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Custodian Investment’s Creative Accounting Raises Doubts Over Planned Capital Raise

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Custodian Investment Plc, formerly Custodian and Allied Plc, a Nigeria-based firm is operating more like a hedge fund, while masquerading as a holding company for its various subsidiaries, that include Custodian and Allied Insurance Limited, Custodian Life Assurance Limited, Custodian Trustees Limited and Crusader Sterling Pensions Limited.

Custodian in a notice to shareholders last week said it planned to raise the Naira equivalent of up to $15 million (N6.15 billion), as additional capital through a convertible loan instrument.

The loan would now be converted into shares in the Company at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company.

Custodian is trading at around N7 per share as at the time of filing this report. Assuming the holding company is able to find takers for its convertible loan and convert at N6 per share, it would mean creation of an additional 1.026 billion new shares, and diluting existing shareholders by 17.3 percent.

Custodian currently has 5.88 billion shares outstanding, and a market capitalization of N41.17 billion.

Why would a corporation issue convertible bonds?

Convertible bonds are typically issued by companies that have high expectations for growth and less-than-stellar credit ratings.

The companies get access to money for expansion at a lower cost than they would have to pay for conventional bonds. Investors, in turn, get the flexibility of turning their convertible bonds into stock or shares.

A startup company with little current revenue and rapid growth potential might be an ideal candidate for issuing a convertible bond.

For the borrower, who usually has discretion over whether to convert, they are a route to cheaper funding, meanwhile for investors interest rates would need to stay low, while stock prices remain high for it to be attractive.

Custodian investment however is a large company that just reported N12.687 billion profits for its 2020 operations so why would it need to borrow like a start-up with little revenues or profits?

A deeper look into the financials of Custodian investment shows that most of the N12.687 billion profits it reported are unrealized paper profits, while a cloud remains over its accounting of a N6.6 billion acquisition of majority stakes in UPDC Plc a Real Estate Investment Trust (REIT).

Paper profits cover cracks in balance sheet

For the 2020 financial year, Custodian investment reported a loss of N2.5 billion at the operating level (Gross revenues less operating expenses).

This however changed to after tax profits of N12.68 billion, thanks to N15.8 billion in net fair value gains.

A deeper look into the huge gains booked shows that these were largely due to changes in fair value of Quoted investments of N15.42 billion.

In other words, the profits are only available on paper unless Custodian sells or unloads its positions which could depress shares.

There is also no clarity on the underlying quoted investments that surged by such a huge magnitude of N15.42 billion in 2020. There was also N543million in unrealized FX gains booked as profits.

Without the impact of the N15.8 billion, Custodian Investments would have reported a loss for 2020, making it clearer as to why the firm is raising a convertible bond.

UPDC transaction

Custodian Investment Plc announced in August 2020 that a binding agreement had been signed with UAC of Nigeria Plc (UACN), for Custodian to purchase a 51 percent equity interest in UACN Property Development Company Plc (UPDC).

Deal Highlights:

  • Sale of 9.465 billion UPDC ordinary shares held by UAC, representing 51 percent of UPDC’s issued share capital, to Custodian.
  • Sale Shares will be sold in two tranches: Initial sale of 946,558,467 shares, representing 5.10 percent of the issued share capital of UPDC, on execution of binding transaction agreements.

Subsequent sale of 8,519,026,201 shares, representing 45.90 percent of the issued share capital of UPDC upon receipt of requisite approvals.

Custodian Investment has apparently concluded the transaction as it reported in its 2020 financial statement that :

“During the year, the Company acquired 9,465,584,668 ordinary shares of UAC Property Development Company Plc “UPDC” shares accounting for 51% of issued shares of UPDC. UPDC continues to operate as an independent entity and the company does not control its operations or its board.”

The transaction is listed under notes in UPDC’s financial as investment in associate (UPDC REITS) for a total consideration of N4.176 billion.

The transaction does not however show up in the income statement of Custodian investment as a cost as it should. As a matter of fact, Custodian investment does not provide any clarity as to how they funded the transaction in its books.

Tough times for Malls, REITS

Custodian investment invested in the UPDC REIT at a difficult time for mall operators and commercial real estate in general in Nigeria.

First Festival Mall, one of the major assets of UPDC that Custodian investment is now exposed to via its 51 percent stake, has reportedly defaulted on a $25 million loan from Stanbic IBTC.

First Festival Mall is a Joint Venture, which includes UACN Property Development Company Plc, Africa Capital Alliance and UPDC Real Estate Investment Trust, that owns a sprawling shopping complex in Festac Town, Lagos

UPDC provided a Revenue Guarantee of $2million (Two Million Dollars) for a loan taken by First Festival Mall Ltd. The loan structure allowed quarterly rental payments and a bullet repayment at maturity.

“The loan has fallen due and First Festival Mall Ltd. was not able to repay. As a result of this, the lender has called on the guarantee in May 2020. We have made a provision for this guarantee of $2million (Two Million Dollars) only at the exchange rate as at 30 June 2020 (N1 – $387.96). However, we are in discussions with the lender to review the details of the guarantee in order to reach a mutually agreeable position on how it will be settled,” UPDC said in its financial statement last year.

Nigeria’s retail space has been under pressure in recent times even before the onset of the coronavirus pandemic and #EndSARS protests that led to the looting and burning of numerous shopping malls in the country.

The usual Anchor tenants such as Shoprite, Silverbird Cinemas and Spar were having a tough time breaking even as foot traffic to malls dropped drastically following the 2016 recession in Nigeria.

Growth has remained at below trend of 2 percent since 2017 leading to a slide in disposable income and consumers willing to purchase only the bare low margin necessities when they visit malls.

The Festival Mall was developed with a $9 million bridge facility part-funding from Stanbic IBTC Bank. The bank subsequently refinanced this amount with the provision of a seven-year $25 million medium term loan facility.

South Africa’s supermarket retailer, ShopRite recently announced plans to pull out of Nigeria, 15 years after it launched in the country.

The major reasons for this are:

  • The company is re-evaluating its operating model and has been approached by interested investors willing to take over their Nigerian outlets.
  • Tough business climate in Nigeria are injurious to sales. An example are losses recorded during the last xenophobic reprisal attacks in Nigeria and #EndSARS protests.


MoneyCentral believes Custodian investment should provide more clarity to potential buyers of its equity-linked bonds on these issues ahead of its sale to investors.

The dilutive nature of the bonds on common stock means potential investors are already underwater, unless the businesses of Custodian investment can create growth in coming years that generates real profits (without the help of creative accounting) helping to push its stock price well above current levels.

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