Wind Telecom and the largest capital drain in Greek financial history

Among the nine Greece-related companies that used the tax-avoidance schemes devised by PwC is Weather Investments which, in 2010, controlled Wind, the telecoms company. It’s a unique case since, because of a legal clash, it allows us to go back in time and unravel a story of financial misdeeds concerning billions of euros.

By Costas Efimeros

Wind Luxleaks

Wind Luxleaks

The financial ‘thriller’ we are about to describe below is more ominous given the absolute silence of the Greek media – in spite of the availability of ample evidence – until the Luxembourg Leaks revelations, published by the International Consortium of Investigative Journalists (ICIJ). This silence becomes even more suspect if we factor in that private investors, including Greek banks, incurred losses amounting to hundreds of millions of euros.

Although international media such as the New York Times , Telegraph and Wall Street Journal had already published certain aspects of the scandal from 2010 to 2014, the one and only, albeit excellent, report by Haris Karanikas (Link in Greek) in the Greek media was in Ta Nea daily news site, just a few days after the LUXLEAKS report was made public. TPPI is basing its narrative of events which began in 2005 on this article.

In the 2010 NYT story, Bertrand des Pallières, the chief executive of SPQR Capital, a London investment firm, and one of the larger bondholders in Wind Hellas, says that the Greek company company ran aground because of the decision by Apax and T.P.G. to heap debt onto it while simultaneously extracting so much cash. “There are private equity funds that get rich by breaking companies and making others poor — whether they are creditors, states or employees.”

‘Trojan Horse’

In a complaint filed against TPG and Apax in 2014 in a bankruptcy court in the USA, the liquidators said : “In the light of day, however, ‘Project Troy’ and ‘Project Helen’ [the codenames used for the funds purchases] can be seen for what they were — a state-of-the-art Trojan Horse designed to financially infiltrate TIM Hellas and Q-Telecom and then systematically pillage their assets from within by piling on debt in order to make large distributions to the equity owners,” the complaint said. “All the while, and even after the company had been left insolvent, TPG and Apax shamelessly collected millions of euros from the company in ‘consulting fees’ and for ‘business advisory services.’”

In early 2005, two of the world’s largest funds,  the Texas Pacific Group (TPG) and APAX. buy up Hellas II, the parent company of TIM (renamed Wind in 2009). The purchase cost the two funds roughly €390 million.

During that time, this company had loans worth around €1 billion. Within two years the two funds organised, with the help of KPMG (another auditing company  which, along with PwC, belongs to the so-called Big Four), the largest known capital drain in Greek history worth €1.8 bln, using a legal financial tool known as ‘Convertible Preferred Equity Certificates’ (CPECs).

CPECs comprise of hybrid financial tools for cross-border investments, which, simply put, mean that they are legal tax avoidance mechanisms. They were created in Luxembourg in particular to allow the transfer of capital from US companies to the favourable tax jurisdiction of the Grand Duchy.

The thinking is quite simple actually: The profits of multinational businesses are treated as debt issued by a subsidiary based in Luxembourg. While the Grand Duchy’s financial authorities acknowledge those profit as debt (and therefore do not tax them), when in the US, the parent companies do not and treat it as capital.

Under normal circumstances, the CPECs allow the sharing of profits and they are not to be cashed in. In the case of TIM something different occured.

In December 2006, the value of CPECs had rocketed up from €1 to €36. TPG and APAX made a bond redemption request and managed to get the permission of financial authorities in Luxembourg.

From the redemption, the funds managed to drain €1 bln away from the company, which they had bought for only €390 million. The price of the CPECs immediately dropped back to €1. The result was huge losses for the shareholders of TIM, including at least two Greek banks, which  had invested €24 million for securities whose value became zero.

Apart from the €1 billion in profits, TPG and APAX managed, within two years, to accumulate a further €800 million from the sale of TIM to Egyptian businessman Naguib Sawiris and Weather Investments.

Weather Investments takes the reins

A year before the drain, Sawiris had made an offer to acquire TIM and Q Telecoms for €350 million. However, while the Greek media presented the proposal by the businessman in triumphant fashion, the company took out a new loan of €500 million. The telecoms company’s total debt by the end of 2006 had shot to €3 billion – 20 times more than it was two years earlier, before the funds showed an interest in buying it.

