What does a former meat packing business in Parma have to do with hedge funds one may ask? Why has such relationship facilitated recent hedge fund losses in some European Convertible Arbitrageportfolios? Calisto Tanzi took over the management of a small meat packing business from his father who passed away in 1961. During the decade of the sixties, the invention of Tetra Pak helped topush the small Parma Italy based business into a �branded consumer product business�, the small business was transformed into one of the world�s largest product companies known as Parmalat.
Parmalat is a big issuer of bonds, to the point that the company had raised funds beyond its needs in the past. There is also accounting questions which raised skepticism among the international banking institutions. The seeds of the current crisis, resulted from the probe by the Italian regulators, following the disclosure by Parmalat officials that US$825 million of its cash was tied up in a Cayman Islands based Epicurum hedge fund.Parmalat authorities also claimed that Parmalat has US $6.6 billion in cash set aside to offset the company�s US $10 billion debt.
The Parmalat crisis has become the Italian equivalent of the American Enron scandal. Through a complicated system of financial arrangements, Parmalat acquired Queen�s land Australian based company called Paul�s in 1998, sources close to the deal said Parmalat massively overbid National Foods, its closest competitor for Paul�s.
Part of the Parmalat crisis developed when it was discovered that Parmalat failed to disclose the nature of some of its assets and investments, which were later found to be �illiquid�. The implication of this is that Parmalat was unable to meet its immediate bond repayment obligations, leading many to speculate that the company �had been involved in huge leveraged interest rate swaps�.
Impact of Parmalat Scandal on Hedge Funds
Some European hedge funds have posted losses in December linked to the crisis between Parmalat and its creditors. According to Goldman Sachs European Convertible Arbitrage Index, hedge funds utilizing convertible arbitrage strategies posted losses of 2.1% in December 2003.
Convertible arbitrage strategy involves purchases of convertible bonds of companies while shorting the stocks of those companies, with the hope of profiting from price fluctuations in the stock prices of such companies. Many bond traders with significant positions in Parmalat�s bonds would post losses as Parmalat bond prices dropped. Many European bond traders purchased Parmalat�s US$1.2 billion convertible bonds released in the month of December 2003.
The sell-off in Parmalat�s bonds started in November, which was the deadline established by Parmalat officials to recoup its nearly US$1 billion investments in the Epicurum hedge funds, that deadline was however missed, resulting in other chain of events as the markets reacted to such news. Market analysts estimate that about 80% of the total value of Parmalat�s convertible bonds has been lost during the months of November and December 2003.
Barep Asset Management, a management arm of Societe Generale was reported to have lost 7% of its assets as a result of the Parmalat scandal. KBC Alternative Investments lost 0.4% in December as well, its managing director, Andy Preston told news correspondents that misrepresentation of balance sheets on a massive scale is not common, but such events happen, and fund managers cannot fully guard against such occurrences.
Paul Oranika
Editor-in-chief
Hedgeco.net
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