Parmalat Tussles With Major Creditors and Former

UNCLAS ROME 003283 SIPDIS SENSITIVE DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA PARIS ALSO FOR USOECD TREASURY FOR OASIA HARLOW, STUART DOJ FOR OFFICE OF INTERNATIONAL AFFAIRS, CRIMINAL DIVISION DOJ FOR US ATTORNEY'S OFFICE, SOUTHERN DISTRICT OF NEW YORK STATE PASS CEA STATE PASS SEC STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN EAGR IT KPRP SUBJECT: Parmalat Tussles With Major Creditors and Former Auditors REF: A) Milan 407 B) Milan 367 C) Milan 356 D) Milan 192 E) Rome 852 F) Rome 687 G) Rome 506 H) Rome 184 -------------- SUMMARY -------------- ¶1. Following GOI approval of a restructuring plan based on a debt-to-equity swap in late July, Parmalat Commissioner Enrico Bondi opened his legal campaign in August against some of the world's largest banks for their alleged role in helping Parmalat Finanziaria (or "Parmalat," Parmalat's holding company) raise USD 14.2 billion debt. Parmalat has sued Citigroup for approximately USD 10 billion; UBS, for euro 290 million; and Deutsche Bank, for euro 17 million. A similar lawsuit against Bank of America seems likely if Parmalat and the bank do not reach a separate agreement out of court. On the flip side, Bondi has reportedly rejected most claims made against Parmalat by Citigroup, Bank of America, UBS, Deutsche Bank, Morgan Stanley, Credit Suisse Group, Banca Intesa and Capitalia. In particular, Bondi rejected 99 percent of the euro 539 million claim of Citibank, 100 percent of the euro 339 million claim of Bank of America, as well as those of Merrill Lynch and Morgan Stanley (euro 25.7 and 35.5 million, respectively). ¶2. Bondi accQted only one percent of U.S. bank claims, while accepting almost a fourth of those by European banks, and 43 percent of those from Italian banks. Those creditors whose claims were rejected have until September 18 to appeal his decision in an Italian court. If a court denies the appeals, creditors cannot convert their debt claim into equity of the new Parmalat according to the debt-to-equity swap included in Bondi's restructuring plan to help Parmalat creditors recover some of their investment. As for the agricultural sector/international trade aspects of the post- bankruptcy Parmalat, it has been business as usual for Italian farmers and international farm trade; however, at best, the new Parmalat may not be profitable until at least the end of 2005. End summary. -------------- INTRODUCTION -------------- ¶3. The following report, compiled by Embassy Rome and Congen Milan, provides a chronology of events since Ref G report of the collapse of Parmalat, reportedly Europe's biggest-ever corporate fraud. -------------- -------------- JULY 21: GOI APPROVES THE PARMALAT RECOVERY PLAN. -------------- -------------- ¶4. On July 21, Minister of Productive Activities Marzano approved Parmalat's recovery plan, prepared by Enrico Bondi, Special Commissioner of the insolvent food giant. Bondi was charged with fixing recovery ratios for shareholders and bondholders of Parmalat and Parmalat subsidiaries also under special administration. The plan gives creditors the right to receive in shares or warrants of the new Parmalat company, a certain percentage of their bonds or shares of the old Parmalat, but does not set share values, since the market will set those once trading begins. Marzano asked and obtained small changes in the debt-for-shares proposal. Shareholders will now receive one warrant for each share they own, up to a maximum of 650, instead of 500. Each warrant gives the holder the right to buy shares of the new Parmalat between 2005 and 2015 at nominal value. For 85,000 Parmalat bondholders, the percent reimbursed in shares will depend upon which of the sixteen Parmalat companies issued the bond they originally held. Recovery ratios will vary according to which Parmalat entity issued the bond and will yield between 7.3 percent (i.e., 73 shares/warrants per 1,000 Euros owned and 113 shares/warrants per 1,000 euros owned). The workout is more favorable for creditors of some smaller Parmalat subsidiaries who will be refunded in shares for 100 percent of their credit (in other words, 1,000 shares/warrants per 1,000 Euros owned). -------------- JULY 28: PARMALAT DEAL WITH THE SEC -------------- ¶5. In releasing news of the settlement July 28, the SEC said Parmalat "engaged in one of the biggest financial frauds in history" from at least 1997 to the end of 2003. The SEC said it had not yet brought any cases against individuals, but underscored that its investigation of fraud was continuing. (The SEC has oversight of Parmalat because its shares are listed in the U.S. and because the food giant offered and sold debt securities in the U.S.) ¶6. On July 28, Parmalat agreed to a sweeping overhaul of its corporate governance as part of a deal with U.S. regulators. The agreement requires Parmalat, after restructuring, to implement good governance changes in line with high-level U.S. standards; but some changes will go further than the rules mandate. SEC announced, in turn, that it had settled its civil lawsuit against Parmalat for alleged wrongdoing in offering more than USD one billion in bonds to U.S. investors and thereby increasing Parmalat debt by that aount when its financial state would not have ordiarily supported such new debt. Parmalat, without admitting or denying wrongdoing as is usual in SE cases, agreed to the governance plan, as well a to a permanent injunction against future breachs of securities laws. ¶7. Parmalat will have new bylaws after re-organisation to ensure that shareholders elect all directors and that a majority of directors are independent of company management. The board must review and approve all strategic and financial