Adela: the violation of the bond market

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Adela, the great Latin American dream that turned into a nightmare, has made history of a kind – its bonds are the first publicly-listed Eurobonds ever to be rescheduled.

1981 sept cover_780


By Tim Anderson


IN ADDITION        


The little Brazilian coast resort of Parati, between Rio and Sao Paolo, is idyllic. And, in 1973, before the wave of Opec price increases, it looked ideal as a weekend getaway. Perfect, that is, except for one thing: a range of mountains separated it from the nearest highway. 

Never mind, said a financial institution whose name was to rock the international banking community eight years later: never mind, we'll cut a road from one to the other. 

But before that could be done, Brazil's boom was snuffed out by the oil shock. Weekend gasoline sales were banned. Parati's attraction as a weekend resort collapsed. 

Yet the road was built. In fact, it was built twice, because the first road crumbled. And in all, the same financial institution poured $7 million into roads, sewerage and other infrastructure at Parati, while some of its employees, hoping to profit from the development, bought plots on it. Everyone lost. 

The shipyard of Metal Empresa in Peru was not ideal: it's 30 kilometres from water, hardly the place to build boats. Yet over the past 15 years, the same financial institution poured in $17 million in equity investment without receiving one centavo in return. 

The same financial institution invested in a project to build anchovy fishing boats from concrete in Brazil. Soon after, the anchovies left Brazilian waters. 

The sacred tradition is that securities are not rescheduled

The financial institution is Adela – in English, the Atlantic Community Development Group for Latin America. Today, it is famous for two things. 

First, it is the issuer of the first publicly-listed Eurobond to be rescheduled in the history of the Euromarkets, a fact that many investment bankers regard as a violation of a sacred tradition that securities are exempt from rescheduling exercises. 

Second, it has the finest list of blue-chip shareholders in the world – 226 international banks and corporations, including IBM, Coca-Cola, General Motors, Bank of Tokyo, Nippon Steel, Hoffman-La Roche, Nestle, the big three Swiss banks, Imperial Chemical Industries, Barclays, Baring Brothers, Midland, Lloyds, Shell Petroleum, Deutsche Bank, Fiat, and others. (To be fair, many of them had forgotten that they were shareholders in Adela until the investment company's recent troubles were thrust upon them. IBM's investment, for example, is so small in relation to its total investment portfolio that the figure had been rounded out. When Adela later approached IBM for more capital, the investment had been forgotten, even though IBM’s former treasurer, Bertram Witham, was now the chairman of Adela.)

Adela began as the great Latin American dream, an ideal promoted by Jacob Javits, who was senator for New York City in the expansive days of John F Kennedy’s presidency. Javits’ entirely laudable aim: to establish a conduit for development investment into a capital-starved Latin America by taking minority equity holdings, in, or by lending to, new companies. 

Javits enlisted the help of Henry Ford II, George Moore, a former chairman of Citicorp, Kunio Miki, a former managing director of the Bank of Tokyo, and Emilio Collado, a former executive vice president of Exxon, to assemble a unique group of blue-chip shareholders in what was to become Adela. Each shareholder owns less than 1 % of the company, a structure that was designed to guarantee it freedom from national control. Today Adela's shareholders are based in 23 countries, a structure that has caused more problems than it solved. 

'Private enterprise did not come out smelling of roses' 

Adela's management has never had the expertise of its shareholders. In fact, the management has been so lacking in expertise that in January 1980 the company declared itself unable to pay its debts. Eighteen months later, the mess at Adela led to what investment bankers maintain is the first rescheduling of a publicly-listed Eurobond – a $25 million floating rate note issued by Adela’s holding company in Luxembourg, and managed by European Banking and Baring Brothers.


Agreement was reached on the rescheduling because the formula guaranteed 'equal agony for all' 
 - Ivor Davies, Adela

That rescheduling has smashed the illusion that a security is sacrosanct. And what has made this all the more significant is that the rescheduling was forced by the banks in a struggle to salvage something from the $240 million they are owed, or which they managed. This has stirred the anger of many who have independently described it as “disgraceful” and “shameful”.

