How vulture funds are complicating revival

Even after spending billions of shillings in the attempts to revive the Webuye-based Pan African Paper Mills, the government still shares the power to decide the fate of the company almost equally with other long-term lenders.

Among the long-term lenders, the most intransigent have been a group of Singapore-based vulture funds who emerged long after Panpaper had been put under receivership.

Bang in the middle of the Panpaper’s revival plans, these funds popped out of the blue, after purchasing Panpaper’s debts in the international secondary debt market.

These faceless entities — basically different mutations of one group going by the names Noon Day Asset Management Asia or Farallon Capital Institutional Partners — are 11 in number.

According to statistics put out by receivers, they held 37 per cent of Panpaper’s debt as at March 2009. Naturally, the only thing they want from the receivership is more money. It will not matter to them whether this is achieved by selling the land and equipment in Webuye in parts.

What exactly are vulture funds? These are entities that purchase distressed debt on the secondary market at a price way below face value and later pop up seeking to recover the full amount of the debt through litigation.

The way vulture funds play their game is all- too-familiar: they purchase distressed debt at deep discounts, refuse to participate in any form of restructuring of the company and then start pursuing the full value of the debt plus interest by adopting hard ball negotiation tactics and chasing the money through court.

Sh6 billion debt

At what point did the vulture funds come into the picture?

Until recently, the list of Panpaper’s long-term lenders comprised of well-known players.

The paper trail shows that as at March 2009, the list of senior debt holders was as follows.

First, the International Finance Corporation, the World Bank’s commercial lending affiliate, was owed Sh2.5 billion.

The second big creditor was the German Bank, Deutsche Bank, which was owed Sh1.8 billion.

There were five other institutions in the category of long term lenders: the French entity, Propaco, with Sh380 million, PTA Bank with Sh 682 million, EADB with Sh317 million, KCB Bank, Sh112 million, and Development Bank of Kenya, Sh62 million.

In all, total long term loans as at March 2009 stood at Sh6 billion. It is important to note that in terms of clout and leverage, the long-term lenders have a great deal of power and influence. This is because they are the ones who hold collateral on land, buildings and all of the paper-making mills and equipment at the factory. The short-term lenders who put the company on receivership in the first place only held securities in floating assets.

In any case, they are no longer players because they sold their interests to the government.

Thus, it is impossible to re-open the factory sustainably without the co-operation of long-term lenders.

The complexion of long-term lenders has also changed.

Stalling negotiations

Immediately the company was put under receivership, IFC and Proparco, wrote to inform the government that they had written off all the money owed to them by Panpaper.

This left Deutsche Bank of Germany as the single largest long-term lender.

It did not take long before the vulture funds discovered that there was money to be made from Panpaper’s revival plans.

In April last year, Deutchse Bank informed the government that it had sold the debt to the Singapore-based vulture funds.

In retrospect, what made the Panpaper debt attractive to the vulture funds were the statements which government and political leaders were making about commitment to pump money into reviving Panpaper.

Throughout the time, the government was negotiating to settle with the short-term lenders, the vulture funds kept mum.

But it did not take long before the vulture funds started playing hard-ball tactics.

It is only recently that the receivers managed to convince them to agree to selling the company.

In the first place, they dragged their feet on appointing a trustee to present them in the negotiations. For many months, no business could be transacted on Panpaper.

This is because the long-term lenders are bound by a trust deed that requires that none of them can act unilaterally and that for a resolution to carry the day 75 per cent by value of debt must agree.

With more than 60 per cent of the senior debt in their hands, the vulture funds have been stalling negotiations.