Commentary on Political Economy

Tuesday, 14 July 2020


Fight for French luxury group sheds light on Chinese investor woes

The 256-year-old French glassmaker is known for its jewellery, crystal ware and lighting including chandeliers © Luca Bruno/AP
Chinese investors who claim to trace their lineage to a renowned fourth-century calligrapher are fighting to retain control of a 256-year-old French crystal glassmaker, following a series of defaults and a private credit deal gone wrong.
The troubles for Beijing-based Fortune Fountain Capital and its struggle to hold on to Baccarat Crystal highlight the problems Chinese investors have run into after taking on excessive leverage to buy European brands — sometimes through private credit deals at lending rates far higher than those of bank loans.
Fortune Fountain, which describes itself as a wealth management platform and family office, agreed to buy Baccarat for €164m in June 2017. It promised at the time to also invest up to €30m in the company.
But in 2019, Fortune Fountain defaulted on a loan from two Hong Kong-based private lenders, Tor Investment Management and Sammasan Capital, which financed at least half of the enterprise value of the deal, according to people familiar with the matter.
In March of this year, the Chinese group replaced Baccarat chief executive Daniela Riccardi with Sun Zhen, a shareholder in Fortune Fountain. The change violated terms that required the Chinese company to seek the lenders’ approval for top leadership appointments, the people said.
That has sparked a fight for control over the storied French luxury brand.
The lenders have replaced the sole board member at the holding company that owns about 97 per cent of Baccarat, giving them the right to vote against the reappointment of Mr Sun at an annual general meeting and appoint an executive with experience in the French luxury industry.
“This is being done not only to protect the lenders, but above all to protect the company,” the lending group said of its attempt to appoint a new top executive.
The current board has delayed the annual meeting, scheduled for this month, until September to postpone the vote.
Fortune Fountain did not respond to a request for comment. Baccarat declined to comment. 
China has attracted a wave of private credit
Baccarat, which takes its name from the town in eastern France where it was founded in 1764, is known for its jewellery, glassware and lighting. Its champagne coupes can cost more than €2,500 each, and its chandeliers have hung in palaces in Moscow and Istanbul.
Fortune Fountain Capital was established in 2017 as a wealth management service for rich families in China and Hong Kong. It said it had “attracted elite bankers from Goldman Sachs, Merrill Lynch and the City of London”, and that its services include luxury lifestyle experiences such as fine wine, artwork and private jet chartering.
The company’s website says its cumulative investments exceed Rmb50bn ($7.1bn).
Claims that its owners are descendants of Wang Xizhi, one of China’s most famous ancient calligraphers, have featured prominently in Fortune Fountain’s marketing.
The 2017 buyout of Baccarat coincided with a flurry of overseas deals, according to data from Refinitiv. Fortune Fountain purchased a New Zealand-based manuka honey maker the same month. In 2018, it bought a controlling stake in Antiquorum Management, a Swiss watch auctioneer, and a large stake in California-based genetics researcher DiaCarta.
People familiar with the Baccarat deal said Fortune Fountain has been unable to deliver on many of its promises to invest in the French company. Chinese media have said the company has large debts in China.
The default on the loan has added Fortune Fountain to a lengthening list of Chinese investors that have snapped up European luxury assets only to struggle to hold on to them or simply fail to close the deals.
Shandong Ruyi, once hailed as the “LVMH of China”, took over more than a dozen foreign luxury brands but has suffered a credit crunch at home, forcing it to back out of its buyout of Swiss shoe and bag maker Bally. Shanghai-listed Gangtai Group agreed to buy Milanese jewellery brand Buccellati in 2017 but has since sold it to Richemont.
As Beijing clamped down on investors moving money offshore starting in early 2017, companies buying foreign assets took on more loans from private lenders outside China.
Private capital allocation focused on Chinese borrowers rose from $432m in 2017 to $1.25bn by the end of last year, according to PwC. Global and Asia-based funds evaluating and investing in the Chinese market surged to $9.3bn in 2019 from $1.9bn five years earlier.
The terms of private credit deals are rarely disclosed, even when companies default. But a few such situations, such as that surrounding the buyout of football club AC Milan, have come to light. 
© Jean-Christophe Verhaegen/AFP/Getty
In AC Milan’s case, a Chinese investor took a €300m loan with an annual interest rate of more than 11 per cent from US hedge fund Elliott Management, the FT reported. When the investor defaulted, Elliott took over the club.
James Dilley, a partner in PwC's deals group, says such defaults by Chinese borrowers have become a trend.
“I’d put this down to a combination of many of these deals being closed at high valuations, acquirers experiencing difficulties in refinancing debt, challenges in getting additional liquidity out of China due to the capital controls in place, and in some cases, underperformance of the underlying business or asset,” he said.

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