Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

This is the story of a small motorcycle leasing and finance company in Thailand, and how its Japanese amour took it to the moon and back.

Once upon a time, in the far eastern exchange of Bangkok, was a penny stock called Group Lease Pcl. The company spent its days helping poor peasants in Thailand and Cambodia buy motorcycles. Yet, no one loved it. At the beginning of 2015, it was worth about 6.1 billion baht ($172 million). Average daily trading volumes were muted, at best.

Then one day, not so far into the new year, Group Lease heard that J-Trust Co., a Japanese knight that had already rescued Indonesia's PT Bank Mutiara, was seeking new adventures. The two set about building a relationship. J-Trust agreed to buy convertible bonds in Group Lease and suddenly, the little firm's popularity began rising.

By mid-December of last year, Group Lease's market capitalization had increased to $2.9 billion, in spite of it only having $482 million in assets. Group Lease's good fortune made it the 30th most valuable company on Thailand's stock exchange, ahead of even petrochemicals giant IRPC Pcl, which had 10 times the assets on its books.

Elevated
Motorcycle financing company Group Lease has seen its market value soar since it became associated with J-Trust
Source: Bloomberg

And it meant Group Lease was trading at almost 100 times estimated earnings!

Abracadabra
Group Lease's valuation peaked in December at 97.5 times forecast earnings
Source: Bloomberg

If Group Lease had transformed into a beauty, J-Trust was still something of a beast. The finance company expanded in consumer credit after the acquisition of parts of a bankrupt business. No matter, the affection between the two blossomed and J-Trust converted its notes into shares. Unsated, it went on to buy even more convertible bonds in Group Lease.

Although J-Trust was making some financial outlays, it was also deriving a lot of pleasure from the relationship. In the quarter ended Dec. 31, J-Trust reported 8 billion yen ($69 million) in additional operating revenue, more than 12 percent of the total, as a result of selling "shares of Bank Mayapada and unrealized gain on the derivatives component of GL's convertible bonds [sic]."

Relationship Bliss
J-Trust's operating revenue has increased since it began its association with Group Lease
Source: Bloomberg

Of course, every fairy tale needs a villain. This one came in the form of an Ernst & Young LLP auditor. As he reviewed Group Lease's 2016 financial statements, Sophon Permsirivallop felt the need for a few disclaimers before signing off. Those familiar with the language of annual reports know this can be a major red flag. Over nine pages, Permsirivallop listed his grievances, expressing particular worry about intercompany loans:

Group Lease "provided loans to the company’s subsidiary in Singapore, who in turn loaned out to two groups of borrowers in Cyprus and in Singapore. These borrowers are also shareholders of the company and have pledged their shares in the company against those loans with the company's subsidiary in Singapore. The loans were subject to pledging of securities of properties in Cyprus and Brazil, Cypriot government bonds, stocks of other overseas companies and shares of the company as owned by the borrowers." 

If you didn't follow all of that, don't worry. In simple terms, Group Lease was lending to its subsidiaries and, as a guarantee for those loans, was receiving its own stock. According to Ernst & Young, if the value of that stock were excluded, the collateral would be sufficient to cover less than 60 percent of the debt.

Group Lease's 2016 audited annual report was published on Feb. 28 but it wasn't until an opinion column in Kao Hoon newspaper appeared last week that anyone stopped to pay attention. (The newspaper updated its commentary March 15.)

On March 8, Group Lease's shares plunged 25.5 percent. The following Friday, after Thai authorities asked March 9 for Group Lease to explain its tangle of overseas loans, they tumbled another 30 percent. J-Trust was dragged along for the ride, sliding 19.2 percent last week.

Chivalrous to the last, J-Trust fought back, saying in a statement that Group Lease's shares fell because of false media reports. J-Trust, which currently owns about 6.4 percent of Group Lease common stock and $130 million of convertible bonds, also said it intends to continue to expand its business via the partnership.

The true cost to J-Trust should become more visible when it releases fiscal year results in May. Investors in both companies will be hoping the affair doesn't turn ugly. But as even small children know, not every fairytale has a happy ending.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Removes reference to pachinko in sixth paragraph.)

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net