For most of the shareholders and creditors, the statement of the company’s finances came as a rude awakening. “We had no warning,” lamented an executive at one of the creditor institutions.

Said Stanislas Yassuovich, managing director of European Banking Company: “Private enterprise did not come out of the whole exercise smelling of roses.”

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Ivor Davies, Adela

Union Bank of Switzerland and Dresdner Bank avoided a rescheduling of $21 million worth of Eurobonds that they had managed for Adela only by lending – or donating, time will tell which – $10 million to Adela. But rescheduling of $186 million worth of syndicated loans (out of a total bank debt of $240 million) has been accepted by 96 banks.Today, the institution that has headquarters in New York, with offices in Zurich and 10 Latin American countries, defies an accurate assessment of its financial condition. Adela has committed more than $2 billion to thousands of ventures, but in 1980 it lost nearly $70 million. Just about the only thing that is clear is none of the creditors is quite sure whether there are any assets to grab. Adela is therefore surviving – just.

After 18 months of far from amicable negotiation, a settlement has been reached on restructuring the company’s obligations. Agreement has been reached because the formula which has been thrashed out guarantees “equal agony for all”, in the words of Ivor Davies, senior vice president, finance, and corporate secretary of Adela.

The only winners so far are the lawyers, who have earned themselves over $1 million for drawing up the rescheduling document which, when conceived, was expected to be 10 pages long, but which dragged out to 160.

How did it happen?

The autocratic Swiss banker Ernst Keller gave Adela its style

Through the mists and fogbanks that swirl around the history of Adela looms the face of Ernst Keller, the autocratic Swiss who ran Adela as Bismarck ran Prussia.

To Adela's founding fathers, Keller appeared as the answer to their prayers. His nationality was perfect for the presidency of a new international investment company. He was running his own investment firm in Lima when they recruited him, which gave him the necessary knowledge of the region and the Latin American ways of doing business. And, above all, he was tough. So when Adela opened for business in January 1965, it opened in Lima, with Keller as president. 

For 11 years, Keller ran Adela with a single-minded dedication to his job. Expenses were meticulously scrutinized. "He counted every penny as if it were his own,” said a former Adela officer. As Adela appointed officers to work for it throughout Latin America, Keller kept them up to the mark by an exhausting schedule of visits to the company's offices and agencies. 

Adela mushroomed. In the 11 years of Keller's tough, committed rule it invested in 21 countries in Latin America in schemes as diverse as rice-growing in Belize, shipbuilding in Peru, dehydrated fruits and vegetables in Chile and sewer pipes and tourist projects in Brazil. 

Keller's style reflected his uncompromising, stubborn personality. An example cited by Eugene Gonzalez, later president of Adela, was the way Keller treated his four managing director deputies, of which Gonzalez was one. “He kept them in acute competition with each other,” Gonzalez told Euromoney in New York, where he is now an adviser to Morgan Stanley. According to some, that style led, on Keller’s departure, to a power struggle that tore Adela apart. 

Underlying Keller's approach was an unshakeable belief that, throughout a region famous for its revolutions, hyper­inflation and unstable image lay a host of good investment opportunities that could be realized by a combination of astuteness, good management and – above all – faith. 

His critics maintain that his faith blinded him to the facts; that in the aftermath of the oil shock many of Adela's investments were already turning sour. One Latin American specialist at a London bank said: "Adela put money into projects that were essentially long term. They may or may not have come right, but they were essentially long term. So, to generate income, they turned to lending and because they were borrowing money at market rates, they had to pick the high risk/high return deals. Many of those were high risk for good reasons.”

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Ernest Robin, Adela

Keller’s argument now is that examples like Metal Empresa and Parati are minor compared with Adela’s total portfolio. During his 11-year rule, he claims that Adela had only 14 problem cases, of which all but two were made profitable; and that, if all the problem cases had been sold when the problems were at their worst, Adela would have taken a loss of $45 million. As it was, Keller claims, Adela turned round the problem cases and made profits of $32 million when it sold or floated them off.Certainly Keller picked some high risk investments: Metal Empresa, for example, which Keller is said to have treated as a personal commitment. Today, Keller maintains that, when he finally left Adela in 1976, Adela had invested only $5 million in the Peruvian company, and that his successors were responsible for injecting a further $12 million. Yet the question remains: Why did Adela invest in Metal Empresa at all? “Metal Empresa used to make boats. What other shipbuilders do you know that are 30 kilometres from the water?" asked an enraged bank shareholder in Adela.

