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Monday, September 8, 2014

Marfin Investment Group (MIG) - Tale of a Zombie!

Every once in a while it happens that I start digging myself into a subject and the more I dig, the greater the appetite to dig even more. Typically, this happens when the digging does not lead to plausible answers but, instead, raises even more questions. This is what happened to me a few months ago when I stumbled into the dealings between Piraeus Bank and the Marfin Investment Group (MIG). I published 5 articles about it at the time and rested my case afterwards. I couldn't rest it for very long because an article about the former Governor of the Bank of Greece, George Provopoulos, brought the issue right back to my mind. Hardly had that issue died down in my mind, Piraeus Bank brought it back to the surface by proudly announcing that they had taken a 144 MEUR profit on a transaction with the MIG Group.

I had made a review of MIGs 2013 Financial Report back in May of this year and in the back of my mind I had stored the information that the group was in a very weak financial condition. Now I read that this group was so strong that a bank could take a 144 MEUR profit on it? That deserved some further research and I reviewed the Financial Report of the MIG group for the first 6 months of 2014, as per June 30, 2014. I will begin with only a few points and then draw some conclusions:

1) the MIG Group has annual sales of about 1,2 BEUR and employs close to 12.000 people. If that were one single company, one would have to say that it is a reasonably large company, though not a giant, and presumably a major factor in its industry. The MIG Group, on the other hand, is spread over a seemingly endless number of companies in several different industries. Its corporate structure and complexity resemble that of an S+P 500 multinational. The obvious question is how such a complex corporate structure can pay off when the aggregate of the businesses is comparatively small.
2) consolidated tangible assets amount to 2,3 BEUR and are exceeded by consolidated liabilities of 2,5 BEUR. A classic case of overindebtedness and insolvency. The group can avoid the latter by putting some value to intangible assets but there is no way of telling what that value really is.
3) all major group companies are still losing money in the first 6 months of 2014, and some of them losing a lot of it! In fact, all companies together lost about 80 MEUR in the first 6 months of the year before taxes!
4) the group has total interest-bearing debt of over 1,8 BEUR! Put differently, total debt is about 50% greater than annual sales which is a staggering relationship by all standards!
5) of that total debt of 1,8 BEUR, 831 MEUR is officially in default, i. e. financial conditions and contractual obligations regulating this debt (covenants) were not met. This gives lenders the right to terminate the contracts and make the borrowings repayable immediately. Put differently: but for the grace of the lenders, the MIG Group survives financially on a day-to-day basis.
6) as is customary, MIGs auditors (Grant Thornton) make only a 'review' and not an 'audit' of interim financial statements. What is not customary is that auditors make specific reference in their review to the fact that the MIG Groups's current liabilities exceeded current assets by 982 MEUR (!), "a fact that may indicate the existence of uncertainty regarding the group's ability to continue as an ongoing concern". Translated into plain English, the auditors are saying that the group is illiquid and cannot meet its short-term obligations. No auditor can suggest such a situation without simultaneously justifying the continued corporate existence: "Group's management has planned appropriate actions in order to enhance the group's financial position and going concern assumption, a condition which has been taken into account in the preparation of the financial statements according to the going concern principle". The plain English translation of that would read something like: "While the group no longer is an ongoing concern, management promised us that they are planning to correct this and that promise, and only that promise, allows us to still consider the group as an ongoing concern".
7) when browsing through the Financial Report, one wonders how the group can still exist when it is overdebted and in default all over the place? Presumably, no lender alone wants to trigger a financial collapse (at least not for the time being) and they all hope that they will lose less money if they can avoid financial collapse.
8) as an icing on a bad cake, MIG changed, once again, its accounting principles in the first half of 2014 and re-stated figures of comparable periods. They are now accounting for their investments in subsidiaries at cost. That way, they prevent any future write-downs of investments for impairment reasons. Changing accounting principles is always a sensitive issue. MIG has now changed theirs for the second time in only a couple of years.

