The Incentivized Asian “Wedge” Snake to Tunnel Corporate Wealth

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BAMBOO LETTER UPDATE | January 19, 2015
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 The Incentivized Asian “Wedge” Snake to Tunnel Corporate WealthWith the volatility in the currency market as the Swiss National Bank abandoned the EURCHF floor which sent the Swiss franc soaring and the ASEAN currencies Indonesian rupiah and Malaysian ringgit dropping to the decade lows against the dollar, we are reminded of what happened during the 1997/98 Asian Financial Crisis. Many auditors could not finalize the accounts of their clients in time because they did not have vital information about the foreign exchange losses incurred and debt covenants triggered on the dollar-denominated loans that their clients had piled up when the dollar-based debt was cheap. As the local currencies devalued sharply against the dollar, resulting in substantially more local currencies needed to service the dollar-denominated interest payments, a wave of default swept across the Asian corporate landscape. But there is a twist to the default story – an accounting tunneling twist.

Two short Asian cases. After the onset of the 1997/98 Asian Financial Crisis, United Engineers Malaysia (UEM), a relatively healthy firm with strong growth prospects, bought out some management-controlled shares of its financially-troubled parent, Renong Corporation, at artificially high prices. Both firms are controlled by the same “family” (Halim Bin Saad via nominee accounts and connected to former finance minister Daim Zainuddin) through a pyramid structure. The buyout directly tunneled corporate wealth to the family at the expense of minority shareholders of both firms. Ting Pek Khiing, Chairman of the Ekran Group, issued shares in Ekran in May 1997 with the declared intention of purchasing shares in the holding company of Bakun Hydro-Electric Corporation, the operator of the largest hydroelectric project ever undertaken in Malaysia. Instead, as the crisis took hold, the money from the share issuance was ultimately used, via third parties, to buy out Ting’s stakes in several of the Ekran Group’s publicly traded affiliates. These are not the typical western-style accruals-based earnings management; they are artful Asian accounting tunneling methods to abuse minority shareholders. “Because I Can”, the controlling owners hissed. But how did they really carry out the tunneling? And how can we detect the incentivized Asian “wedge” snake that tunnels corporate wealth?

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Billionaires Facing Higher Debt Costs on Oil Slump: Bloomberg

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Bank Losses From Swiss Currency Surprise Seen Mounting: Bloomberg

AIM stocks miss target but backers remain undeterred: FT

Stay calm, New York has its first $100 million apartment: Quartz

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Argentina’s ‘Soy King’ abdicates in favor of biotech: CNBC

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Consumer & Others

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