Now that the great Chinese money-laundering M&A wave of 2016 is long forgotten, in some cases with tragic consequences such as Wednesday’s freak death of HNA chairman Wang Jian, and the Chinese conglomerates and oligarchs who spent billions to fund acquisitionsin the US and around the globe…
…are on the verge of bankruptcy or defaulting outright, it’s time for their first-lien lenders to party as they are about to take over countless now-worthless equity tranches.
The latest such example is none other than infamous distressed investor, Elliott Management, whose founder Paul Singer once seized an Argentinian frigate, the ARA Libertad, in 2012 as part of his long-running debt dispute with the recently insolvent Latin American nation (which then went on to troll bond investors by selling 100 year bonds just a few years later).
And now, according to Bloomberg, Paul Singer is set to take full control of legendary Italian soccer club, AC Milan, after its shady Chinese owner, “businessman” Li Yonghong, failed to repay debt owed to Singer’s Elliott Management by a Friday deadline, just one year after Li acquired the club.
What is perhaps most striking, is how modest the amount of money in dispute was: Li Yonghong was due to repay only €32 million of the more than €400 million ($469 million) of debt accumulated by the hedge fund, and less than 5% of Milan’s purchase price.
As Bloomberg reminds us, Paul Singer’s hedge fund played a key role in allowing Li to conclude the €740 million purchase of Italy’s most successful football club at the international level, which was sold by Silvio Berlusconi’s investment company Fininvest at just the right time in April 2017 top-ticking China’s M&A wave, by providing last-minute financing. Elliott then lent Li €303 million to complete the purchase “and provided a further €32 million to help the club resolve a dispute with soccer’s European governing body UEFA.”
Meanwhile, Milan’s troubles – now that it was owned by a largely unknown Chinese investor and whose funds in turn were sourced by the world’s biggest “vulture hedge fund” – only grew and in May, UEFA said that the team “breached financial fair-play rules because of uncertainties about the team’s effort to refinance the loan provided by Elliott.” Because of this, AC Milan was banned from European competition.
But what we find most surprising is that Li was unable to kick the can indefinitely by coughing up a relatively modest €32MM, a fraction of the total purchase price, and an indication that behind every Chinese oligarch there is a financial black hole where money enters but never leaves.
That may also explain why the sale of AC Milan to Li was complicated until the very end:
The original investment group changed several times, and in September 2017 Bloomberg reported that it filed a false bank report during negotiations with Berlusconi’s company. Li denied the allegations.
But the biggest problem came to what has emerged as China’s Achiles heel: cross border fund transfers, i.e. money laundering, which China cracked down in 2016 and 2017, following the unprecedented capital outflow surge that started in 2015 and drained China of billions in US Treasurys as it scrambled to defend the yuan:
the deal, originally scheduled to close in December 2016, also was delayed because the investment group lacked authorization to export funds from China. Regulators in China have been ramping up their scrutiny of outbound investments, with a particular focus on sports and entertainment.
Sensing the end was near, AC Milan hired Bank of America earlier in this year to refinance the team’s debt and according to Bloomberg, in recent weeks the club has attracted investors willing to buy controlling stakes, though no deals were secured.
Possible buyers included Italian-American media magnate Rocco Commisso and the Ricketts family, which owns the Chicago Cubs Major League Baseball team.
But how did Li emerge as the latest Chinese financial paper tiger? It turns out his exit plans were foiled by, what else, Chinese market turmoil. His original plan included IPOing the club on a Chinese stock exchange, and in a draft of the original fundraising materials, the Chinese investor group indicated the team’s value could multiply several times in the long term to reach €2.9 billion euros, rivaling Real Madrid and Manchester United, according to Bloomberg.
Those plans were indefinitely put on hold when potential investors fled, and instead Li had to use his personal wealth to help complete the deal and also pledged the team as a guarantee to secure financing from Elliott last year.
And now that Li can no longer afford to make even a nominal payment to Elliott, his equity stake is worthless which means that Paul Singer is now the proud owner of Italy’s most iconic football club. One wonders how long until Elliott at least gets some free marketing out of the deal and its logo graces the shirts of Milan’s players alongside that of the Emirates. A vulture, of course.
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