An article in the Nassau Guardian tells about a new loan offering from Fidelity Bank, who are involved in Commonwealth Brewery Limited’s (CBL) much talked about $62 million initial public offering (IPO).
The bank is offering 100 percent financing at interest rates up to 16 percent to “investors” interested in getting in on the IPO.
Is that really a sound method of investing?
“At 100 percent financing for an equity security – usually at the very bottom of the pecking order should a company go bust — investors considering the loan option with interest rates far beyond CBL’s recent dividend yields should give the loan careful consideration,” the Guardian article by Stuart Miller warns.
Admitting that the offer “has raised some eyebrows in the investment and banking sectors,” the article’s author points out the “risks inherent in equities – perhaps amplified in a capital market with an illiquid history,” such as the Bahamas.
The article says that Gregory Bethel, president of Fidelity Bank, advises that potential investors get financial advice before pursuing the offer. Saying that Fidelity does indeed offer financial advice to investors, Mr Bethel was quick to clarify the distinction between his bank’s role as investment advisors and their role as lenders in this scenario.
Summing up, the Guardian article suggests it would take real faith in Commonwealth Brewery’s stock going up to get involved in this scheme.
“The caveat Bethel offered to take investment advice may be twice as important when considering borrowing at around twice the rate of the dividend yield. For the professional investor, it would likely require great faith in the ultimate appreciation of the share price, or a certainty that he could pay off the borrowed money fairly quickly and bring his carrying costs into positive territory.”
