Krono Partners administration report: £4 million of investors’ money depends mostly on a “Company X” in the Cayman Islands

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Last week the administrators of Krono Partners PLC, top-10 accountancy firm Smith & Williamson, published their initial report into the company.

Smith & Williamson was appointed as administrators after Krono Partners stopped paying interest on its bonds in March 2018. This was apparently due to bank accounts operated by Jade State Wealth, a subsidiary of Krono’s escrow partner Accounting Worx Limited, being frozen.

Why Krono Partners has been unable to find another payment administrator, if this was the only thing preventing it from making payments, and has had to undertake the dramatic (and expensive) step of going into administration, is not addressed by the administrators.

Who are Krono Partners?

Krono Partners invested in a range of investments via a company registered in Nevis (a small island in the West Indies) known as Krono Capital SA (or KC), to which investors’ money was loaned. KC is described as an “investment partner” by the administrators.

The initial management of Krono Partners at its incorporation in 2013 were Ivan Rosenschein (Managing Director), Glenn Teller (director), Ulrik Debo (Consultant Advisor), Rune Vind (Consultant Advisor) and Lenka Kalkovska-Vind (Head of Administration).

Glenn Teller left Krono in 2015 due to being abroad and not being able to devote enough time to the company.

Ivan Rosenschein left in 2016 as he had a business opportunity which required him to resign from all other companies. Rosenschein is currently working as a publicist for Danish actors and artists.

Vind and Kalkovska-Vind left also left in 2016 for “personal reasons”.

When Rosenschein left Krono, management discussed whether to wind up the company and repay bondholders early, or keep it running. They decided to keep it running and Rene Lauritsen, a partner of KC, was appointed sole director, with the entire share capital of Krono Partners transferred to him. How much Lauritsen paid to acquire the share capital of Krono Partners is not known.

In 2017 Krono’s investments were transferred from KC to Krono Partners, since when it has held investments directly rather than via the Nevis company.

Statement of Affairs

The administrator has identified a total of just over £4 million owing to creditors. This does not include the costs that Smith & Williamson will charge for the administration, which stand first in the queue. (Smith & Williamson’s fee basis has not yet been agreed with the creditors’ committee.)

The administrators’ Statement of Affairs contain a list of assets, provided by Krono’s directors, which have a total “Estimated to Realise” value of £5.7 million. The total amount used to purchase these assets (“Book Value”) were, according to the same table, just under £8 million. However, despite Krono Partners managing to lose c. 30% of its money in a 9-year bull market, it still apparently has £5.7 million to cover the total creditor claims of £4 million.

So, everything is fine and creditors can get paid as soon as Krono Partners has managed to find itself a working bank account. Right? Maybe. The administrators are at pains to point out that the list of assets comes from Lauritsen.

[6.1] We make the following observations:

* the estimated realisations are those of the director, creditors should be aware of the speculative nature of the investments

The administrators go on to say that despite the Statement of Affairs showing a surplus of assets over liabilities, the value of the assets is too uncertain to confirm whether investors are likely to get their money back.

[9] Estimated outcome for creditors

The joint administrators are not currently in a position to provide an assessment of the likely outcome for unsecured creditors given the uncertain nature of the Company’s investments.

Krono investors are being kept almost entirely in the dark as to what these investments actually are.

[7.1] We have not revealed the names of any of the entities in which the Company holds equity or debt investments or its joint venture partner in relation to ETNs [Exchange Traded Notes] as we consider this information to be commercially sensitive at this stage.

