Banks Keep Firms Afloat

As the industry wrestles with the fallout of the global economic crisis and its impact on the solvency and survival of Antwerp diamond companies, local diamantaires are discussing and debating the issue of responsible business practices by bourses and bankers as it relates to bankruptcies.

Some background first. Assume a diamond company has reached a stage where it’s virtually unable to meet its debts and sustain business. In the event that all options have been explored unsuccessfully, a committee of the diamond bourse to which the company belongs will one way or another have to release the information and invite all creditors to present themselves. This process includes, of course, the banks.

What Banks Know    
The concern is that this sharing of information isn’t always reciprocal in that bankers don’t notify the bourse when they become aware that one of their clients is virtually bankrupt. Indeed, it’s been reported that there are instances where bankers, for their own reasons, prefer to keep some clients who are in a precarious situation alive and to refrain from disclosing that information to the market. “The worry is that keeping such companies afloat enables them to keep buying or getting goods on commission while they’re on the verge of bankruptcy,” said a manufacturer who wanted to remain anonymous. “Doing so means that the moment the actual situation is revealed, the financial hole caused is even bigger and goes even deeper into the fabric of the market.”

The case of the Antwerp Diamond Bank (ADB) has been cited as an example of the potential problem. It’s no secret today that the KBC Bank, mother company to the ADB, has decided to get rid of the diamond branch, which is a noncore business. With that in mind, some diamantaires believe that the fact that ADB is up for sale is one of the major reasons it would want to keep a low profile and maintain unhealthy companies so it would be more attractive to a perspective buyer and avoid suspicions that there are any unhealthy clients or assets hidden in the ADB portfolio.

David Wahl, president of the Kring, Antwerp’s rough diamond bourse, admitted that “The issue is delicate. Even though it’s understandable that the image of a company might be very important for it, my belief is that sustaining companies in times of difficulty is a very important element for the industry. It’s the kind of action that has enabled and continues to enable many companies to have a chance of becoming stronger and getting back on healthier feet. And this kind of support is something those in our industry can witness almost every day.”

From the bourse’s point of view, Arthur Beller, president of the Antwerp Diamond Bourse, said: “From the moment it becomes necessary to inform the market, we do it. However, it’s not my place to get involved in the way the banks manage their businesses.”

“Should the situation of a company be in such despair that the commissioners are forced to transfer the case to a liquidation committee, that information is indeed eventually released to the industry,” said Willy Rotti, president of the Diamond Club of Antwerp, one of the city’s diamond exchanges. “However, the bank, as well as any private company, has a personal relationship with its clients. It can’t withdraw a loan overnight, for example. In the framework of this confidential relationship, the banker can come to consider his client riskier and ask for more guarantees or reduce his credit, but it’s only a last resort to declare him bankrupt. These are the kinds of things that must be assessed on an individual case basis. In the example of Overseas Diamonds, the bank decided to initiate the move, and at that point, the bank was already up for sale.”

What Banks Say
Pierre De Bosscher, chairman of the ADB, said that “First of all, I would like to state that ADB is not at all a good example of the perceived problem by the industry. We have internal and external auditors, credit committees and a supervisory body, the CBFA [Belgian Banking, Finance and Insurance Commission], looking after the correct application of all corporate governance rules by the management of the bank. Moreover, we financially report according to IFRS [International Financial Reporting Standards] rules, meaning that assets are marked to market. Even if we’re an entity for sale, it’s not an asset, neither for KBC, our shareholder, nor for us, to sell a subsidiary with a bad portfolio. Any buyer will do the usual due diligence anyway. It’s in the interests of all that we are a sound, responsible bank.”

Totaling up the year
Simply put, year-end sales appear to be far better than expected. Shashin Choksi of Swati Gems is quite optimistic. “The holiday season is much more positive than the most optimistic people would have dreamed just six months ago. Obviously, the figures are not comparable to the levels of 2006 or 2007, but the good news is that there have been no suicides and almost no catastrophic bankruptcies.”

Axel Beck of Beck Diamonds agreed that “The month of December was excellent. We’ve received a lot of last-minute orders. This is probably due to the fact that, in spite of the ambient frenzy around rough diamonds, we’ve decided to keep our prices steady.”

The Marketplace

• All commercial goods are moving, as a lack of goods is evident because of reduced production.
• 4-grainers in D-M, VS2+ are moving well across the board. In the same category, the G-I range is selling even better. There is a lack of goods at reasonable prices.
• 2-caraters were hot in September and October but have cooled down a little.

Article from the Rapaport Magazine - January 2010. To subscribe click here.