Scottish beef company gets secret loan from secret Cayman company
By David Montgomery From Argus Leader
Desperate Aberdeen beef plant took $30M loan at 29% interest in
In March 2010, the once-promising Northern Beef Packers plant in Aberdeen was in trouble. The multi-million project was only partially completed, out of money and in danger of collapse.
The rescue came from a mysterious corner. A company called “Epoch Star Limited” offered to loan $30 million to Northern Beef to complete the plant.
But Epoch Star wasn’t a bank. Instead, it was a company, incorporated in the British Virgin Islands, “solely for the purposes of providing a one-time lending facility of foreign investors to Northern Beef,” in the words of Northern Beef attorney Rory King of Aberdeen.
Epoch Star, in turn, was wholly owned by another company, the Cayman Islands-incorporated Pine Street Special Opportunity Fund I. And both Epoch Star and Pine Street were run by a professional fund manager corporation called Anvil Asia Partners, also incorporated in the Cayman Islands but based out of Hong Kong.
The investors in Epoch Star and Pine Street were and remain secret. All that was disclosed to the public was that there were fewer than 10, and that none were a bank, financial institution, or “in the sole business of lending money.”
But South Dakota law imposed taxes and regulations on lending institutions. To avoid that, Epoch Star and Northern Beef asked South Dakota’s banking commission to rule that “Epoch does not engage in the business of lending money as contemplated” under South Dakota law, and thus was not subject to those laws.
In July 2010, the commission voted 4-0 to grant Epoch Star’s request.
“That’s as firm as we can get,” commissioner John Lillibridge of Burke said, according to a Mitchell Daily Republic report on the meeting.
The loan was “short-term” and carried a high rate of interest — 29 percent, according to a lawsuit filed by Joop Bollen, a figure closely connected to the financing of Northern Beef.
This high rate was justified, a leader with Anvil Asia Partners wrote in an affidavit, because of the risk.
“If the NBP business fails or is jeopardized before Epoch can be paid … Epoch will have extraordinary difficulty recovering its investment,” wrote Wai Yee Christine Ma, a Hong Kong-based director of AAP. “While Epoch’s loan will be secured by the real property and personal property assets of NBP, it is unlikely the collateral could be sold for any purpose other than as a beef plant. If the plant has already failed for some reason, the prospects that Epoch would substantially realize on its collateral would be dim. Thus, Epoch’s interest rate on its loan matches this extraordinarily high rate of risk.”
Another reason Northern Beef sought the loan was to protect its existing investors from losing everything. The plant had received funding from 69 Koreans under the federal EB-5 visa program, where foreigners can receive green cards by investing at least $500,000 into American businesses.
“Due to unforeseen difficulties in the banking industry and the loss of previously committed financing, the project was halted, thereby jeopardizing the current EB-5 investors’ immigration status,” King wrote in an email to Roger Novotny, director of the South Dakota Division of Banking at the time.
Epoch Star, King wrote, was created to loan money “for the purposes of bailing out the current EB-5 investors … of Northern Beef Packers, LP and to establish an operational beef packing facility.”
Because its purpose was “bringing Northern Beef Packers, LP to operational status,” King argued, the loan from Epoch Star did not “require Epoch Star Limited to obtain a money-lending license” or pay banking taxes.
Nor, the Banking Commission found, was Epoch Star “in the business of making mortgage loans as a mortgage lender” even though its loan was secured by Northern Beef’s facility.
Had the Banking Commission ruled Epoch Star was subject to banking laws, it would have been required to apply for a money-lending license. That process typically takes several weeks, said Bret Afdahl, current director of the Division of Banking.
The licensing process also includes a $1,000 fee and requires the posting of a $10,000 surety bond.
Applying for a license would also mean the Division of Banking would examine financial documents to determine whether to approve the license. Afdahl said the department might look at any one who owns 10 percent or more of a company seeking such a license.
“Generally, we’re going to look at a financial statement of who the lending company is, to make sure they’re above water and solvent,” Afdahl said.
Lenders also have to pay South Dakota’s bank franchise tax. That’s 6 percent per year on net income for companies with income below $400 million. If Epoch Star had had to pay that tax on a full $30 million loan, it would have owed hundreds of thousands of dollars per year to the state with a 29 percent interest rate.
Afdahl said the department or commission typically has to rule several times a year about whether a company is “in the business of lending money.” Every situation, he said, is a little different.
But even with approval from the Banking Commission, the Epoch Star loan went away quickly.
After an initial loan of $3 million was made from Epoch Star to Northern Beef, the packing plant used $35 million invested by 70 wealthy Chinese citizens to purchase Epoch Star, along with the loan.
The loan from the Chinese investors was a mere 3.5 percent, far less than the Epoch rate.
“We began with them,” said David Palmer, the CEO of Northern Beef, in a September bankruptcy hearing for the company. “And at a point in time the cost of their loan was determined to be much higher than using the (Chinese investor) funds. And so we … bought Epic and went directly to their funds.”
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