plans and al transactions with a material effect on operatins. In addition, the roles of chairman and chief executive will be split. Finally, there must be a code of conduct that all directors must follow; and an internal control and governance committee must report at least twice a year to the board. Parmalat has also agreed, subject to some legal protection, to make available for investigation, all officers and employees upon request and without subpoena. -------------- Bondi's Legal Campaign Against the Banks -------------- ¶8. In late July after GOI approval of his restructuring plan based on a debt-to-equity swap, Bondi began his legal campaign against some of the world largest banks for their alleged role in helping Parmalat raise USD 14.2 billion in debt. On August 7, Parmalat Finanziaria S.p.A. (the Parmalat holding company, or "old Parmalat") through Bondi rejected some of the claims (to convert their debt into equity) made by Citigroup, Bank of America (BOA),UBS, Deutsche Bank, Morgan Stanley, Credit Suisse Group, Banca Intesa and Capitalia. In particular, Bondi rejected 99 percent of the Citibank's euro 539 million claim, 100 percent of BOA's euro 339 million claim, and those of Merrill Lynch and Morgan Stanley (euro 25.7 and 35.5 million, respectively). In sum, Bondi accepted only one percent of U.S. bank claims, while accepting almost a fourth of those by European banks, and 43 percent of those from Italian banks. Creditors whose claims were rejected have until September 18 to appeal Bondi's decision in an Italian court. If a court denies the appeal, creditors cannot convert their debt claim into equity of the new Parmalat, according to the debt-to-equity swap ratio included in Bondi's plan to help Parmalat creditors to recover some of their losses. Deutsche Bank and UBS -------------- ¶9. On August 9, Bondi filed suit against Deutsche Bank AG to recoup euro 17 million related to bond issues it arranged for Parmalat in 2003. This suit is very similar to that filed against Union Bank of Switzerland (UBS) AG on August 6 to recoup euro 290 billion that allegedly UBS received in connection with a euro 420 million private placement arranged for Parmalat in July 2003. The two lawsuits were filed in an Italian court and are based on Italy bankruptcy law that allows a company to revoke deals that occurred within two years of the company being declared insolvent. Citigroup -------------- ¶10. Two weeks ago, Bondi filed a law suit against Citigroup in New Jersey seeking at least USD 10 billion in damages for reportedly helping Parmalat's former managers hide the true status of the company's financial situation, allegedly to benefit Citigroup at other creditors' expense. Bank of America -------------- ¶11. With the prospect that Bondi may be preparing another suit against them, BOA has reportedly been negotiating with him to avoid the suit. So far, the Bank's public stance has been cautious. "We participated in transactions with Parmalat because we believed Parmalat, with an investment- grade rating, was strong, honest, and respectable, and also since these transactions were used for legitimate business goals. We do not believe that a lawsuit against us would be sustained by the facts." ¶12. In fact, however, the Bank of America involvement is complicated. Two credits Bondi rejected in the debt-for- equity swap were the result of an earlier restructuring in 1999 of loans Bank of America extended to Parmalat Brazil through a complicated arrangement. After having created two companies in the Cayman Islands -- Food Holding and Dairy Holding - to which Bank of American provided USD 300 million (funded by U.S. pension funds and insurance companies),both companies purchased eighteen percent of Parmalat Brazil. In this transaction, what was initially a loan/credit to a Cayman Island middleman was carried on the books of Parmalat Brazil as equity. (Note: Brazilian courts have recently awarded Parmalat's Brazilian operations -- Parma at Brazil - an opportunity to avoid bankruptcy by granting the firm two years to repay creditors.) ¶13. BOA also managed all private placements for Parmalat bonds from 1993 to 2002 (some euro 1.4 billion),and also cashed an 80 million dollar guarantee several days before Parmalat's declaration of insolvency. These two facts might suggest BOA indirect complicity; but on the other hand, BOA helped bring to light Parmalat's mismanagement/fraud in December 2003 by publicly revealing that a BOA account allegedly opened by a fictitious Parmalat affiliate -- Bonlat - did not, in fact, exist - nor did the four billion dollars in that account. Credit Suisse First Boston (CSFB) -------------- ¶14. Bondi filed a euro 248.3 million lawsuit August 19 against Credit Suisse First Boston (CSFB) at the Parma court. In 2002, CSFB fully subscribed a euro 500 billion convertible stock loan to Parmalat Partecipacoes (Brazil) (which CSFB, in turn, sold to other creditors/financial institutions) in return for Parmalat's payment of euro 248.3 million at some future date. Bondi's suit calls for repayment of this sum, and he has announced further possible actions against the bank for additional damages. Bondi recently rejected CSFB's petition to swap euro 324 million of Parmalat debt into equity in the new company. -------------- Bondi's Legal Campaign Against the Auditors -------------- Grant Thornton and Deloitte & Touche -------------- ¶15. On August 18, Parmalat brought suit at Cook County Court in Illinois against the auditing firms Grant Thornton and Deloitte & Touche, the Italian food group's former auditors, who had provided auditing services prior to the company's collapse. The suit seeks damages of about USD 10 billion. Grant Thornton is accused of having helped