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How a high-society Chinese family's takeover of French luxury brand Baccarat unravelled into a boardroom battle with creditors and seizure of assets

·7 min read

French luxury firm Baccarat has survived the Spanish flu, two world wars and the 1789 French Revolution. Now the changing fortunes of its distressed Chinese owner have prompted a French court to take the crystal maker into protective custody.

Major shareholder Coco Chu has gone from partying with Lenny Kravitz at a Baccarat Goldfinger-themed party in Paris in 2017 to wrangling with creditors and being stripped of assets, including her multimillion-dollar flat in Hong Kong.

Euronext-listed Baccarat is the battleground between Chu's family office, Fortune Fountain Capital, and its creditors. The Chinese borrower has fallen into arrears on loan repayments and broken French law by ignoring creditors' proposals for new directors, people familiar with the situation said.

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Fortune Fountain is just the latest example of a Chinese company that bought a string of trophy assets on credit and is now struggling to stay afloat as the coronavirus pandemic drains already stressed finances.

Baccarat chandelier and tableware. Photo: SCMP Handout alt=Baccarat chandelier and tableware. Photo: SCMP Handout

Between 2016 and 2018, Chinese firms went on a US$411 billion global shopping spree. When Beijing turned off the spigot of cheap bank loans in 2017, buyers turned en masse to private credit lenders in Hong Kong to finance their deals, which typically charge higher interest rates.

In recent weeks, two high-profile Chinese acquisitions were seized by lenders. China's Fosun International lost control of Cirque du Soleil and embattled conglomerate HNA relinquished its stake in airport baggage handler Swissport to distressed debt funds.

Cirque du Soleil filed for bankruptcy protection in June. Photo: AFP alt=Cirque du Soleil filed for bankruptcy protection in June. Photo: AFP

As the coronavirus pandemic takes its toll on economies globally, credit rating agencies are scanning for financial weaknesses up and down the capital structures.

"You can get a knock-on effect if a shareholder or an affiliated company is under duress, even if the actual rated company itself isn't experiencing the same," said Matthew Ginsburg, Fitch Ratings' chairman for Asia-Pacific.

In the wake of ChemChina's leveraged US$44 billion takeover of agricultural firm Syngenta in 2017, analysts fear that the Basel-based company's assets might not be ring-fenced from its new owner. Ratings agency Moody's analysts said in January: "The high debt level at ChemChina is a key constraint to Syngenta's ratings."

Elsewhere, Jining-based fashion house Shandong Ruyi, which aspired to be China's answer to LVMH, is arguing with creditors about selling shares in textile maker Lycra within a year of sealing its acquisition. Moody's downgraded Lycra's credit rating partly due to the financial crisis at Shandong Ruyi.

Founded in 1764 in the Lorraine region of France, Baccarat has crafted crystal artefacts for European royalty and Hollywood stars. A champagne flute retails at US$300 and a chandelier could set you back around US$200,000.

Fortune Fountain agreed to buy an 88.8 per cent stake in Baccarat for about 164 million (US$194 million) in 2017. The Chinese firm then turned to Hong Kong-based private credit funds Sammasan Capital and Tor Investment Management for loans worth at least half of Baccarat's enterprise value at around 200 million.

Pension funds to insurance companies have been pouring capital into private credit funds to try and make money in low- or zero-interest rate economies. Private credit funds typically ask for a higher interest rate than the average 3 to 5 per cent commercial bank loan, commensurate with the risks they take.

Fortune Fountain's shareholders include Wang Liang Ping and her daughter Coco Chu, who claim to be descendants of fourth-century calligrapher Wang Xizhi, as well as her daughter's partner Jack Sun.

Baccarat and Sun did not respond to requests for comment. Wang and Chu could not be reached via Baccarat or a press agency.

A rare hand scroll copy of Chinese calligrapher Wang Xizhi. Photo: AFP/The Guardian alt=A rare hand scroll copy of Chinese calligrapher Wang Xizhi. Photo: AFP/The Guardian

Family-owned companies tend to lag behind their non-family-owned peers in terms of governance, according to a study of over a thousand publicly listed companies released by Swiss bank Credit Suisse.

Set up in 2017, Fortune Fountain describes its activities as principal investment, financial services and wealth management - including helping the ultra-rich with immigration, overseas study and arranging private jets. It hired bankers from western firms, including Kevin Sims, a former RBS banker. Sims said he left Fortune Fountain in June 2019.

Fortune Fountain staff celebrate the company's first anniversary of operations. Photo: PRNewswire alt=Fortune Fountain staff celebrate the company's first anniversary of operations. Photo: PRNewswire

Red flags quickly emerged after the acquisition of Baccarat closed. Fortune Fountain failed to lodge documents related to the loan late last year, and then started defaulting on payments in January. Creditors' requests for an explanation and remedial action went mostly unanswered, the people familiar said.

"This is corporate governance 101," said a person close to the creditors.

A court-appointed provisional liquidator set about winding up a Fortune Fountain affiliate in Hong Kong after law firm Allen & Overy chased it for a US$300,000 unpaid legal bill, according to the Official Receiver's Office.

Fortune Fountain's Hong Kong website is not loading. The lights were off in its office in Central Hong Kong on Tuesday, there was unopened mail at the main entrance and desks seen through the window were empty and no computers visible.

Fortune Fountain's financial problems in mainland China also seem to be snowballing. In March and April alone, the Shanghai Pudong New District Court listed it as a dishonest debtor for failing to comply with judgements at least seven times, mostly for not meeting its financial obligations. A Shanghai financial court on July 31 banned Fortune Fountain staff from making expensive purchases, such as buying plane tickets or sending children to expensive schools because the company, together with a mainland affiliate, had failed to repay 307.4 million yuan (US$45 million) of debt and interest payments.

Baccarat CEO Daniela Riccardi resigned in March and Fortune Fountain shareholder Sun took over her role. Riccardi joined Italian notebook brand Moleskine in April. She did not respond to a request for comment. Creditors did not have a chance to veto Sun's appointment, violating a key man clause in the loan, the people familiar said.

This was the "straw that broke the camel's back," said the person close to the creditors.

A shareholders' meeting was set for September 17 when creditors planned to vote against three directors including Sun and replace them with a creditor representative and two French-speaking industry and corporate finance specialists, according to a document seen by the Post. They want the new board members to search for a CEO and help formulate a new business plan.

In a bid to outmanoeuvre Fortune Fountain, the lenders took over a holding company in Baccarat's complicated ownership structure, similar to a Russian nesting doll, handing them control of 97 per cent of Baccarat voting rights.

In a counter move, Fortune Fountain ignored the creditors' proposed directors in the AGM's agenda, the people familiar said.

On Tuesday Baccarat said that a French court has stepped into the dispute and appointed provisional administrators to assess the crystal maker's financial position and any breaches of law.

Now the gloves are off as the creditors seize collateral put up for the loan, starting with assets unrelated to Baccarat to minimise disruption to its operations. One such asset is a Hong Kong flat owned by Chu, and they are also eyeing the family's land on the Caribbean island of St Kitts.

As an ultimate power play, the creditors could enforce a debt-for-equity swap and take control of Baccarat. For now they will be looking to work with the administrators who will report back to the court in four months' time.

Additional reporting by Iris Ouyang

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.