The assets of Krono Partners are listed in the administrators’ report as follows:

  • Listed shares: 42,500,000 shares in an unnamed US listed company, described as “restricted” due to the high proportion of shares owned by Krono. The administrators are working to obtain a share certificate for this shareholding; the first was lost in the post by the courier.
  • Unlisted shares: Krono has “a significant level of shares” in two unlisted entities (both in the US) referred to as Company A and Company B. Both are supposedly to be listed on stock exchanges (in the US and Canada respectively) within the next six months.
  • Micro loans: three micro loans totalling £532,608, one to the listed company mentioned above, and the other two to companies not already mentioned. The value of these loans has been written down to £398,493 by Lauritsen.
  • Other debtors: £85,000 from the realisation of an equity investment, which the administrators have since received.
  • ETNs: Krono has invested in an Exchange Traded Note platform run by “Company X”, a company registered in the Cayman Islands. In return, every time a company raises funds using Company X’s platform, Krono is entitled to a percentage of funds raised. None of these ETNs have concluded at the time of the administrator’s report (which means that Krono hasn’t yet seen any money from this investment), but 10 such fundraisings are reported to be in progress on this platform. Krono’s anticipated cut of these fundraisings accounts for £4.5 million of the £5.7 million anticipated by the director to be available to pay creditors, by far the largest part.
  • £93,289 in cash (which the administrators are trying to release to the administration estate account).
  • $49,729 in a share trading account with Interactive Brokers inc.

So in summary, whether there is actually enough money to pay investors depends largely on whether the anticipated returns materialise from Krono Partners’ investment in “Company X”.

This in turn depends on whether Company X is successful in raising corporate finance on its ETN platform on behalf of other companies, so that Krono gets its cut.

Whether these returns materialise will perhaps become clearer in the next administrator’s report. This will be due seven months after the start of the administration, i.e. April 2019.

Ulrik Debo, Krono Partners’ “Consultant Advisor” since inception, is also a partner in “Company X”. How this obvious potential conflict of interest was managed is not discussed in the administrator’s report.

Where did the £8 million come from?

As mentioned above, the list of assets provided by the director claims that £8 million was invested in the assets now owned by Krono (the book value column), which are now estimated to be worth £5.7 million (the estimated to realise column).

However, Krono Partners only raised a total of just over £4 million from its bonds – £3.5 million from its “Distressed Asset Bonds” lauched in 2013, and half a million from its “Micro Loans Bonds” launched in 2016. Where did the other £4 million come from? There’s no indication either in the list of creditors or in the list of shareholders.

Krono Partners PLC’s accounts filed to date (up to June 2016) contain no indication that it previously possessed £8 million in assets.

Another one for the administrators to clear up in due course.

Distressed property

Hang on a sec. Wasn’t Krono Partners supposed to invest in distressed properties, do them up, de-distress them, and sell them on to generate returns for bondholders? Its original bonds were even named “Distressed Asset Bonds”, from which the large majority of investors’ money came from (£3.5 million of £4 million). Why is almost all the money now in unnamed US companies and ETN platforms in the Cayman Islands?

According to the administrators, while Krono Partners management initially identified some distressed properties, and went so far as to have contracts in place, they realised that it would take 12 to 18 months to realise a return from these properties. This meant it would take too long to generate a return to meet its regular payments to bondholders.

One would think that Krono’s management should have spotted the screaming misalignment between their debt structure and their proposed project before they took money from investors and started trading, not afterwards.

It shouldn’t take an ICAEW member to see that if you propose to raise money from bondholders in exchange for bonds paying regular interest back to them, then either 1) You should have a project which is likely to generate continuous earnings from which interest can be paid. Or 2) If earnings will only be generated at the end of the project (i.e. when the distressed asset is sold), then bonds which roll interest up and pay interest at the end of the term would make more sense.

Perhaps former MD Roscenschein was better suited to promoting the shining stars of Scandi drama than the tedious business of corporate finance all along.

Anyway, this is now ancient history. While Krono Partners apparently invested in a few entities relating to property development at some point, the administrators note that none of the current assets of Krono Partners are property-related.

2014 FCA investigation

Another interesting fact to emerge from S&W’s report is that Krono Partners was investigated by the FCA in 2014, shortly after launch. The FCA reviewed the company and took no further action.

The Company was contacted by the FCA in 2014 which undertook a review of the Company and its products. The Company instructed Peters and Peters, a firm of solicitors, to help with the FCA review. After 4 months, the FCA closed its case and confirmed the Company could continue its business.

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