Banex Case Analysis

1. The recapitalization plan involves investing an additional USD $5m in BANEX. Should Paul DiLeo support the recapitalization plan? Should other investors contribute? Why or why not?

Although there is a chance of stabilization of the economy and growth of the cattle prices, in my opinion, Paul Dileo should not support the recapitalization plan. There are some signs for investors and debt holders that are going to contribute to Banex's failure. The signs are:

* The political environment: in case of bankruptcy (the costs will be much more in case of bankruptcy after recapitalization), the Nicaragua's legal framework for intervening and liquidating a bank is uncertain, not altogether transparent, and thus unpredictable. There were cases when bankruptcy took 2.2 years and cost 60% more.

* The social environment: the "No Pago" movement contributed to a significant deterioration of financial stability.

* High credit risks: As concluded MicroRate "portfolio at risk was much larger than Banex's financial statements admit". PAR>30, refinanced loans amouted to 19.1% of the gross portfolio, etc.

* Economic factors: world financial crisis.

Taking into account these factors, it is very risky for shareholders and debt holders to invest any amount of money in Banex. Paul Dileo should sell the shares of Grassroots and also, suggest other investors to sell the Banex wholly.

2. Is there anything Grassroots capital should have done differently?

Grassroots should implement some actions to eliminate the issues that arose in the environment of the Banex. Firstly, it should thoroughly perform due diligence and review the loan portfolio of Banex. Instead of having cattle loans representing 28% of the portfolio (aggressive expansion), Banex's management and also investors should wait until the environment (economic, social and political) will become stable. Secondly, Grassroots Capital should understand the consequences of the socio-economic issues and quickly...