ABN AMRO Vs Arjav – It's About Transparency and a Sign of Things to Come

When IDEX Online first reported the story about ABN AMRO sealing Arjav's diamond inventory, many wondered why the industry’s leading lender decided to act against one of the largest diamond firms. In these sorts of cases, diamond traders would usually suspect insolvency, but no one suspects this of Arjav. In fact, the issue is not actually about whether Arjav is good for the money, but if it will agree to meet regular transparency standards; the kind any large lender has to meet. If the company had simply agreed to these standards, the case may have been averted altogether.

The important conclusion is that the diamond industry, specifically large manufacturers and diamond wholesalers, is heading toward transparency whether it likes it or not. Banks simply will no longer finance non-transparent businesses.

Communication Breakdown
Arjav, all agree, is a sound business. According to research conducted by Chaim Even-Zohar and to IDEX Online sources, Arjav had a credit facility that was agreed on in 2009, was re-negotiated in 2011, and again in 2012.

The 2011 credit facility is a $215 million credit agreement that combined two facilities – a $100 million non-secured low interest 10-year fixed-term loan provided to Ashit Mehta, Arjav's principal, and a $115 million credit providing working capital to the diamond company. Among the terms of the facility were demands that Arjav hire a chief financial officer and that it submit detailed monthly lists on all financed receivables. We understand that a CFO was not hired.

At the end of 2011, the group’s global debts were in the $800 million range, according to Even-Zohar, with a turnover of $900 million. The debts include $154 million owed to ABN AMRO, $150 million to Standard Chartered Bank, $39 million to ICICI, $17 million to the State Bank of India and $27 million to the Bank of India; a total of $387 million in Antwerp alone.

The 2012 negotiations, which ended with the goods being sealed and Arjav suing the bank, included a request for an independent business review. It seems that the continued lack of a CFO bothered ABN. A bank spokesperson, speaking on condition of anonymity, stressed that the review is not an audit. This was the main point of contention, the bank insisted on the review and Arjav refused, claiming that no other diamond firm was asked to submit to such a procedure.

Insisting on Transparency
The bank source told us that such reviews are common in the U.S. and India, and common in other industries. "It's a standard practice," he said, adding that the bank was not doing this to decrease its exposure to the diamond sector.

Over a six-month period in 2012, Arjav reduced its debt by $65 million, after the bank repeatedly requested that the diamond firm reduce its debt after a number of defaults.

ABN did not, however, give up on its demand for either a new credit agreement or a third-party business review. Eventually, after months of discussions, on December 4, Arjav received a letter with the subject line “Termination of Facilities under Credit Agreement” demanding the immediate payment of $154,103,325.

Arjav, it seems, was willing to give up on $215 million in financing, only to avert the review. Even if the company has nothing to hide – and ABN is not looking for illegal activities – the bank must wonder about the steadfast refusal. With more than $230 million in additional credit in Antwerp, other banks may also want to understand this better.

Going on the Offensive
As a counter measure, Arjav went on the offensive. It gave a series of interviews to the industry and both the Indian and Antwerp press, claiming that ABN is in the wrong. It also sent a few reporters copies of its lawsuit against the bank. It completely ignored the demand for transparency; a basic and growing request from the global diamond industry.

Some reporters may feel misled on learning of the real background to ABN's decision. Our ABN source said, "This is slander." The forex claim for which Arjav is suing ABN in Antwerp is an old case they are pulling only now, he added.

It’s A Test Case
"All we asked for is more transparency," the ABN spokesperson said. To him, it's a simple matter. The banking world has changed in the decade since 9/11, and the minimum level of disclosure is much higher today than it was back then.

More diamond companies will have to be aware of this need for increased disclosure, especially global groups with multiple entities in different countries and large credit facilities. Things are set to change.

This is no cautionary tale; this is the real thing. If the industry’s leading bank is willing to close such a major account, clearly smaller firms should take note. This cannot be stated more clearly: Independent business reviews will become a standard component of future credit agreements.

If a major diamond company is willing to forgo a major source of financing just to avoid a review, maybe it's not reading their diamond financing road map right. The requirement for greater transparency is here.

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