Exclusive: GAM whistle blower concerns focused on bonds sold by metals tycoon

April 28, 2019

By Tom Bergin

LONDON (Reuters) – A whistle blower at Swiss asset manager GAM Holding AG who alerted UK financial regulators last year did so over concerns about the purchase of more than half a billion pounds of bonds from commodities tycoon Sanjeev Gupta, according to two people familiar with the matter.

The bonds related to a biodiesel-fueled power generating business, the people familiar with the matter said. But the employee who brought his concerns to regulators believed the operation was unlikely to make enough money to repay the bonds partly because of the high cost of the fuel it planned to use, these people said. A Reuters analysis of corporate filings, regulatory documents and market data supports that view.

UK-based GAM fund manager Tim Haywood paid more than 550 million pounds in 2017 for the bonds that were due to repay about 1 billion pounds over 20 years, according to the people familiar with the matter and corporate filings.

But the assets backing the bonds were generators and related equipment installed at a cost of around 22 million pounds, corporate accounts show. Those generators have largely sat idle for two years, according to public company accounts and Ofgem data.

GAM has previously publicly said it suspended and then dismissed Haywood following an internal whistle blower alerting UK regulator the Financial Conduct Authority, but the company has not disclosed which securities it related to or what the concerns were. The details of the bonds, including how much GAM paid and the underlying business, also haven’t previously been reported.

GAM has seen a more than billion-dollar drop in its stock market capitalization and placed restrictions on client withdrawals following a wave of redemption requests.

Gupta, an Indian-born British national, is executive chairman of GFG Alliance, which manages the industrial, finance and metals investments of the Gupta family. GFG, which encompasses the company that sold the bonds, said both the company and Gupta declined to comment.

Haywood, via a spokesman, said he disputed GAM’s allegations of gross misconduct, is appealing his dismissal to GAM and that he looked forward to clearing his name.


The business model behind the bonds was to generate electricity from biodiesel that would qualify for UK government-issued green energy credits, according to company filings. The proceeds from selling the green energy credits would be used to repay the purchaser of the bonds.

It was a novel plan. No other company was commercially generating electricity from biodiesel, according to industry specialists and data from the UK’s power regulator, known as Ofgem.

Reuters’ analysis is based on benchmark figures from published market data, equipment manufacturers and regulatory information, which it confirmed with at least four industry experts. They said the cost of biodiesel and the sale price of power can vary over time but said the business model was unlikely to be break even due to the high cost of the fuel, let alone generate sufficient profits to repay the bond holder.

“Diesel generation is not very common because it’s expensive. Given that biodiesel is even more expensive than diesel, it’s not really something that has been used,” said Prashant Vaze, Head of Policy at advisory group Climate Bonds Initiative.

GFG named the bond plan Project LRB, or “Little Red Boxes,” a reference to the red-painted steel shipping containers that held the generators, according to one of the people familiar with the matter. These had been installed at its factories in Wales, Scotland and Northern England in 2016 and 2017.

GFG planned to run the generators on hydrotreated vegetable Oil or HVO, the person added; Ofgem data shows the generators did a short run with HVO.

HVO is an expensive way to produce power, say industry specialists. GFG would have to spend around 180 pounds or more on fuel to generate each Megawatt hour unit of power, or MWh, according to a Reuters analysis of data from fuel retailers, Ofgem and generator manufacturers.

Gupta’s generator business could potentially have sold power for as much as about 80 pounds per MWh by selling directly to a commercial customer if they found one willing to accommodate a generator on site, said Diane Dowdell, of energy consultant Ganninon Ltd. Gupta’s generator business could also have sold power wholesale to the grid, but that price would be lower, according to Ofgem data.

Another potential source of revenue for Gupta was the green energy credits, called Renewable Obligation Certificates or ROCs, that the UK government issues to companies that generate power from renewable sources. Gupta’s biodiesel-fuelled power business could have sold these to electricity retailers on the market for about 64 pounds per MWh, according to data from regulator Ofgem.

Based on this analysis, Gupta’s operation would face losses of at least 35 pounds for every MWh produced even if the power was sold to commercial clients and credits were sold.


GAM announced Haywood’s dismissal in February, saying he didn’t comply with due diligence procedures and had signed certain contracts by himself where internal policies required two signatures, but it hasn’t specified the transactions that led to his dismissal.

The FCA, the regulator, declined to comment on which individuals, companies or assets it might be investigating.

U.S. investment bank Morgan Stanley acted as placement agent of the bonds. UK-based financing group Greensill Capital structured the notes, according to filings with the Luxembourg corporate registry. Both companies declined to comment.

Last week, GAM announced that GFG Alliance had agreed to repurchase the remaining assets in Haywood’s funds at the valuation at which they were purchased, without elaborating why.

Those assets were the biodiesel business bonds, known as Liberty Industries PPA Ltd. bonds, that GAM purchased almost two years earlier, according to people familiar with the matter.

The bond repayments were made with Gupta funding payments from other companies that fall under the GFG group, as he is allowed to do under the terms of the bonds, the two people familiar with the matter said.

GFG is now examining ways to allow the generators to operate profitably, according to Kerry McDonald, general manager of the Liberty Aluminium plant in Scotland.

Walking across a yard where eleven of the red containers sit silently, McDonald said the group was looking at using less expensive biofuels and selling waste heat to commercial clients.

“You can produce a cheaper fuel using waste from animal processing” he said.

(Editing by Cassell Bryan-Low)

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