Companies that supplied the failed Italian dairy giant Parmalat on letter of credit (L/C) terms may be confident that they will be paid. However, according to an Italian legal expert, even suppliers with L/Cs should be slightly circumspect about whether payment is a certainty.

Meanwhile the picture regarding banks' L/C exposure to Parmalat is beginning to emerge.

Administration

Parmalat filed for bankruptcy in late December 2003 after a EUR 4 billion hole was revealed in its accounts.

Since the Italian government passed an emergency law two days before Christmas, the company has been in a kind of administration similar to the US' Chapter 11, under which the dairy giant is protected from moves by creditors to secure payment while its administrators try to formulate a rescue package.

Supplier confidence

At least one supplier however is reported to be confident that L/C-backed deals will be honoured. "The money that Parmalat owes us is secured," a spokesman for Arla Food ingredients, Louis Honore, is quoted as telling a specialist food trade journal.

According to Food Navigator, Arla apparently used some combination of irrevocable L/Cs and credit insurance in its dealings with the dairy company and under these agreements Honore is quoted as saying "we will definitely get the money."

Legal questions

The same food journal also says it sought the opinion of an Italian lawyer regarding the Arla spokesman's surmise.

"The irrevocable L/Cs and insurance are in principle safe because there is a third party who guarantees for them," Andrea Bucci, is quoted as saying. The lawyer at bankruptcy specialists, Studio Legale Bucci reportedly went on to caution that "it is not quite sure," and that "it depends on the developments of the situation."

Not watertight

If the administrators fail to come up with a rescue package and Parmalat remains insolvent, then legal experts argue that under Italian law, no contract will be watertight.

Bucci apparently told Food Navigator that under Italian law, no particular kind of guaranteed payment takes precedent over ordinary payments.

Bank exposure

A clear picture of banks' L/C exposure to Parmalat has yet to be revealed. The Bank of America however has said its exposure to the failed company totalled US$274 million at the end of 2003.

The US' third largest bank said in a regulatory filing that its direct loans and L/Cs to Parmalat totalled US$244 million, while derivative exposure amounted to US$30 million.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.