In February 2007, Weather Investments purchased TIM by depositing €500 million and guaranteeing the company’s loans worth €2.9 billion. Six months later, the company’s balance sheet for 2006 was published and, for the first time, the drain of its capital became official. The losses incurred from the redemption of the CPECs amounted to €951 million.

In October 2007, Weather Investments also bought out the state-owned company Tellas (owned by PPC, Greece’s Public Power Corporation) for €175 million.

The Greek media outlets were, again, triumphant in their coverage but failed to report on the company’s spectacular losses. Again, small shareholders had a different view, noting that the absorption of Tellas created a huge liquidity problem for the company, which further deteriorated its position. What is impressive is that, this time, again, despite the internal disagreements nothing came out.

Project Mist

In 2009, Wind was ready to collapse and Weather Investments decided to make a proposal to restructure its debt. The programme was called ‘Project Mist’ and included the transfer of the company’s headquarters from Luxembourg to Britain with which it came to an Advanced Tax Agreement (ATA). The deal included the non-taxation of the transfer of Wind’s assets. Sawiris came to an agreement with Wind’s biggest creditors and rebought the restructured company, leaving out smaller investors who incurred huge losses – recently estimated at €400 million.

And this is where LuxLeaks comes in to add the final – shocking –  piece to the puzzle. PwC undertook the creation of a complex tax structure with which the company’s headquarters was transferred back to Luxembourg – again tax free, not just for Wind but for its Arab owners as well.

The ‘legal’ game that was played was criminal. Luxembourg’s financial authorities first gave the green light for the exploitation of the CPEC’s and the draining of the company. Then they gave the green light for the restructuring of its debt through non-taxation of the transfer of the company’s headquarters to London (which cost small shareholders millions) and then it gave the green light for the company’s return to Luxembourg, again without getting taxed.

Finally, in December 2010, Sawiris was forced to leave Wind even though he again made an offer to rebuy it from the creditors.

The damage to Greece

According to official figures, TIM / Wind paid the Greek state €384.85 million annually in tax until 2004. From the moment it came under the control of the funds and KPMG handled its tax affairs, the state’s revenues dropped to €11.5 million per year. Matters were made even worse from 2008 up until 2011 when Weather Investments took control and, with the help of PwC, the taxes paid did not exceed €4.8 million per year.

KPMG and PwC, two of the world’s four largest tax consulting companies, devised the mechanisms that allowed the legal tax avoidance of Wind and Q Telecoms. The Greek state is losing a total of €50 million which should be entering its coffers every year. Instead, it is getting close to zero.

You would be wrong to imagine that these are the only two diabolical tax consulting companies.In the case of tax avoidance it’s good to generalise.

According to court documents from the cases filed by investors, who lost millions of euros and now are seeking compensation at the US bankruptcy court, Morgan Stanley is also involved – as the company that advised Wind to delay its restructuring until it got new loans – as well as Ernst & Young, which is accused of conflict of interest – as It was tasked with auditing the company from 2005 to 2007 and also undertook the restructuring of its debt in 2009.

Wind’s small-time investors that are now seeking compensation claim that the games played by tax consulting firms have irreparably damaged the company. The reasoning is that the other telecoms companies were not that affected by the financial crisis also because of the total rise in the fortunes of the sector.

The omerta and the ridiculous rebuttal by Wind

After the ICIJ revelations, none of the Greek media presented the huge scandal of Winds’ tax evasion and the draining of its capital. Perhaps the people in charge at the company thought they could refute their involvement in the Luxembourg files with inaccurate reports that didn’t mention the gist of the story. Wind’s response to LuxLeaks said: “Wind has nothing to do with Weather Investments. From 2009, Wind’s shareholders are international investment funds and its parent company is Largo Limited. Wind Hellas was and is a Greek company. It was established in Greece and maintains its headquarters there since 1992, paying its taxes under Greek law on its total revenue.”

The question whether Wind is linked to Weather Investments does not merit an answer. The date of the announcement is also wrong. The exit of the Arab businessman occurred in December 2010 and the new management undertook duties from 2011. The fact that Wind is a Greek company means nothing if its parent company keeps changing headquarters. As for the taxes stipulated in Greek law… we recommend they better read the LuxLeaks file.

Tags: pwc, wind, Weather Investments, LUXLEAKS, Convertible Preferred Equity Certificates, CPEC, TIM Hellas, Q-Telecom, Naguib Sawiris, Project Mist