Fire rages over Red Dragon ‘prawn ultimatum’

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By:
Eric Ellis
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A spat between a company controlled by one of Asia’s richest families and a group of well-known western investors is turning ugly. Owners of Red Dragon’s exchangeable bonds have moved to put the company in default. Parent company CP Prima is fighting back hard. As Eric Ellis reports, it’s all part of the bitter cocktail that is Indonesia’s capital markets.

IT’S THE EMERGING market investor’s lament – if it’s Tuesday it must be Shanghai, Wednesday Mumbai and Thursday Rio.

But it seems that if it’s most any day of the week, it’s Jakarta: there’s yet another financial drama to upset Indonesia’s emergence as a credible investment destination.

Indonesia’s current business crisis is about udang-udang, prawns to most of us and a staple of the Indonesian diet. Prawns are the high point of a nasi goreng, the spicy fried rice ensemble regarded as the country’s national dish. And there’s plenty of spice in the $4 billion legal spat between a group of foreign hedge funds and bondholders and one of Asia’s biggest industrial combines, the Thai-Chinese Chearavanont family’s Charoen Pokhpand empire.

Dhanin Chearavanont and family are up in arms about investors’ attitude to Red Dragon

Dhanin Chearavanont and family are up in arms about investors’ attitude to Red Dragon

The Chearavanonts control the Jakarta-listed aquaculture business Central Proteinaprima – CP Prima. It is one of the world’s biggest prawn and shrimp farmers, centred on the Dipasena seafood farms strung along the coastal flatlands of southern Sumatra. Indonesia is one of the world’s top-five prawn producers and CP Prima supplies some of the biggest names in global food distribution with seafood – Safeway, Sainsbury’s, Costco, Tesco, McDonald’s and 7-Eleven – from its Sumatran farms.

Pitted against it is a grumpy gathering of mostly western hedge funds and investors, including Morgan Stanley, GLG Partners, Highbridge Capital Management and Marathon Asset Management. After a series of ructions in the Indonesian bond market, notably the $12 billion default by the Widjaja’s family Asia Pulp and Paper in 2001, then the world’s biggest bond default, foreign investors had gingerly stepped back into the Indonesian bond fray. But now they might be wishing they hadn’t.

That’s because they’re facing allegations of trying to mount a takeover of CP Prima by stealth, not to mention a $4 billion lawsuit, filed in Indonesia’s infamous legal system. An outraged CP Prima and the Chearavanonts claim the foreign funds have engaged "in a public deception campaign – a campaign which under Indonesian law approaches slander....trying to distract the public by defaming the CP group and some of its shareholders". It all makes for a rather unpalatable Indonesian prawn cocktail.

So how did it get to this?

In June 2007, a Singapore-based vehicle called Red Dragon was set up by the Chearavanonts to sell $200 million-worth of bonds exchangeable into CP Prima stock. It seemed a sweet deal; investors were promised an annualized return of 10% over three years, with the bond backed by CP Prima share-linked collateral equal to 250% of the bonds’ face value. Red Dragon controlled about 12% of Jakarta-listed CP Prima at the time, and several other Chearavanont vehicles pledged stock to the bonds.

The caveat seemed to be the need for CP Prima shares to at least hold their own, which didn’t seem a problem at the time as Indonesian capital markets began to re-emerge after the long dark years of the 1990s’ Asian contagion crisis when the Indonesian economy collapsed. At the time of the bond deal, CP Prima shares were trading at about Rp650, slightly off their three-year high of Rp750.

Sharp fall

Then enter the global financial crisis. That prompted a dramatic investor flight to quality worldwide. Markets in southeast Asia, particularly Indonesia with its history of financial scandals, hardly fitted the quality profile.

CP Prima shares fell sharply. By the time Lehman Brothers collapsed in September 2008 – the generally accepted low-water mark of the crisis – CP Prima stock that had traded at Rp750 a year earlier were unloved at Rp50, off a staggering 93%. The collapse of the stock caught many offside, such as the Singapore brokerage UOB Kay Hian. In July last year, it had became so enamoured of the stock that it initiated coverage of the company. Analyst Yap Swie Cu issued a gushing research paper entitled A giant in the making, with a 12-month buy-side target of Rp410, almost double the then Rp235.

UOB Kay Hian was very, very wrong. By July 2009 investors who had taken Yap’s 12-month advice were holding stock that had fallen a further 60%. Some 16 months on, the CP Prima shares are trading at Rp70, up from a year low of Rp50. Yap’s Rp410 looks a very long way off.

