This is going to be fun

Asil Nadir is back!

I don\’t even know what the charges are against him let alone whether he did any of the things alleged so I\’ll not pass comment on any of that.

What was fun though was what was going on in Polly Peck. It was all entirely legal even if a tad misleading.

The company would lend money to citrus growers so that they could afford to tend their crop. Then when the crop was picked Polly Peck would buy it, box it and ship it. The profits on this were ginormous and no one was really sure how they were being made.

Cue much speculation about dodgy business.

What was actually happening was that the loans were being made in Turkish Lira. At the time this was a very high inflation currency (over 50% I seem to recall) with similarly high interest rates. The loans carried these high interest rates. So, you\’re lending out money, you\’re receiving 50% or more in interest on the loans, excellent, that\’s a profit, book it to the P&L.

Massive profits!

But of course, a currency which is undergoing high inflation will, likely as not (certainly, over time it will, even if not each and every day or week) be depreciating. In theory it should depreciate according to how high the inflation is. Not quite, but roughly, you\’d expect 50% inflation to lead to a 50% depreciation against a currency that had no inflation. So while you\’ve got a huge profit you can book on the interest, you also have a huge loss somewhere on the currency.

You can book this to the P&L, indeed there are arguments that perhaps you should, but it wasn\’t a legal requirement that you did so. So, Polly Peck didn\’t. They wrote off such losses against the reserves, bypassing the P&L altogether.

One of those times when Ritchie\’s moanings about the economic substance of transactions in accounting having a real point. Pointing to the profit and very much not pointing to the associated losses. Quite possibly misleading but not illegal.

PP was borrowing in strong currencies (I seem to recall Swiss Franc bond issues, not sure) to lend out in that rapidly depreciating Turkish Lira, booking the high profits, writing off the currency losses and that\’s what made the machine work. It all fell over in the end, of course, the clue being that a company which was reporting such huge profits having an insatiable need for more borrowings.

I will admit to laughing when it was explained to me (Private Eye I think) how simply it was all done. One of the reasons it wasn\’t spotted earlier was that The City, the respectable part of it, assumed that there was something dodgy about the whole thing and therefore both didn\’t purchase the shares and didn\’t lend money and therefore didn\’t have teams of analysts going over the company books. All the information was there in the accounts, as it had to be, it simply required a close reading to grasp what was going on.

It was very much a small shareholder\’s stock: some of whom made substantial fortunes as it went from pennies to £32 (including stock splits etc) and of course many more who made substantial losses as the shares crashed back to ground again.