US$600m can't be recovered from Cayman Islands fund

Wednesday, December 10, 2003

MILAN, Italy: During the last month, Parmalat, the highly indebted Italian dairy products group with sales of US$8.6 billion, has been struggling to contain a crisis of confidence after its auditors, Deloitte & Touche, raised doubts about the company's US$605 million investment in a Cayman Islands-based fund, Epicurum.

Epicurum reportedly specialises in leisure and entertainment, a long way from Parmalat's international business of food and dairy products Epicurum is described as a Cayman Islands mutual fund in many of the reports in the foreign media but according to the Cayman Islands Monetary Authority, it is neither registered nor licensed by them.

Deloittes said they could not evaluate the investment made by Parmalat in the fund, which is represented in Italy by a law firm, Zini & Associates, that has close ties to Parmalat's majority shareholder, Calisto Tanzi. The investment in Epicurum represents one-quarter of Parmalat's market value.

This week, Parmalat must tell Consob, Italy's stock market regulator, why it still has not recovered the US$605 million it had invested in the Cayman Islands fund. Consob is reported to be investigating the fund and any possible misleading communications by it and by Parmalat. Trading in Parmalat shares has been suspended since Monday.

Parmalat last Thursday missed its own deadline for the recovery of the cash, the second time in two weeks that it had failed to meet a promise to shareholders to get the money back. Investors and regulators are increasingly worried about the liquidity of the group.

Standard & Poor's has already downgraded Parmalat's bonds by four notches from BBB- to B+ citing "severe concerns" about the group's liquidity and there are now serious doubts about the fate of Parmalat's US$180 million bond issue which matured on Monday. There has been no confirmation that the company had yet managed to redeem the bonds. The bond prospectus gives Parmalat a five-day grace period before it is considered in default.

Failure to repay this bond would trigger so-called cross default provisions, implying that a large proportion of Parmalat's other bonds would also be automatically considered to be in default.

In a further knock-on effect, the price of shares in Italian bank Capitalia fell sharply on Tuesday because it is financially exposed in the event of continuing problems at Parmalat.

Parmalat has insisted that its investment in Epicurum is fully liquid, and promised to liquidate it almost one month ago. It said Epicurum's board has approved its pullout.

Neither Parmalat nor Epicurum has revealed who manages the fund. Zini & Associates, an Italian law firm that works closely with Calisto Tanzi, the majority owner of Parmalat, represented it in Italy. Gian Paolo Zini, the law firm's founder, three weeks ago said he had stopped representing the fund. He told the Financial Times of three US executives involved, none of whom are known in the US investment community. Epicurum, through a lengthy e-mail written in English, defended its right to privacy but the letter was full of grammatical errors and Italian turns of phrase. 

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