Genting’s Lim crosses swords with the German authorities

GENTING Hong Kong Ltd (Genting HK) is embroiled in a legal tussle with the German government. This is not a casino license in Germany, but a shipyard in the state of Mecklenburg-Vorpommern in northeastern Germany, an investment made by Tan Sri Lim Kok Thay in 2015.

The rationale for the investment of over US$35 million was to have vertical integration, which means owning a shipyard that could build cruise ships for Genting HK’s cruise operations.

However, last week Genting HK – in which the Lim family holds a 75.7% stake – announced that its shipyard MV Werften Holdings Ltd (MVWH) was filing for insolvency, following failed negotiations. financing between the German authorities and the company.

“As a result, and without any likely prospect of additional funding being available to MVWH, the directors of MVWH are obligated under German law to file for insolvency,” Genting HK told the investing public in its filing. on the Hong Kong Stock Exchange.

Genting HK’s share price more than halved to HK$0.32 on January 13 after the announcement, from HK$0.73 the day before.

There will be no direct impact on our listed entities, namely Genting Bhd and its subsidiary Genting Malaysia Bhd, given the absence of cross-shareholdings. Still, this raises eyebrows, given the Genting Group’s track record of related party transactions.

The filing for the insolvency petition was filed about a week before the court’s decision on January 17.

Genting HK pointed to the repercussions caused by the insolvency filing, which triggered a default under an existing facility agreement. This in turn triggered a cross-default under other financing deals entered into by the group, amounting to some US$2.78 billion.

He added that his lenders under the cross-default financing agreement could demand early repayment. However, the company had not received any notices from the affected lenders as of January 13.

To recap, the legal dispute arose out of the drawdown of a loan facility provided by the state of Mecklenburg-Vorpommern – the State MV Backstop Facility. The facility is aid provided by the German government to businesses affected by the Covid-19 pandemic.

The issue of the loan facility between the German authorities and Genting HK was brought before the German courts on December 27, 2021, which indicated that a decision on the matter would be issued on January 17.

“Pending the outcome of the legal proceedings hearing and the company’s ability to tap into the state’s MT support package, there can be no assurance that the group will be able to cope with any its financial obligations under its financing agreements as they mature,” Genting HK said in the filing.

The company further warns that if it is unable to meet its debt repayment obligations as they come due or if it is unable to reach an agreement with its creditors for an extension of its borrowings, it could be a “significant adverse effect on the group’s business”. , Outlook, Financial Condition and Results of Operations”.

To make matters worse, Genting HK was denied a draw on other loan facilities.

According to the filing, Genting HK sought other sources of liquidity within existing contractual commitments. One of these is the group’s authorized and realized construction milestone drawdown of €108m (RM516m) on the €1.36bn multi-currency term credit facility agreement. concluded in connection with the construction of the Global One vessel (Global 1 facility agreement). The other is a €30 million “silent participation” tranche of the new €300 million Federal Economic Stabilization Fund (FSM).

Genting HK asserts that it is contractually authorized to draw amounts under these facilities in accordance with the existing terms and conditions. However, it was denied installation under Global 1’s installation agreement. The company claims that German government export credit insurance agency Euler Hermes, involved in financing Global 1 , declined to confirm the insurance coverage required under the facilities. Consequently, this led to participating banks refusing to release the milestone payment.

Euler Hermes’ refusal is based on a business review of the company’s five-year outlook prepared at the request of the insurer, which took into account different stress scenarios affecting the cruise line, including a persistent and lasting reduction activity due to Covid-19. 19, according to Genting HK.

Is this the final nail in the coffin of Genting HK, which is well regarded as Lim’s brainchild?

Many say how MVWH ended up in its current insolvent status can largely be blamed on the Covid-19 pandemic, which has halted work and temporarily docked cruise ships for the past two years. However, it cannot be said that the cruise line was in the best financial health before the pandemic. It has been loss-making since the financial year ended December 31, 2016 (financial year 2016).

Notably, the company’s cash and cash equivalents were shrinking rapidly before the pandemic. Its cash and cash equivalents were US$1.155 billion in fiscal 2017, but fell to US$595.1 million in fiscal 2019.

As his cash dwindled, his borrowings increased. From $1.89 billion in total borrowings in fiscal 2017, bringing its net debt to 16.2%, the number nearly doubled in fiscal 2019 to $2.74 billion. dollars and increase its net debt to 49.3%.

Needless to say, the situation has only gotten worse during the pandemic. According to its annual report for fiscal year 2020, the company’s cash and cash equivalents were just US$217 million against a debt of US$3.38 billion. Its gearing reached 114.5%.

In August 2020, Genting HK released a profit forecast, warning investors of a “significantly higher” net loss for 1HFY2020 compared to the previous corresponding period, due to the pandemic. Shortly after, it announced it was temporarily suspending payments to its creditors to preserve cash and stay in business. Advisors were hired to dialogue with creditors to restructure the company’s debts.

Despite the massive net loss of US$742.59 million in the first half of 2020, Genting HK was confident that it had enough capital to meet its financial obligations over the next 12 months if its efforts, such as cost reduction and raising new capital, were proving successful. .

Genting HK managed to find help from external parties. White Supreme Corp has purchased a 50% stake for HK$50 million (RM26.8 million) in Genting Macau Holdings Ltd. .

The deal also saw Ao pay HK$700 million to take over a shareholder loan that Genting Macau owes to Star Cruises Asia Holding Ltd, a unit wholly owned by Genting HK.

Although the sale resulted in a loss of $159 million, the cruise line said, it would free up cash and proceeds from the sale would be used for general working capital to fund its cruise-related and other operations.

Meanwhile, Darting Investment Holdings Ltd, which is a minority shareholder of Dream Cruises Holding Ltd – an indirect subsidiary not wholly owned by Genting HK – has also helped the company through a new share subscription in Dream Cruises which raised US$59 million in cash and secured US$247.93 million in intercompany loans in April 2021.

In June 2021, Genting HK announced that it had finalized a restructuring agreement with its creditors and stakeholders. Its restructuring exercise included financial aid provided by the German authorities as well as other loan facilities there.

This offered a glimmer of hope that the cruise line would be out of choppy waters. Unfortunately, the loan facility was not easy. Genting HK now has to fight German authorities in court.

Realistically, time may not be on Lim’s side. Will the company prevail against the German authorities? The January 17 court verdict would have far-reaching implications for the cruise ship operator.

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