His favoured technique for dealing with problem investments was what Keller called his "fire brigade”. If an equity investment was going badly, but he believed it could still be saved, he injected new management and a stream of fresh cash. Today some of his colleagues have harsh things to say about that policy: one former board member claimed that the result was an injection of more cash than management. 

Whatever the merits of that, Keller evidently was turning in a formidable performance. Year after year, the annual report of Adela talked of "solid progress" or "good progress". In fact the company was so apparently profitable that between 1974 and 1977 nearly $2 million was distributed to employees under a profit-sharing scheme. 

The company's insatiable appetite for funds was bringing problems to Keller. Although 96 of the largest banks in the world were among his shareholders, and although he could rely on them to raise syndicated loans or manage bond issues for Adela, Lima was too far from the Euromarkets. That is why Adela had an office in Zurich from the outset, to handle its treasury operations. But by 1975, Adela had six offices, including New York, Washington and Zurich, and representatives in eight other Latin American countries. Keller's control problem was stretched to breaking point. An affair involving the Zurich office made that apparent. 

The Zurich operation used part of Adela's cash balances to provide bridging finance for a condominium in Lugano, in spite of being contrary to the principle that Adela should lend only on Latin American projects. How did that happen? 

According to Keller, the proposal came from the Zurich office itself. He, in return, insisted that Adela would put up half the funds only if a Swiss bank was found to put up the other half. The money would be lent for six months only. But somehow (memories among present and past Adela officers are hazy on this point) Adela was left with the entire financing package, and was later forced to seize the condominium itself.

The power struggle was an example of rule by committee 

In the meantime, Keller had other problems to contend with. One was his own position in the company. 

Adela's board was vast, reflecting its diverse shareholders. At times, it reached 100 people. Annual meetings, held in different parts of the world, were elaborate affairs, sometimes more closely resembling conventions than meetings. The chairman's post at Adela was an honorary one. According to some, Keller felt that the chairman's job should be a working one, and that he should have it. The board refused. Several times, Keller threatened to leave. Only several substantial improvements in his pay kept him there. But in 1976, worn out by a job that makes the chairmanship of ITT look easy, Keller finally quit, telling the board that he had been declared seriously ill. And Adela's problems began in earnest.


Collado sacked the wrong people. Most of them left because they saw it as a troubled ship 
 - Ernest Robin, Adela

Under Keller were four managing directors with equal power. The board appointed one of them, Eugene Gonzalez, as Keller's successor to the presidency. But the three managing directors were given equal power with him. The power struggle that followed was an example of rule by committee. It began on the day of Gonzalez's appointment, and ended a year later when he left Adela.

Collado's policy was as different as could be from Keller's autocratic style. He attempted to delegate more decision making to the three managing directors, while retaining overall control.To replace Gonzalez, one of the founding fathers of Adela, Emilio Collado was drafted in from Exxon as a caretaker president. 

He saw a clear danger in retaining Adela's financial controllers in Zurich. His decision; to run Adela from New York, leaving the three managing directors in the field. But he also decided to cut the Zurich office down to a skeleton staff and move financial control to New York. 

But only four of the 15 officers in Zurich were prepared to move. In the disruption caused by the change and the loss of staff, Adela's internal financial monitoring procedures were badly hurt. 

It was then that Adela lost 60 of its 72 officers. Collado maintains today that he fired most of them. But Ernest Robin, now manager and treasurer of Adela in Switzerland, who was in charge of personnel at the time, maintains: "Collado sacked the wrong people. Most of them left because they saw it as a troubled ship."