These few points alone (one could write pages about more problems) suffice to describe that the MIG group is a financial zombie. It is hard to say whether it is an operational zombie as well. On one hand, there seem to be decent operating companies active in interesting branches of the real economy. On the other hand, why are decent operating companies active in interesting branches of the real economy losing so much money? Why do they have so much debt? The problem is: even if they had no debt at all, they would still be losing money!

One puzzle is how the enormous level of consolidated group debt has built up. One ought to research that question. Normally in a group, the debt builds up at the holding company level because the holding company buys companies all the time and finances these purchases with debt. In the case of the MIG Group, most of the debt is in the operating subsidiaries. How did it get there? What was it used for?

Since the operating companies are decent companies active in interesting branches of the real economy, they definitely seem to be worth saving. Is the membership in the MIG Group a benefit or a hinderance in that effort? I would say a hinderance. When looking through MIGs Financial Report, one wonders whether group management has time for anything other than dealing with banks and lawyers, negotiating and documenting agreements, etc. It’s hard to spend the morning negotiating convertible bond issues with banks and lawyers and return in the afternoon to deal with day-to-day issues of the dairy industry… And what the synergies are between the dairy industry and aviation would need to be explained to me!

The thing which bothers me the most is that both, MIG and Piraeus Bank as its major shareholder and lender, have a habit of making bad news look as good news, presumably hoping to fool readers. Piraeus brags about having made a profit of 144 MEUR on one transaction with MIG when in actual fact all they did was to upwrite the value of assets without any apparent reason/justification for doing so. And MIG, on page 10 of its Financial Report, makes it appear that almost all of its divisions are making very solid profits when one has to look into the details on page 53 to see that they are making enormous losses.

MIG tells a great story about itself on its website, describing itself to be "uniquely positioned to take advantage of an expanding array of investment opportuntities in the South-East European region; opportunities which traditional investment vehicles lacking MIGs regional focus, scale, expertise, and/or investment flexibility and financial resources may find difficult to identify and exploit". Piraeus Bank tells a great story about its relationship with MIG and how that fits its overall strategy of "enhancing the viability of troubled assets against extensive collaterals"

Successful enterprise typically requires a combination of hard and soft facts. Both, MIG and Piraues, seem very strong in the area of soft facts; in the area of story-telling.

When it comes to hard facts, it seems clear that the MIG Group is a financial zombie and Piraeus Bank a rather adventurous lender, to say the least! 

PS: I understand that Piraeus has now received permission to trade the convertible MIG bonds which it acquired a couple of months ago. Presumably, they will look for innocent depositors to take some risk off their books. Message to those innocent depositors: STAY AWAY FROM THOSE MIG CONVERTIBLES!!!


  1. Scary stuff.

  2. (6) Accepting the review from MIG's auditors and comments, when current liabilities exceed (3 times here?) current assets indicate at least an uncertainty. Under this view, in page 30, for group, non-current liabilities increased around 230 mil and current liabilities decreased almost 230 mil !
    The agreement with Piraeus -as MIG claims -and the ongoing with Fortress, suggest , that group is trying to replace short debt with longer term.
    Probably these agreements show a hedge fund approach to refinance or acquire "distressed assets", strategies very popular for many hedge funds, but not for individuals, i suppose.
    Gross profits are around 17% of total revenues and losses seem reduced compared to H1 2013 partly because income tax -deferred? ( i can't understand note 21) compared to H1 2013.

    About Austria, Klaus, you didn't comment. My approach is honest, no intention to use any knowledge for anything.


  3. It is a real pity. And not only it has too much debt, but I have heard that some companies within the Group haven't even paid interest to the banks for the last 2 years.

  4. Excellent analysis, thanx...
    I have seen many defaulted files in many countries, but never have I seem the debt of any company with these characteristics carried at par- usually banks would underprovision and justify this with optimistic analysis. This is insane...

  5. Dear mr Kastner,

    This is a thorough, well-researched analysis. Private investors need more of this kind of investigative financial journalism to correct the misinformation by banks and accounants, with vested interests. Keep up the good work.