Parmalat - an Italy Dairy Company Case Study

Parmalat, an Italy dairy company 2.1 Introduction In December 2003, the Parmalat Group (“Parmalat”), a company so massive that it comprised 1.5% of Italy’s Gross National Product (“GNP”), suddenly collapsed and entered bankruptcy protection. The collapse of this multinational food and beverage giant was the result of the discovery of systematic financial fraud, which took place over a period of several years. On December 8, 2003, despite showing approximately $5 billion in cash on its balance sheet, Parmalat was barely able to avoid defaulting on a $150 million note payment that had come due. It was only able to do so by invoking a five-day grace period. Four days later, as public suspicion of Parmalat’s financial situation grew, the company was somehow able to locate money to make the note payment. On December 19, Bank of America announced that an account that Parmalat alleged contained approximately $3.9 billion of cash did not exist. It was at that moment that Parmalat’s insolvency was revealed to the public. Parmalat’s size and importance to the Italian economy as a whole presented a unique problem for the country. At the time, Italy’s bankruptcy law was inadequate, archaic, and poorly formulated to handle the bankruptcy of such a large company. To cope with this reality, Italy, through emergency legislation, rewrote its bankruptcy law in only four days. The result of this process was Decree-Law No. 347 of December 23, 2003 (the “Marzano Law”). The new law allowed the Parmalat bankruptcy to proceed under conditions that were more favorable to the company and to Italian national interests. Two examples of such national interests were the well-being of Italian stock and bondholders, and the interests of Italian dairy farmers, a group owed as much as €125 million.In Italy’s rush to safeguard national interests, it failed to exhibit the same level of concern for Parmalat’s banks and international creditors. The ad hoc nature of recent bankruptcy reforms in Italy, particularly the circumstances surrounding the creation of the Marzano Law in the midst of the Parmalat scandal, has negatively affected prospective creditor confidence. More generally, it has negatively affected investor confidence, resulting in some investors completely refusing to invest in Italian corporate debt.This note examines where Italy has made errors in the development of its bankruptcy law and policy from the creditor’s perspective. It also offers suggestions as to how Italy can modify its

bankruptcy laws to correct these problems and make Italian companies’ debt offerings more attractive to creditors. 2.2 Operational v functional Restructuring Parmalat was not difficult: it had a good underlying operation overburdened by enormous indebtedness. The success of the so-called 'Parmalat law' depended on the fact that, for the first time, the 'debt/equity swap' arrangement was introduced in order to deal with