Parmalat's former management create non-existent firms and of having falsified transactions "to misappropriate billions of dollars to Parmalat." Deloitte & Touche is accused of negligent auditing of Parmalat accounts that helped its former management misappropriate some USD 11.7 to 16.3 billion. According to the two auditing firms, Bondi's lawsuit is "unjustified" and "illegitimate." ¶16. Comment: A successful suit against both firms will likely hinge on whether Parmalat can convince the U.S. court to breach the structural barriers of both accounting firms, whose Italian operations are insulated from U.S. operations to limit potential liability. End comment. -------------- -------------- Farmers and International Farm Trade: Business as Usual -------------- -------------- ¶17. The impact of Parmalat's financial collapse on Italian farmers has been much less than expected. Even after its financial collapse, Parmalat controls about 30 percent of Italian fluid milk market; purchases dairy products from 5,000 suppliers here; and delivers 2.8 million liters of milk daily. The firm also processes and sells fruit juice. One reason business has continued is that after the January 2004 declaration of insolvency, Commissioner Bondi promised farmers delivering milk and other products to Parmalat would be the first paid from liquidated assets. As a result, foodprocessing activities have continued; and, surprisingly, sales have grown since January. ¶18. The GOI also passed a decree law to protect livestock farmers involved in Parmalat's collapse, with preferential- rate loans guaranteed by the Interbank Guarantee Fund and a twelve-month suspension of social-insurance tax payments for farms affected by the Parmalat collapse. The EU Commission approved this "state aid" in July 2004 as conforming to EU state aid rules. ¶19. So far, Parmalat's domestic and international sales of its products have continued without interruption. (Although Bondi predicts 2004 sales of some euro 3.6 billion and a loss of euro 108 million, he hopes for a marginal profit in 2005.) Some agricultural cooperatives and Parmalat competitors are interested in acquiring parts of the firm; however, the GOI, main farmers' organizations, and labor unions support maintaining Italian ownership of the parent company (though seem open to selling some foreign subsidiaries). -------------- THE UNIONS -------------- ¶20. Just after Parmalat was declared insolvent, the unions joined forces with new Parmalat management to "defend the Parmalat trademark and image" and to guarantee the job security of its 4,000 employees. To date, as Productive Activities (Industry) Minister Marzano instructed Bondi, the insolvency/restructuring has meant no job loss in Italy (though there may be some in foreign subsidiaries/affiliates). Nonetheless, unions continue to be vigilant. -------------- NEXT STEPS -------------- ¶21. As reported reftel B, the workout process will continue through January 2005. By October, all creditors wishing to participate in the workout must have filed at the Court of Parma; they will then vote on the plan in December 2004. (Note: the fact that the voting system has net yet been decided upon concerns foreign bondholders who might not be in Italy at that time to vote. End note). If creditors approve the plan, the Court of Parma must then approve the plan in January 2005. Should Bondi fail to secure approval for the plan, Parmalat will be forced into bankruptcy according to the provisions of Italian law. -------------- Comment -------------- ¶22. Bondi has tried to juggle demands of both creditors and regulators to help Parmalat emerge from restructuring in ¶2005. While some of the restructuring is solid and controversial, other parts are controversial for U.S. interests. ¶23. First, the good news. Bondi has been intent on keeping day-to-day Parmalat operations going to lay the groundwork for the firm's continuing viability. In addition, his agreement with SEC on instituting state-of-the-art good governance rules could help regain investor confidence. His workout tries to win over creditors-turned-investors by pledging them 50 percent of restructured Parmalat profits over the next 15 years, including revenues derived from legal actions against the banks. And, while there are no Parmalat subsidiary sales here providing opportunities for other would-be U.S. investors, there might be opportunities in the sale of Parmalat's fourteen U.S. subsidiaries. ¶24. Now, the bad news. It is hard to say how the workout will affect foreign and, especially, U.S. investment in Italy. First, Bondi seems to have taken advantage of provisions of Italian bankruptcy law allowing a firm to revoke agreements reached within two years of the firm's declaration of insolvency. Secondly, creditors-turned- investors under workout plan terms are not fully supportive of the different ratios assigned for the conversion of debt- to-shares plan. Although U.S. banks can appeal Bondi's rejection of their claims to convert old Parmalat debt into new Parmalat equity, it is not clear any appeals will be won: his acceptance of only one percent of U.S. bank claims might suggest less-than-equal treatment for U.S. banks, compared to Italian and other European banks. Finally, Bondi has sown the seeds of discontent with some banks first by a rejection of their claims, and then a lawsuit against them (e.g., on Citigroup, Bondi will honor only one percent of the banking group's claims, and will also sue the firm for USD ten billion.) How this workout will affect long- term bank and other investor views of Italy as a good and safe place to do business, remains to be seen. End Comment. SKODON NOTE: SVC FOR MISSING PARA MARKINGS NNNN 2004ROME03283 - Classification: UNCLASSIFIED