Real estate became Adela's biggest single investment 

The full effects of the oil price rises on the Latin American economies also coincided with a move by Adela from being primarily a minority investor in equity to a lender. Its increase in lending also coincided with a fall in its ability to assess risks and monitor performance. Many of those loans were to existing equity investments, which meant that Adela at times was effectively doubling up on its investments.

It's not clear precisely how much Adela committed to fixed-rate lending, but the evidence is that it was very hard hit by the sharp increases in interest rates towards the end of the 1970s. In 1978, interest payments on Adela’s debt rose by more than $10 million to $40.7 million, but income from loans grew by only $2 million. Adela was being squeezed from both sides.

For Eugene Gonzalez, this illustrated the basic problem for Adela: “It failed to recognise changes in the environment,” he said. “I felt that Adela needed to change its orientation from a development to an investment bank. We needed to be paid for our brains, not our money.”

The company was already deeply into real estate. By 1978 real estate was its largest single investment – 30% of the total. Later, much of the real estate investment was the result of Adela seizing assets as payment for bad debts. 

In 1979 Collado's health failed, and he retired from Adela. Joe Borgatti, an American with a wealth of experience in Latin America, had joined the company as vice president in November 1978. He took over from Collado. As he worked his way into the job, the extent of Adela's problems began to unravel. Borgatti decided that Adela required a senior finance man above all. With the help of the board, he found Ivor Davies. 

Davies is an Englishman who had been with Shell for 31 years. He had retired at 56, after spending the last part of his career in the Philippines. Before joining Adela, Davies had examined only the annual report for 1978 in which Adela showed a modest $400,000 profit. "I had a twinkle that all was not well, but I had no idea of the extent of the problem,” said Davies. 

'Some banks had to phone round to calm others down' 

It had been obvious to Adela insiders for some time that it was approaching a crisis. But it wasn't clear from the outside. Singer and Friedlander lead-managed a $30 million syndicated loan in February 1979, just 11 months before the moratorium was called. It could not have been clear to the six other banks which lead-managed $7.7 million in loans later in the year. But in mid-1979 the unease spread. At the board's request, a committee under the chairmanship of Thomas Wilcox, chairman and chief executive of Crocker National Bank, conducted the first external examination (other than the auditors) of the health of Adela. Before it reported, the International Finance Corporation, the hard-lending arm of the World Bank which had lent $10 million to Adela in 1970 (half of it still outstanding), was also invited by the board to carry out a detailed study of Adela. 

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Eugene Gonzalez, Adela

There had never been anything approaching a close friendship between the two organizations. Adela had regarded itself as a more dynamic institution than the IFC; its officers are reported to have treated their IFC opposite numbers with thinly veiled contempt. The two IFC officers dispatched into Latin America to investigate Adela probably had as much incentive to carry out a thorough investigation as anyone. As the IFC report neared completion, the debt-equity ratio of Adela fell below the permitted level under

Luxembourg Jaw. Then the IFC’s officers reported as many of the mistakes and indiscretions of Adela officers as they could find, and suggested the worst: that Adela was broke. 

In December 1979 a committee under the chairmanship of Fritz Karsten, former managing director of the Amsterdam­Rotterdam Bank, examined the evidence and presented it to an executive committee meeting of Adela on January 20, 1980. On the basis of the report a moratorium was called on Adela's debt repayments. Adela admitted to losses rising at $1 million a month.

Many of the 96 creditor banks were furious. For the most part they had known nothing about Adela's ill health. 

"Some banks had to phone round to calm others down, as they were intent on pulling the plug,” said Carl Malmaeus, assistant general manager at Toronto-Dominion Bank in London.

The problem was what to do next. Adela's management, led by Borgatti and Davies, recommended rescheduling the debts and raising more capital from shareholders. But the spirit of expansiveness and optimism which marked Adela's formation had disappeared. The board said $50 million in new capital was needed. Many shareholders felt that, having made a mistake, they should accept their loss and not follow Adela's example of throwing good money after bad. 


I felt that Adela needed to change its orientation from a development to an investment bank. We needed to be paid for our brains, not our money 
 - Eugene Gonzalez, Adela 

As it turned out, only 36% of its investments were profitable. Only 27% of the 450 companies to which Adela had lent $320 million were servicing their debt. 

