesday, 10 June 2015 00:48 - - {{hitsCtrl.values.hits}}

Conflict of interests between LRA and issuer company having common director and two directors being on LRA’s Rating Committee including former SEC Chief and DG

Dr. Dayanath Jayasuriya

Directs CSE to defer opening of Rs. 3 b BBB rated debenture issue

The Securities and Exchange Commission (SEC) has directed the Colombo Stock Exchange to defer the opening date of the subscription of the proposed debenture issue of EAP Broadcasting Company until a rating is obtained from an independent agency.

EAP’s Rs. 3 billion debenture issue was scheduled to officially open on 11 June.

The SEC directive came following deliberations at a meeting of commissioners yesterday. The SEC said there was a prima facie conflict of interest in the rating of the proposed debenture issue of EAP Broadcasting by Lanka Rating Agency (LRA). This arises from having a common director on the respective Boards of Directors of both the issue company and the credit rating agency and two of the directors of the issuing company being members of the Rating Committee of LRA.

“The commission was of the view that the integrity of the process adopted by LRA does not appear to support the credibility of the rating,” the SEC said. It added that the commission took serious note of the fact that LRA was in breach of Part VD (vi) of the Schedule to the SEC Act, which stipulates the terms and conditions a Credit Rating Agency has to comply with in order to be registered with the SEC.

The commission, having afforded a hearing to the Boards of Directors of EAP Broadcasting Company Ltd. and Lanka Rating Agency Ltd., decided to direct the Colombo Stock Exchange with regard to deferment of the opening date.

LRA has originally issued a BBB rating for the company and the instrument. The managers to the issue are People’s Bank Investment Banking Unit.

Though the SEC did not name the persons concerned, the Common Director reference is M.P. Jayawardena who is Chairman of LRA and a Director on the EAP Broadcasting Board. The two directors of the company serving on LRA’s Rating Committee are none other than the former SEC Chairman and one-time Director General Dr. Dayanath Jayasuriya (Chairman of EAP Broadcasting) and former NDB CEO veteran banker Russell de Mel (Director of EAP Broadcasting)

EAP Broadcasting last month announced an issue of 15 million Listed Rated Redeemable Debentures (with a Sinking Fund Mortgaged in favour of the Trustee) of Rs. 100 each with an option to issue up to a further 15 million debentures in the event of an over subscription of the initial 15 million debentures.

There are two types of debenture issue. Type A has a fixed rate of 10.50% payable annually for four years and Type B was 11% fixed interest rate payable quarterly for five years.

The main objective of the company is to utilise the proceeds of the issue to invest in valuable properties for further development. This objective will be achieved through the establishment of a full subsidiary named Galaxy Landmarks Ltd. The company intends to purchase a portfolio of commercial properties owned by ETI Finance Ltd., recently valued in terms of the restructuring process of the company.