The Energy Earth saga is a reminder of how an investment can yield a painful experience and a slow legal process.
Energy Earth saga a salutary reminder of the perils of investment, writes Darana Chudasri
Some investors are hooked on investing in high-yield corporate bonds amid the low interest rate environment. But the Energy Earth saga serves as a reminder of how an investment could yield nothing but a painful experience of deception and slow legal prosecution.
Debenture creditors awaited yesterday the verdict of the Court of Appeals, deciding whether to uphold controversial coal miner Energy Earth’s appeal against a class action lawsuit on the grounds the case should be considered a consumer protection case.
Earlier, the Civil Court of Southern Bangkok approved a class action lawsuit being pursued against Energy Earth for financial damage incurred by debenture holders.
The Court of Appeals eventually ruled the case is considered a consumer protection case as a class action lawsuit and the hearing would resume on May 12.
Energy Earth requested mediation in court and the court ordered document submission of a debt reconciliation plan with the plaintiffs’ attorneys and the entire group of around 2,000 debenture holders by March 31.
Debenture holders will then have to vote whether to approve Energy Earth’s debt reconciliation plan. Debenture holders who agree to the plan will proceed with compensation in court, while those who disagree will have to negotiate with Energy Earth further.
If Energy Earth fails to comply with the debt reconciliation plan, debenture holders could revert back to a class action lawsuit for damage compensation.
Energy Earth has been de-listed from the Stock Exchange of Thailand (SET) index since Sept 20, 2019 because of the company’s failure to submit financial statements by the bourse’s deadline.
In addition, the company faces another probe into 12 billion baht in loans granted by Krungthai Bank after the miner failed to redeem two lots of bills of exchange worth 90 million due in June 2017.
“The company lacks sincerity and has tried to negotiate and settle the debts outside of court,” said one of the debenture holders who requested anonymity.
BEGINNING OF THE END
Energy Earth was listed on the Market for Alternative Investment index in 2010 through backdoor listing of shares of Advance Paint & Chemical (Thailand) Plc. The company later filed an application for its shares to trade on the SET index.
Energy Earth’s market capitalisation climbed to 30 billion baht in 2013 and its market cap hovered around 15 billion before the controversy unfolded.
In December 2015, Energy Earth issued its first subordinated debenture series worth 1.5 billion baht, with a twoyear maturity period and an interest rate of 4.9%.
Its second subordinated debenture series soon followed. The 4-billion-baht debenture was issued in October 2016, with a 4.65% interest rate.
The nightmare started in 2017. In May 2017, the company’s shares plunged by 30% over two consecutive days amid rumours circulating about conflicts among the management team.
In a nutshell, executives and major shareholders of Energy Earth used company shares as collateral to seek loans from a few brokers for investing in other businesses. The shares used as collateral were almost 10% of the total shares, some 339.16 million shares.
Futures, financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price, were used as a tool for the loans.
Brokers set a condition that when there is a correction to Energy Earth shares at a certain level, a forced sale is required.
In essence, Energy Earth executives offloaded their shares when the share price plunged to the stipulated level to obtain money to repay the loans.
It marked the beginning of a controversial saga where money and assets were siphoned off by Energy Earth executives, resulting in significant damage to investors, especially retail debenture holders and equity shareholders.
“The company had fraudulent intentions,” said the source.
Just a few months after the second debenture series was issued in 2016, creditors suspended lending because the company had taken money out of the country through a letter of credit document, which was used as an advanced payment for the purchase of goods totalling 2 billion baht.
In July 2017, the company requested the Central Bankruptcy Court enter it in the bankruptcy process with more than 20 billion baht in debt. The insolvency was caused by debt collection documents issued by its business partners and related companies in China.
In September 2017, the Central Bankruptcy Court ordered Energy Earth to enter a rehabilitation plan and appointed EY Corporate Advisory Services the company’s planner.
After entering business rehabilitation for a few months, the company told the court it managed to complete a debt negotiation with creditors, meaning it was no longer insolvent.
But the company later appealed to the court to enter another rehabilitation plan again. During this period, Energy Earth converted liquid assets, such as advance payments, reservation fees and other assets, in exchange for the rights to two Indonesian coal mines valued at US$731 million.
“We were very confused. The company’s management twisted their words. Not only is this a case of insolvency, but also a case of siphoning money,” said the source.
MORE CONTROVERSIES ENSUE
A controversy surrounding the company’s business rehabilitation and rights to the two Indonesian coal mines started to surface as further investigations took place.
The Securities and Exchange Commission (SEC) has accused former directors and executives of Energy Earth and their associates of creating artificial debt for the company to enter a business rehabilitation plan.
The accused have also fraudulently misappropriated Energy Earth assets as their own or that of a third party, according to the SEC.
For the two coal mines in Indonesia, EY Corporate Advisory Services, the business rehabilitation planner for Energy Earth, reported the company’s
rights to the coal mines held by Indonesian nominees were nullified according to Indonesian law.
The value of the two coal mines was appraised at 1.5 billion baht, considering the undeveloped areas have restricted transport access, according to the EY report.
The report also mentioned Energy Earth acquired another Indonesian mine worth 3.69 billion baht in 2015, but the mine had zero fair value as there was no economic value when factors associated with investment value were taken into account.
The amount of coal estimated to be excavated in the concession period was included in Energy Earth’s mining rights, while suspicion was also raised regarding the valuation of the two coal mines under the assumption that the mines could begin operation in 2019 and 2020, according to the EY report.
In June 2019, the Civil Court of Southern Bangkok ordered holders of Energy Earth’s two debenture series to file a class action lawsuit, but the company could appeal legally.
“Energy Earth has tried to separate debenture holders who have joined the class action lawsuit by telling some of them to negotiate individually for faster repayment. This is tricky,” said the source.
In January 2020, Energy Earth signed a composition with 152 debenture and bill of exchange creditors worth a combined 426.1 million baht.
EXPENSIVE LIFE LESSON
“Sometimes issuing companies lack responsibility. They come up with stories to deceive securities holders,” said the source.
“They also have expert lawyers to help [cover up] their deeds, while law enforcement in Thailand is still subpar.”
The value of corporate bond issuance continues to break records since 2014, with last year’s new debenture issuance worth 1.1 trillion baht, according to the Thai Bond Market Association.
The outstanding value of total corporate bonds stood at 3.96 trillion baht in 2019. High-yield debentures contributed 6% of the total and 66% of these debentures are classified as secured, rated corporate bonds.
After going through the Energy Earth fiasco, the source, a senior investor, will never invest in any non-rated corporate bond again.
“I bought [Energy Earth’s] corporate bond with a 4.9% interest rate, which I thought was attractive and could provide earnings for daily spending after retirement,” said the source.
“All investments have risks. If the return is not worth the risk, the money is better spent investing in the real sector or my own business, instead of being deceived into giving it to other people.”
‘‘ Energy Earth has tried to separate debenture holders who have joined the class action lawsuit by telling some of them to negotiate individually for faster repayment. This is tricky. DEBENTURE HOLDER