Market sentiment, complains CP Prima vice-president Patrick Yip, the executive tasked with the public relations fightback, hasn’t been helped by the "inappropriate" claims made by his hedge fund adversaries. He admits his company was somewhat blindsided by the battle with the hedgies, and had been caught on the back foot in the public relations war that has ensued.

Yip says the bondholders claims are "totally unwarranted" and insists his company has done nothing wrong – indeed far from avoiding its obligations, CP Prima’s management has gone out of its way to save the company for its investors. Red Dragon officials have hinted that the attack on them seems designed to precipitate a crisis at the group, which would allow vulture capitalists to swoop on the carcass. Yip says the company is operating "very profitably and normally" and that Red Dragon has continued to meet its obligations to bondholders, paying the coupon on time and in full.

That’s not how the hedge fund spinners see it. They have described management as incompetent and claim Red Dragon has tried to dilute their stake in the company by issuing new shares designed to ward off bondholders’ claims on the collateral and the company. But that’s nonsense, says Red Dragon. The rights issue was necessary and prudent financial crisis management to sustain CP Prima with working capital as wider market sentiment and liquidity turned sour. Company officials say they’ve held the bondholders’ interest to be paramount at all times, topping up collateral to offset the slump in the share price.

That hasn’t impressed the bondholders. In April this year they struck back, demanding that the bonds’ trustee, Bank of New York Mellon, bring forward bond payments and moving to seize collateral outside Indonesia in bank accounts held by Red Dragon.

Last December, BNY Mellon issued a notice of default – an act described by one player in the saga as "the prawn ultimatum". That came after an earlier friendly reminder by the trustee to Red Dragon to top up collateral, a demand bondholders claim had been ignored.

Red Dragon is not impressed and four Chearavanont-associated shareholders in Red Dragon have responded with a legal action of their own, suing BNY Mellon and Indonesian bank Bank Danamon, the security agent and various funds for $4 billion in corporate and reputational damages, each claiming $1 billion. The Chearavanonts are backing their reputation, claiming they have always respected obligations to shareholders and bondholders, even during the dark days of the financial crisis. They have also issued suits against the banks and bondholders in London.

Somewhere in the middle of it all is Indonesia’s controversial corporate regulator, the Capital Market and Financial Institution Supervisory Agency (Bapepam), with its record of quirky and opaque rulings. It seems to have issued conflicting rulings on the matter, each seized upon by one side or the others in support of its legal claims. Further complicating the picture is the fact that the main legal case has been filed in the South Jakarta financial court, notorious for its corporate rulings. And it all comes at a time of turmoil in Indonesia’s judicial system, as recently re-elected president Susilo Bambang Yudhoyono extends his war on Indonesia’s "corrupt legal mafia".

Red Dragon contends that the bondholders are wilfully overreacting to a summary breach of collateral levels at a time of turmoil in financial markets. It suspects an attempt to push CP Prima into decline and seize control. On August 9 the firm said in a statement: "It is deeply disappointing that foreign hedge funds continue to wage a public deception campaign – a campaign which under Indonesian law approaches slander. They are trying to distract the public by defaming the CP group and some of its shareholders."

Some of the characters that featured in the Asia Pulp and Paper cast earlier in the decade have resurfaced in the Red Dragon drama, notably APP’s former chief financial officer, Hendrik Tee, retained as an adviser to Red Dragon.

Another player is the financial lobbyist Lin Che Wei, who developed a profile in Indonesia during the bank reconstructions that followed the 1990s’ financial crisis and incurred the wrath of a number of former cronies of the disgraced president Suharto by arguing that they should not be allowed to regain control of their much-abused banks. Lin’s Jakarta-based Independent Research and Advisory has been appointed by the grumpy bondholders as a lobbyist.

Successful defence

Also in the picture is the famed lawyer Todung Mulya Lubis, the chair of the Indonesian chapter of the anti-corruption monitor Transparency International and the lawyer who successfully defended Time magazine in the $100 million libel suit and appeal brought by Suharto after Time claimed in an article that he and his family had stolen as much as $20 billion. Suharto had initially sought damages of $27 billion, which was just short of the figure at which Transparency International had put his wealth.

Mulya Lubis has claimed that the case could be argued as the Chearavanont family "trying to avoid repaying its debts". But they are fighting words to the Red Dragon/CP Prima team, which suggests this is one bond drama being fought in courtrooms around the world that’s only going to get worse before it gets better, which seems to be Indonesia’s perpetual fate.