The creditor banks, already formed into a creditor banks steering group by the board, soon realised that they were more likely to salvage something from the wreck if they supported rescheduling. So, from banks which were both creditors and shareholders, Adela received extra capital. 

The industrial shareholders had no such incentive and – with some notable exceptions – refused to contribute. By May 1980 the total contribution to the share issue had crawled to $20 million. "We were living day by day. Anything less than $20 million would have made rescheduling very difficult," said Davies.  

Any one of hundreds of parties could have pulled the plug 

At any moment any one of hundreds of involved parties could have caused Adela's total collapse. The Germans, Scandinavians, British and many others had contributed to the capital raising. The US, Italy, Japan and – ironically – Latin America were not so forthcoming. The rescheduling seemed doomed. 

Davies is given much credit for the rescue act that followed. Dresdner and UBS had been fighting the rescheduling of the $21 million in Eurobond issues they had lead managed. To do so would have required a meeting of all holders. The task of assembling hundreds of individual bond holders was something both banks wanted to avoid. 

Sensing the vulnerability of UBS and Dresdner, and knowing Adela's desperate need for cash, Davies calculated the income loss to holders at $10 million if the bonds were rescheduled. He then asked Dresdner and UBS to put up the money. The two banks accepted Davies' estimate and saw it as a good compromise. After all, “there weren't too many options,” admitted a banker close to the negotiations. It was thought that at least this solution avoided the ignominy of rescheduling. 

For the first half of 1980, Davies and Borgatti lived on a knife edge, unsure whether the creditor banks would allow Adela to survive. They were particularly worried that they would not be permitted to keep up the redemption instalments on the floating rate note. 

But in July 1980 the banks reluctantly allowed Adela to make the mandatory redemption instalment on the FRN. "If we had not obtained that repayment it would have been a very serious situation. We would have been forced to call a meeting of noteholders, or possibly declared an immediate event of default,” said Hugh Osbourne, managing director of the Law Debenture Corporation, which acted as trustee for the issue. 

The interest payment on that floating rate note fell due in January 1981, one year after the moratorium on the servicing of bank debt had been called. 

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Joe Borgatti, Adela 

Most investment bankers are deeply conscious of the tradition that, no matter how bad things become, borrowers must continue to service the interest and principal payments on their securities. In the case of Poland, for example, the borrower has been aware that while rescheduling bank debt is inevitable, the Bank Handlowy international bond issues should continue to be serviced. Most investment bankers view that as a sacred tradition: some of them would even prefer an outright default on a bond issue to a rescheduling. And as far as the bond markets are aware, there had not been a rescheduling of a single publicly-listed Eurobond. 

The principle, right or wrong, is that securities are held by individuals who should be protected, while bank debt is owed to banks that are large enough to take risk. 

Adela, through little choice of its own, is believed to be the first institution to violate that tradition. What has upset investment bankers – particularly those who sold the issue to investors – most, is that Adela wished to service the FRN, but the creditor banks prevented it from doing so. Considering that many of the creditor banks are also very prominent in the securities markets and, therefore, conscious of the traditions of that market, the decision seems even more questionable.

But, if Adela couldn't service the FRN, why wasn't a default declared? One creditor bank said: “Not calling a default bent the rules, even if it was the right thing to do.” This was said with the full knowledge that the trustee has discretion over calling a default. The answer is that Adela was close to signing heads of agreement with the 96 creditor banks. Because of that, the Law Debenture Corporation, as trustee, decided to hold off on the grounds that, if it declared a default, the holders of the notes would receive nothing. The issuer was Adela's holding company in Luxembourg, where there were no assets to seize. 

A possible alternative to a default, or a rescheduling, would have been for the managers to contribute capital to Adela, as UBS and Dresdner did to save their Eurobond issues for Adela from going the same way. That was certainly considered. "It was discussed,” admitted a spokesman for one of the lead managers, who insisted that his reply be attributed to both lead managers, Baring Brothers and European Banking, "but rescheduling was seen as a better option." 

