NMC Health finds $2.7bn in debt hidden from its board

NMC Health Plc uncovered $2.7bn of debt hidden from its board that was used for unknown purposes, tipping the troubled Middle Eastern hospital operator into a full-blown accounting scandal.

The company, which until recently traded in the FTSE 100, is trying to establish the exact “nature and quantum” of the debt facilities, but some of the money may have been used for unauthorized purposes, NMC said late Tuesday.

The discovery more than doubles NMC’s borrowings to around $5bn, up from the $2.1bn that was disclosed in June.

The revelations deal a hammer blow to the Abu Dhabi-based hospital chain, which has been in free fall since December, when short seller Muddy Waters Capital LLC alleged that NMC overpaid for assets, inflated cash balances and understated debt. The debt disclosures heap fuel on concerns that arose when an investigation found the board was unaware of borrowing arrangements involving NMC’s founder and its former vice chairman.

The discovery that NMC “has at least $2.7bn in undisclosed debt and no cash, it is no longer just a fraud. It is a massive fraud,” Muddy Waters founder Carson Block said in an emailed statement.

More Questions
In recent weeks, five of NMC’s 11 board members have either been fired or resigned amid reports of financial improprieties. Founder Bavaguthu Raghuram Shetty was forced out on February 17 after the company said he may have misreported the size of his stake, calling into question who really holds control.

“How could the company’s banks not raise flags until the share price of NMC started collapsing?” said Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital Ltd. “It shows the whole system around NMC and its service providers, who both thought they were untouchable, is in question.”

NMC’s $400m sukuk due November 2023 collapsed after Tuesday’s statement, falling 38 cents on the dollar to less than 25 cents, according to data compiled by Bloomberg. Shares in Finablr Plc, which is also owned by Shetty, fell 8.3 per cent on Wednesday, bringing this year’s decline to 84 per cent.

Wow! $NMC.LN has identified over $2.7 bln in undisclosed debt facilities, which exceeds reported debt of $2.3 bln. The $5 bln known gross debt is apparently equal to net debt, meaning cash is roughly…Zero. On the other hand, it’s off to a “strong operating start to the year”!

— MuddyWatersResearch (@muddywatersre) March 10, 2020

The scandal also puts a spotlight on corporate governance in the United Arab Emirates. Its troubles come less than two years after the collapse of Abraaj Group, which snuffed out private equity in the Middle East.

“While the NMC scandal may be overshadowed by other crises at the moment, it will likely encourage greater scrutiny over future transactions and investments taking place in the UAE,” said Robert Mogielnicki, a resident scholar at the Washington DC-based Arab Gulf States Institute.

The largest healthcare chain in the UAE, NMC had appointed investment bank Moelis & Co. and consultant PwC to help the company in discussions with lenders and bring transparency to its financial position.

NMC has also asked its creditors for an informal standstill on its debt as Abu Dhabi considers injecting capital to mollify investors.

In January, the company put former US Federal Bureau of Investigation Director Louis Freeh in charge of a review, which discovered that businesses owned by Shetty and former Vice Chairman Khaleefa Bin Butti borrowed money from NMC’s supply-chain lender.

NMC guaranteed repayment of those $335m of borrowings, which the board was also unaware of.

The shares have been suspended in London since Freeh’s findings were revealed February 27, and the UK’s Financial Conduct Authority has started a formal enforcement investigation.