First Enron of 2020: Muddy Waters’ Short-Target NMC Health Just “Discovered” $2.7 Billion Undisclosed Debt
Oops, the rot runs even deeper than Muddy Waters could have imagined.
By Nick Corbishley, for WOLF STREET:
This wildly turbulent year just produced its first Enron-like scandal. At the rotten heart of it is NMC Health, a FTSE 100 company that has health-care operations in 19 countries and is based in the United Arab Emirates. Last Thursday, the company’s shares were suspended after an internal review uncovered a morass of dodgy accounting and fiduciary shenanigans. Now it was revealed that those shenanigans had helped to conceal at least $2.7 billion of undisclosed debt.
The discovery more than doubles the size of NMC’s debt mountain to around $5 billion, up from around $2.1 billion last June. The proceeds from much of that debt were used for “unauthorized purposes,” the company now admits, although it’s not yet clear what those purposes were. NMC also apparently has no cash on hand to service that debt and is currently receiving support from Daman Insurance, a health insurance company that is 80%-owned by Abu Dhabi’s government and the rest by Munich Re, to pay overdue bills to suppliers.
For some time, NMC’s cash flow was supplemented by reverse factoring deals. Reverse factoring is a form of financial engineering, an arrangement with a lender that turns the company’s trade accounts payable into debt that is owed to a financial institution. But since that debt does not have to be disclosed as debt, the company appears to have less debt than it actually has. Once these shenanigans are discovered, as just happened to NMC as well as to UK outsourcing giant Carillion and Spanish green energy behemoth Abengoa before it, the cash can quickly run dry.
NMC is reportedly two weeks behind in paying February salaries to its staff. Now, banks are wary about lending the company fresh funds. Earlier this month, it even asked lenders for a temporary standstill on its existing facilities.
There had been hopes that NMC might be bought out before things got this serious but those hopes were dashed damning findings of the internal review published last month. One of the two companies that were reportedly mulling a takeover bid, GKSD, has pulled out, while the other, KKR, denies even discussing the matter.
It’s a dramatic reversal for a company that appeared not so long ago to be in reasonable health. Then, on December 17, short seller Muddy Waters hit the company with accusations that NMC had been misleading investors and failing to disclose vital information regarding:
- Its lack of internal controls;
- Its true ownership
- Its true debt burden;
- Its true cash-on-hand and asset values;
- Its rampant use of reverse factoring.
“We have serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels,” read the first line of Muddy Waters’ report. NMC was engaging in a raft of accounting irregularities, it said, including overpaying investments, materially overstating cash balances, and reporting profit margins that “seem too good to be true.” The report concluded with this line:
“We are unsure how deep the rot at NMC goes, but we do not believe that its insiders or financials can be trusted.”
As it turns out, the rot runs even deeper than Muddy Waters could have imagined. The latest revelation that NMC “has at least $2.7 billion in undisclosed debt and no cash” prove that “it is no longer just a fraud. It is a massive fraud,” Muddy Waters’ founder Carson Block said in a statement.
Clearly, NMC’s board did not do a very good job of supervising NMC. In the last few weeks five of its 11 members have either resigned or been fired from the company, including its Indian-born billionaire owner Bavaguthu Raghuram Shetty after being accused of misreporting the size of his stake in the company.
Under Shetty’s stewardship, NMC appears to have taken a leaf out of Enron’s playbook by taking on increasing amounts of debt to pump up the value of its stock, which it then used as collateral for even more debt. This “circular symbiosis” was “reminiscent of Enron’s off-balance sheet debt structures in which Enron issued shares to ‘special purpose entities’, which borrowed money using the stock as collateral, and then bought (poor) assets from Enron,” Muddy Waters said in a February 10 statement. “As with Enron, this circular arrangement would work until the stock value falls, which is what ultimately triggered Enron’s collapse.”
Before being suspended from the FTSE 100 last month, NMC shares had collapsed by 76% since August 2018. Shares in Finablr, a financial services firm owned by NMC’s founder, Shetty, continue to trade. On Wednesday, they plunged 25% to 22 pence, almost 90% lower than what they were worth just three months ago, before Muddy Waters published its report.
The company’s bonds are also still being traded. And they are also deep underwater and getting deeper by the day. A $400 million sukuk (a Sharia-compliant financial certificate that essentially functions like a bond) due November 2023 crashed after Tuesday’s announcement, plunging by about 60%, from about 63 cents on the dollar to less than 25 cents on the dollar. Clearly, the market expects these bonds to default, with not much left for bondholders. By Nick Corbishley, for WOLF STREET.
“Even more damning than our initial report”: Carson Block of Muddy Waters. Read... Muddy Waters’ Short-Target NMC Health, a FTSE 100 Company, Admits Doctoring Accounts on Massive Scale. Shares Suspended
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