"The whole thing is a disgrace" declared an investment banker who had placed part of the issue. “This thing was sold – and in spite of what people may say, much of it was placed with widows and orphans, not just with banks who look on FRNs the way they look on syndicated loans – on the strength of a bunch of blue-chip shareholders who would keep Adela's name clean in the securities markets."

Other securities institutions felt that the Law Debenture Corporation had been too soft with Adela, and that it had not consulted them during the rescheduling negotiations. “It was just take it or leave it,” complained one. But the Law Debenture Corporation believes it scored a major victory – even though the redemption date for the FRN was pushed back from 1986 to 1991 – by retaining the float rate on the notes. Said one securities firm: “At least we’re not saddled with the lousy rate the banks got [on the bank debt that was rescheduled].”


There are enough hard assets to ensure Adela pays its debts... We have to patch up our relationship with the shareholders 
 - Joe Borgatti, Adela 

With the rescheduling agreement progressing, Adela needed more bad news like it needed another Swiss condominium. The investment company was still out of luck. Just as confidence in the firm was returning under the even-handed approach of Borgatti and the tight financial control of Davies, another bolt hit the company. It happened in June last year when all the parties were locked in rescheduling negotiations. It is alleged that an Adela loan officer left the company with $2.5 million of its funds, that he has been arrested in Brazil and extradited to Argentina where he is said to be held. “That,” said Davies, “couldn’t have happened at a worse time.”

Apparently, however, that hasn’t stopped the rescheduling, though “it was a near thing”, according to a banker involved.

Toronto-Dominion, one of the six Canadian banks which hold 25% of Adela’s debt, has led the negotiations for the creditor banks. Singer and Friedlander, despite the anger and embarrassment it felt at lending to Adela 11 months before the collapse, also played a very active role, especially helping to calm the hawks. Many banks, it seemed, wanted to tear Adela apart – partly for its assets, partly for revenge. 

In the end, after long negotiation sessions, the banks have rejected Adela's proposal to repay over seven years at a fixed rate of 7%. Instead it will repay at 6% in 1981, 7% in 1982 and 8% from 1982 through to 1986, or if lower, Libor. The losses incurred will be accumulated and turned into shares in 1991. 

When the rescheduling document was conceived, it was hoped that it would take a month to draw up and be 10 pages long. Instead the negotiations have taken 18 months, and the document is 160 pages. On top of that a more detailed document, covering some technical details, is still to be drafted. “That's merely a formality. It should not take long to draw up now the principles are settled," said Davies.

The one major question is: How did Adela’s shareholders and creditors fail to see the collapse coming?

The commonest reason given is that Adela’s condition was concealed by loans to poor equity investments, and through what bankers called its "optimistic" accounting practices. 

Certainly Sir Reay Geddes, former chairman of Adela, and now deputy chairman of Midland Bank, is forthright in his condemnation of the accounting practices. "They were out of date and unsuitable,” he told Euromoney last month. 

Under the accounting procedures used by Adela, stock dividends were taken into income. When this stopped in 1979, it depressed income by $6 million. 

Income from investments was assumed even if it had not been received for over six months. Capital gains were assumed in the same way. Assets, it is claimed, were not written down and losses were not recorded. In 1979 reserves were increased by $10.3 million and by $9 million in 1978 on a portfolio of approximately $400 million. 

What angers bankers is the change in the allocation of reserves between the 1979 and 1980 accounts. After the moratorium had been called in January 1980, the subsequent annual report set aside $41 million for reserves on the board's recommendation. But Arthur Young, the auditors, insisted that $56 million was required, and said so in the annual report, although a year earlier it had approved a quarter of this amount. 

Paul Kramer, partner at Arthur Young, insisted that the accounting practices followed were correct and clearly indicated on the accounts. The extra $15 million, on top of the $41 million recommended by the board, was necessary, he said, "because the company had changed in character since it stopped servicing its debt." 

Borgatti and Davies have taken every precaution they feel is possible to guard against further problems. 

Borgatti's aim now is to turn Adela into more of an investment consultancy, which will produce fees. But its days as an investor – at least for the foreseeable future – are over. The Javits dream is dead. 

