Parmalat dive reveals failures over financial disclosure
Parmalat’s fall from grace in December indicates inadequate disclosure by the company – at best. The markets are spooked and the company’s five-year spreads have widened to 2408.8 basis points. Geraldine Lambe reports.
In December 2003, Italian dairy group Parmalat fell from grace in the most dramatic fashion. When it had to turn to new creditors in order to make the payments necessary to redeem E150m of bonds, the company was ignominiously downgraded by Standard & Poor’s from triple B- to D in three ratings actions over four days.
Credit analysts say the whole affair has been revealing in various ways. First, it seemed to catch S&P offguard, despite the greater access the ratings agency has to company information than the market at large. Second, it showed that, at best, Parmalat’s disclosure had been grossly inadequate.
Written assurances
As recently as the end of September 2003, the company’s liquidity seemed assured – it claimed to be sitting on E4.2bn in cash balances, and yet on December 19, the company revealed a nearly E4bn hole in its finances.
And in S&P’s defence, it is reported that Parmalat had sent written assurances to S&P that it could meet its payments just before the credit crunch. In a release, S&P stated that all key information provided by Parmalat had been “misleading”, and that there were now serious questions about the quality of the firm’s assets, given its inability to pay what was a comparatively modest amount.
On December 16, S&P downgraded the company from BBB– to B+, then to CC the following day. Following the revelation about the hole in the balance sheet, it was shunted down further to D.
There were still bonds outstanding with payments due in December, and at the time of going to press, turnaround specialist Enrico Bondi – jetted in on December 15 to help the firm restructure – was trying to negotiate a stay of execution and support from banks. If he fails, it is feared that the company could plunge into bankruptcy.
The scale and speed of Parmalat’s deterioration is clear in its tumbling bond prices and credit default swap spreads. According to Mark-IT Partners, in the 28 days up to December 19, its five-year spreads widened by 2408.8 basis points.
And figures from Credit Market Analysis (CMA) reveal that the firm has been reduced to trading on an “upfront” basis since December 8. At December 17, protection buyers had to pay 53% of the CDS contract cost.
“It is hard to see how Parmalat can keep going after such blatant financial irregularity,” says one credit analyst. “Market spreads are reflecting these fears.”
