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Parmalat flirts with default after Epicurum's no-show

Parmalat plunged into the most serious crisis in its 40 year history this week after it failed to repay a Eu150m bond that matured on Monday.

After a hastily convened extraordinary general meeting on Tuesday afternoon, Parmalat said it would redeem the bond at the end of the five day grace period, this Monday (December 15).

Bankers said Parmalat had previously bought back Eu110m of the bond, so the amount in question is in fact a residual Eu40m.

While that means the threat to investors is smaller, it also makes the company's decision to delay payment all the more worrying.

As recently as September 30, Parmalat claimed to be sitting on Eu4.2bn of cash and cash equivalents.

The Italian food company has been accused of misleading the public over the state of its finances. "There are factors that don't add up," said Clark McPherson, an analyst at Credit Suisse First Boston in London. "Parmalat's cashflow should be enough to cover small claims such as those outstanding."

Standard & Poor's (S&P) downgraded the company from BBB- to B+ on Tuesday, and then to CC on Wednesday, a total of eight notches in the space of 24 hours.

Parmalat's rating will be further lowered to D if it misses the Monday repayment deadline.

"Information provided by Parmalat to S&P and the market has been misleading," said S&P credit analyst Hugues de la Presle in a conference call on Wednesday.

"The company's rating is driven by its liquidity and ability to repay the bond that matured on Monday. However, given this is a modest amount that should be easily serviced, there are questions about the quality of Parmalat's assets."

The agency added that it had received no communication from the company since last Friday (December 5).

Fears over Parmalat's financial health heightened on Monday when the company declared that it had so far failed to liquidate its Eu496.5m investment in Epicurum, an obscure Cayman Islands fund.

After the investment was questioned by Deloitte & Touche in early November, Parmalat pledged to recover its investment by November 27. But the company announced on Monday that the Epicurum fund did not liquidate Parmalat's investment by the December 4 deadline.

Parmalat stated: "The fund has explained that this non-fulfilment was as a result of difficulties arising from the liquidation process relating to Parmalat's stake in the fund, owing to contemporary requests for liquidation received from the majority of the fund's investors."

According to Parmalat, Epicurum is now liquidating all the fund's activities and has asked Parmalat to accept a delay in payment.

Luciano Del Soldato, Parmalat's chief financial officer, resigned on Tuesday — the third CFO to go this year.

Enrico Bondi, former CEO of Telecom Italia and a turnaround expert, was appointed as a consultant to the company on Wednesday evening.

He has been mandated to draw up a plan for the group's industrial and financial restructuring by the end of January 2004.

"Instead of stepping in as an adviser, we'd like Bondi to take on a more permanent role on the board," said an analyst at a US bank in London.

He added that Bondi has been brought in as a dealmaker to negotiate with the banks.

The key to the company's problems may be whether the Italian banks that have extended Eu1.2bn of credit lines to Parmalat will continue to do so. EuroWeek understands that Capitalia is Parmalat's biggest Italian creditor, alongside Banca Intesa.

"The question mark hangs over whether the liquidity is not there, or the assets are there but they are not as liquid as has been portrayed to the market," said McPherson.

"A popular theory is that they are tied up in tax structures that cannot be unwound, in which case Parmalat may need short term funding to get it through this period. The other scenario is obviously more serious."

Parmalat's woes were reflected in volatile trading of its bonds and shares.

Parmalat's 2010 bonds, which had been trading in the 79.00 area at the beginning of the week, closed at a cash price of 63.00/65.00 yesterday (Thursday).

Parmalat suspended trading in its shares from the end of last Friday, after failing to liquidate the Epicurum stake on Thursday. The stock resumed trading yesterday, and fell all day to close at Eu1.18, a 47.4% drop on last Friday's closing price of Eu2.24.

Though Parmalat's troubles have not caused sweeping spread widening of other corporate credits, some specific names have been affected.

"We have seen some credit spread volatility spreading on names such as Ahold and Pinault-Printemps-Redoute — both lower rated names that also have relatively poor financial disclosure," said McPherson. "Investors who have seen Parmalat blown up are probably somewhat hesitant to be involved with other credits that may be perceived to have similar problems."

Italian banks have suffered — Capitalia's share price dropped from Eu2.89 last Friday to Eu2.60 yesterday.

With over Eu5bn of bonds outstanding, Parmalat could become one of the largest defaults in European credit history.

Consequently, many investors will have a nervous weekend, waiting for Monday to find out whether the company will pay up.

But the financial community is also looking for a solid plan that will take Parmalat beyond next week.

Parmalat needs to pay back $400m by the end of the year to a group of investors that exercised a put option on a minority stake in its Brazilian operations.

The company is also expected to redeem several private placements it has made over the past few years, including issues sold to US and Canadian investors, and to make Eu2.8m of coupon payments which are due by year end. 

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