Mystery €2.6m loan. Half of Kasco’s exposure to BOV loaned without security to unknown third party.

Mystery €2.6m loan. Half of Kasco’s exposure to BOV loaned without security to unknown third party.

For a business that barely makes an average €57,000 of yearly profits, the bank exposure of Keith Schembri’s Kasco Group is massive. Ranging between €5m and €7m that financing is provided by the Bank of Valletta. Kasco Group used to bank with HSBC but moved banks around 2014.

In spite of the extent of this exposure and the very timid profitability of the business, in 2016 Kasco Group extended a loan to an undisclosed third party of €2.6million without security, without interest and without terms.
This emerges from the Group’s accounts that show the loan was due before 31st December, 2017.

For an apparently cash-strapped business the loan is truly remarkable. During 2016 ‘Other Receivables’ decreased by €558,000, ‘Trade Receivables’ (debtors for operational activities) decreased by €345,000 and ‘Bank Borrowings’ (loans and overdrafts) decreased by €132,000. In the meantime ‘Trade Payables’ (creditors) increased by €1.7m, meaning the Group was not using its own funds to reduce its creditors.

The maximum available ‘free’ funds amounted to just over €1m (add the receivables). Assuming all these were used to extend the €2.6m loan to a third party, the Group must have had another €1.5m to €1.6m stacked up somewhere.
Such a situation is immediately suspect as money laundering and under normal circumstances Kasco Group would be required to explain the sourcing and payment of these funds through documentary evidence.

The auditors of Kasco Group, Nexia BT, simply put a footnote on this occurrence in the accounts.

At the time the loan was extended, Bank of Valletta was exposed by €5.7m. Given Kasco Group’s declared financial situation one would have expected the Bank to ‘jump’ on such excess funds in possession of the Group in order to force it to reduce its debts. There had already been some tightening of debts as bank exposure was reduced from a high of €6.8m in 2012 to €5.7m in 2016. Normally you’d expect the bank to ensure this trend is continued unless the performance of the client was improving, which it wasn’t.

At the current rate of average yearly profit of some €57,000, repaying the bank the €5.7m Kasco Group owes BOV would, interest free, take a hundred years. Unless of course Keith Schembri injects capital in the business which as far as can be ascertained from his own declarations he does not have the money for.

Keith Schembri retains Brian Tonna and Nexia BT as his auditors. If Keith Schembri’s own declarations are to be believed his auditor is in thrall of him since Keith Schembri bailed out Brian Tonna when he was going through an expensive divorce. The code of ethics of auditors forbids them from accepting loans from their clients but Brian Tonna remains Keith Schembri’s auditor in spite of the fact they both implicitly admitted breaching the code of ethics.

This fact must be kept in mind when assessing the information provided by Kasco’s financial statements when signed by Brian Tonna’s Nexia BT.