Monday, February 20, 2006

Deutsche Bank vs Beckett
Political Risk, Investment Risk, Country Risk

This legal case is being heard in Singapore, and hence will be patchily reported in Malaysia (if at all). However, the case is very interesting for all regional investors concerned as it exemplifies the 3 different risks of investing in a developing nation. The strange thing is that the "aggrieved party" is an Indonesian concern. Apparently, there is political clout and real political clout.

During the terrible days after the financial implosion, DB arranged a US$100 million loan to Beckett (controlled by Sukanto Tanoto and Hasjim Djojohadikusumo). This loan largely funded Beckett's profitable stake in Adaro Indonesia, allowing Beckett's stake to rise from 15% to 40% in one of the world's biggest coal mines. Both DB and Beckett are registered in Singapore.

Following that, Beckett had problems keeping up with payments and in 2001 DB exercised its right to sell the highly prized 40% stake in Adaro Indonesia to Edwin Soeryadjaya for just US$44.2 million. The stake has since been sold off last year by ES to a consortium in recent times to Goldman Sachs, Citigroup and a Singapore government investment arm.

The main point of contention from Beckett was that the US$100m loan was offered as part of a longer term capital raising plan proposed by DB. Obviously Beckett claimed that the follow up financing was not made to them thus causing them to lose control of the collateral. Did DB or people in DB collude with ES? Wow, better than fictional spy movie.

The accusations were aplenty, here's my take:

1) The court and legal processes in Singapore are efficient, and the ability to seize collateral and exercise it may actually encourage more foreign companies to set up official companies in Singapore when dealing with companies/countries in the region. It may prove to be a big step to encouraging all parties to set up Singapore based entities when signing up important deals - this could be made a preferred requirement by foreign companies in the future.

2) Is Beckett's court actions only put in place because of the sharp rise in coal prices over the last 2 years?

3) The stake was already on-sold to an influential consortium, who should be aware of Beckett's claims prior to the purchase, or is it otherwise? If the consortium was aware of Beckett's intention to sue, why did it go ahead with the purchase? Was it so confident that the deal would stand with a Singapore government investment arm in its consortium?

4) If the consortium was not aware of Beckett's protestations and intentions to sue, what would become of the "stake" if Beckett prove to be successful in its claims? Many observers would also be quietly aware that this case involve a Singapore government investment arm - any "gives or takes" or will justice and fairness prevail the day.

5) DB's actions in seizing the collateral and selling it quickly looks dubious. Surely, the coal mine is a very attractive asset even back in 2001, and a refinancing package based on the 40% stake in Adaro Indonesia should have been a more acceptable solution even though Beckett has defaulted on the earlier loan. The fact that DB did not keep written records of crucial meetings as it negotiated the sale to ES again makes it more questionable. There is no evidence of DB calling for alternative bids. DB has countered that by saying that they did receive two other bids, but were lower than ES'.

On the surface of it all, it looks like DB could lose the case, which will bring forth a lot of repercussions for all parties involved, not to mention a number of heads to roll at DB.

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