In the long term, Borgatti hopes that Adela can win back the confidence of its shareholders. But right now, as part of the rescheduling agreement, the IFC, the creditor banks, and the bond managers each have a man in Adela's offices to monitor its daily activities. Clearly it will take a long time to overcome this deeply felt distrust. 

"We have to patch up our relationship with the shareholders,” said Borgatti. He has no illusions about the size of this task. 

Adela's present is a shadow of its grandiose past. In the last two years its staff has been cut from 278 to 100. Many of its branches will be turned into agencies outside Adela's employ, working solely for commission. Overheads will be cut and control re-imposed by moving the headquarters back to Lima. 

It will take a long time for Adela to regain the confidence of its shareholders. Borgatti said: "There are enough hard assets to ensure Adela pays its debts." As yet, few are convinced. And some creditor banks and shareholders will never work with Adela again.

The disaster of Metal Empresa

Adela’s biggest single disaster is Peru’s Metal Empresa, a company which never made a profit and owes far more than it owns. Alex Brodie reports from Lima on a company that survived on handouts from Adela and which seems to have made everything except money.

Nothing has gone well for Peru's Metal Empresa. But whether it lives or dies on Lima's airport road matters little to the Euromarkets. What matters more is its historical importance as the biggest financial disaster of Adela, which itself made history as the issuer of the first publicly-listed Eurobond ever to be rescheduled.

Metal Empresa is no back street operation. It's a rambling 57,000 square metre plant behind high brick walls topped with barbed wire. Slogans cover the walls. They demand more pay for the workers, whose wages have been pegged and constantly depressed by Peru's 80% inflation. The sloganeers have found their villain – Ricardo Seminario, the company's general manager.

"We've made just about everything here – except money," said Seminario, grinning broadly. Metal Empresa has lost $7 million since 1970. The company is valued at $5.5 million. For a firm that owes more than it owns, it's a mystery how it stays in business. But Seminario has an answer: "We received money to pay our debts." Almost all of it, it was revealed, came from Adela.  

The roof at least was built to resist earthquakes 

Adela, which now owns almost all the company, arrived in 1967 to rescue an ailing metal mechanics firm, Pro­mechanica, which was then only inches from bankruptcy. Under the new name Metal Empresa, and flush with new money, the firm moved into its golden age of profligate spending. A thousand workers were taken on to build boats to meet the demands of Peru's fishing boom, when the country was the world's largest exporter of fish meal. Metal Empresa also won a $7 million order for 30 fishing boats for Mexico. 

Then the trouble began. Peru's economy was bad and getting worse. The golden Mexican contract wasn't as good as it appeared. The Mexicans paid for the boats at 80 sols to the dollar, while Metal Empresa paid back its loans at 130 sols to the dollar. Then suddenly the fishing boom ended. Climatic changes caused ocean currents to move, and the anchovies moved with them. Bankruptcies of small companies put so many second hand boats on the market that no one wanted new ones. 

All that remains of these heady times at Metal Empresa today are pictures depicting busy boat yard scenes on the walls of the spartan executive offices. Today Seminario presides over a rambling, rusting and largely deserted plant. The 1,000-strong workforce has been reduced to 200 recalcitrant full time employees, whose productivity is not 35% of what it was. Said Seminario: “It takes 18,000 to 22,000 worker-hours to build a modern boat. It takes us 58,000.” 

The place is desolate. Hundreds of discarded hard hats gather dust in the stores. Huge spaces stand empty – the boat yard, as well as the giant hangar where once the life-sized plans for the boats were marked up. When visitors do come, they often want to see the roof of the works, a remarkable architectural experiment. It's four inches thick and is supposed to be earthquake-resistant. The machinery is old – in some cases 20 years old – and the most modern piece is an enormous 14-year-old furnace used to repair faulty welding.

Sales manager Jose Miguel Gonzales was depressed: "Unless we get new equipment, the competition [from small firms] will wipe the company out of the market. Within the next few years we shall be behind the competition. 

"You have to understand," Gonzales said, "that you are in the third world in Peru. I have a masters degree in business administration. I might as well throw it away. What you need here is not a business analyst, but a diviner." 

