Mecklenburg-Vorpommern Economy

Gentings Lim crosses swords with German authorities

GENTING Hong Kong Ltd (Genting HK) is involved in a legal dispute with the German government. It is not about a casino license in Germany, but about a shipyard in Mecklenburg-Vorpommern in north-eastern Germany – an investment made by Tan Sri Lim Kok Thay in 2015.

The reason behind the investment of over US$35 million was vertical integration, ie owning a shipyard that could build cruise ships for Genting HK 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) would file for bankruptcy after financing talks between the German authorities and the company collapsed.

“Accordingly, and with no likely prospect of additional funding for MVWH, German law requires the directors of MVWH to file for bankruptcy,” Genting HK told the investor public in its filing with the Hong Kong Stock Exchange.

Genting HK share price more than halved to HK$0.32 on Jan. 13 after the announcement of HK$0.73 the previous day.

There will be no direct impact on the domestic listed companies namely Genting Bhd and its subsidiary Genting Malaysia Bhd as there are no cross-shareholdings. It still raises eyebrows given the Genting group’s track record in related party transactions.

The bankruptcy filing was filed about a week before the January 17 court ruling.

Genting HK highlighted the impact of the bankruptcy filing, which triggered a default on an existing loan agreement. This, in turn, triggered a cross-default of around $2.78 billion under other group financing agreements.

It added that its lenders could request early repayment under the cross-default financing arrangement. However, as of January 13, the company had not received any communication from the relevant lenders.

As a reminder: The starting point of the legal dispute was the use of a loan facility from the state of Mecklenburg-Western Pomerania – the state MV backstop facility. The facility is an aid from the federal government for companies affected by the Covid 19 pandemic.

The loan facility matter 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 made on January 17.

“Pending the outcome of the court hearings and the Company’s ability to draw down the government’s MV backstop facility, there can be no assurance that the Group will be able to meet its financial obligations under its financing arrangements to meet the due date. said Genting HK in the filing.

The company also warns that if it fails to meet its obligations to repay debts as they come due or agree with its creditors on an extension of its credit , prospects and financial condition, there could be “material adverse effects on the group’s business”. and operating results”.

To make matters worse, Genting HK was denied access to other credit facilities.

According to the filing, Genting HK has sought alternative sources of liquidity as part of existing contractual obligations. One is the drawing of the Group’s eligible and completed €108 million (RM516 million) construction milestone under the €1.36 billion multi-currency credit facility agreement related to the construction of the Schiffs Global One (Global 1 Facility Agreement). On the other hand, there is a 30 million euro tranche “silent participation” of the new 300 million euro Economic Stabilization Fund (WSF).

Genting HK says it is contractually entitled to draw the amounts under these facilities under existing terms. However, he was denied facility under the Global 1 facility agreement. The German state export credit insurer Euler Hermes, which was involved in the financing of Global 1, has refused to confirm the insurance coverage required under the facilities. This consequently led to the banks involved refusing to release the milestone payment.

Euler Hermes’ refusal is based on a business review of the company’s five-year outlook, prepared on behalf of the insurer, which considered various stress scenarios affecting the cruise operator, including an ongoing and sustained reduction in business activity as a result of Covid-19. 19, according to Genting HK.

Is this the final nail in the coffin for Genting HK, believed to be Lim’s invention?

Many say the fact that MVWH slipped into its current insolvency status can be largely attributed to the Covid-19 pandemic, which has halted work and temporarily docked cruise ships for the past two years. However, it can’t be said that the cruise line was in the best financial shape before the pandemic. It has been in the red for the year ended December 31, 2016 (FY 2016).

In particular, the company’s cash and cash equivalents were declining rapidly before the pandemic. Its cash and cash equivalents were $1.155 billion in fiscal 2017 but shrank to $595.1 million through fiscal 2019.

As his cash pile dwindled, his borrowing grew. From $1.89 billion in total loans in FY2017, representing a 16.2% net leverage ratio, the number nearly doubled to $2.74 billion in FY2019, raising the net leverage ratio to 49.3%.

Needless to say, the situation has only gotten worse during the pandemic. According to its fiscal 2020 annual report, the company’s cash and cash equivalents totaled just $217 million against its $3.38 billion in debt. His gearing reached 114.5%.

In August 2020, Genting HK issued earnings guidance, warning investors of a “significantly higher” net loss for 1HFY2020 compared to the same period last year due to the pandemic. Shortly thereafter, it announced that it was temporarily suspending payments to its creditors to conserve cash and maintain the company’s continued existence. Consultants were hired to work with creditors to restructure the company’s debt.

Despite the massive net loss of $742.59 million in H1 2020, Genting HK was confident that it would have enough capital to meet its financial commitments over the next 12 months should its efforts such as cost-cutting and raising fresh capital take hold prove fruitful.

Genting HK managed to find help from outside parties. White Supreme Corp acquired a 50% interest in Genting Macau Holdings Ltd, the Company’s indirect wholly owned subsidiary, for HK$50 million (RM26.8 million). White Supreme is owned by an investment company owned by real estate, leisure and hospitality investor Ao Mio Leong.

The deal also saw Ao pay HK$700 million to assume a shareholder loan owed by Genting Macau Star Cruises Asia Holding Ltd, a wholly owned entity of Genting HK.

While the sale resulted in a $159 million loss, the cruise operator said it would free up some liquidity and the sale proceeds would be used as general working capital to fund its cruise-related and other operations.

Meanwhile, Darting Investment Holdings Ltd, a minority shareholder of Dream Cruises Holding Ltd – an indirect non-owned subsidiary of Genting HK – also backed the company through the new subscription of shares in Dream Cruises, raising $59 million in cash from $247.93 million in intercompany loans in April 2021.

In June 2021, Genting HK announced that it had entered into a restructuring agreement with its creditors and shareholders. Its restructuring measure included financial assistance provided by the German authorities as well as other local loan facilities.

That offered a glimmer of hope that the cruise line would be out of troubled waters. Unfortunately, the credit facility did not come easily. Genting HK now has to deal with the 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 ruling would have far-reaching consequences for the cruise ship operator.