Parmalat Tussles With Major Creditors and Former

UNCLAS ROME 003283

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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

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SUMMARY
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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.

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INTRODUCTION
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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.

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JULY 21: GOI APPROVES THE PARMALAT RECOVERY PLAN.
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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).

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JULY 28: PARMALAT DEAL WITH THE SEC
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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.

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Bondi's Legal Campaign Against the Banks
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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
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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
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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
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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)
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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.

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Bondi's Legal Campaign Against the Auditors
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Grant Thornton and Deloitte & Touche
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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.

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Farmers and International Farm Trade: Business as Usual
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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).

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THE UNIONS
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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.

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NEXT STEPS
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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.

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Comment
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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
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2004ROME03283 - Classification: UNCLASSIFIED