Seminario wasn't as pessimistic and saw hope. For a company which has never made a profit, it is still the largest metal works in private hands in Peru. He also pointed out that losses were down to $30,000 last year and with $250,000 of work on the order books, there was hope of breaking even this year. "There's always a first time," he said with a smile. 

While boat-building is not over, Metal Empresa today will do almost anything. Company pride has been hurt by having to do repairs. But there is also work on pipes for an aqueduct and pylons for the state electric company. The firm has also signed a productivity deal with the workers. Luxuries like advertising have been cut back as have other costs which were once thought essential in the halcyon days of Adela's easy money. Up-to-date book keeping has never been the firm's strong suit, but accountants are now working flat out to meet a government deadline for the presentation of overdue reports dating back to 1979. 

There have also been economic and political changes in Peru which augur well for business. A one-year-old civilian – and so far stable – government has replaced the disastrous junta rule. Government ministers, who at one stage changed almost daily, have stayed in office and seem to talk sense. 

Seminario does not moan the loss of Adela subsidies. Borrowing certainly dulled the edge of husbandry at Metal Empresa and its general manager is the first to realise it.

“The day they subsidize the company again, I leave," Seminario said emphatically. "The company has got to learn to live within its resources. When you have a rich father, the son does not work." 

This new attitude has given rise to rumours that Metal Empresa might just break even after all. Today, breaking even has the same appeal as riches once had.

Adela's imitators are thriving

Adela is not the only international investment company set up by benevolent private enterprise. Two organizations, one in Asia and one in Africa, were modelled directly on Adela at a time when it looked faultless. 

Pica, Private Investment Company for Asia, and Sifida, Société Internationale Financière pour les Investissements et le Développement en Afrique, were both established in 1969. 

Both organizations are far smaller than Adela. Pica has a professional staff of only 18 and Sifida has just 17. But both appear more successful. Last year Pica made a net profit of $3.02 million, 18.6% up on its 1979 level. Sifida pushed up its profits over the same period by 299%, from $231,801 to $924,701.  

Sifida and Pica are known for their conservatism 

Sifida and Pica are known for their conservative approach. Sifida has only 21 equity investments. Of these, 14 showed a profit or broke even in 1980, three were making expected start-up losses and four were problem cases which Sifida admitted in its 1980 annual report. 

Sifida differs from Pica and Adela in that it manages and co-manages syndicated credits. This is why its head office is in Geneva. In 1980 it participated in 16 syndicated loans, thus helping to raise $349.6 million for projects in nine countries. 

Sifida concentrates its help on companies in staple industries, producing materials such as cement, textiles and steel. Unlike Adela, it is not involved in real estate or resort development. But, like Adela, it has investments right across its territory – that is, from Gabon to Madagascar. 

Pica is centred in Singapore and is active in Korea, the Philippines, Malaysia, Indonesia, Thailand, Taiwan, Hong Kong, Papua New Guinea and Japan. Its equity investments are more varied than Sifida's and clearly reflect the needs of the area. 

In Taiwan, Pica has bought into a company called Megahertz which produces liquid crystal display units for watches. In 1980 it obtained 6% of Li Fung, a trading company in Hong Kong. Pica sees Li Fung as a way of participating more actively in the Chinese business of the area.

Pica has also seen the need to change its lending policy, in recognition of the same changing circumstances which weakened Adela. Competition from banks and governments is forcing Pica away from long-term project finance towards bolder lending. 

Pica's chairman, Sir James McNeill, wrote in the 1980 annual report: "The prime need is now for risk capital, since medium and long-term project loan finance is now usually available from government and banking sources.” 

The shareholder lists of Pica and Sifida are as impressive as Adela's. IBM, Barclays, Mitsubishi, Deutsche Bank, Fiat and many other shareholders in Adela are also the owners of Pica and Sifida. Most companies are said to have taken their share in Adela and forgotten about it until Adela's management asked them for more money. Pica and Sifida are probably more closely monitored by their shareholders than ever before. And certainly more intensely by those companies which are also involved with Adela.