MKW Capital Management, an international private-equity fund, is preparing to fire a fresh salvo against the Macau government for losses suffered due to the sudden grounding of budget carrier Viva Macau Airlines four years ago.
The fund, which is backed by US investors, will press compensation claims for what it says is a US$200 million loss in equity valuation caused by Macau’s sudden revocation of the sub-concession permit of Viva Macau in 2010. The damages claim will be pushed anew through the diplomatic channel after Macau’s top court failed to provide relief last year to the collapsed airline.
Among the several entities drawn into the battle, not surprisingly, are the US Consulate General for Hong Kong & Macau and some US academics.
“We have been following developments in the Viva Macau case closely. We are in touch with both company representatives and the Macau government on this matter,” Scott Robinson, spokesman for the US Consulate General for Hong Kong & Macau, told the Hong Kong Economic Journal’s EJ Insight.
“Our representatives have observed past proceedings in this case, and we have raised the matter at senior levels of the Macau government,” Robinson said in an emailed reply. “We have repeatedly stressed, both publicly and in our discussions with government officials in Macau, the importance of timely, transparent, and fair judicial decisions to ensure that Macau remains an attractive place for US and other foreign investment, and we will continue to do so.”
Last month, Harvard Business School professor Dante Roscini and Asia Pacific Research Center assistant director G.A. Donovan jointly published a case study report to flag concerns over the Viva Macau case.
The failure of Viva Macau’s attempts to obtain relief through the courts over the last few years left MKW with few options, the report said. There was no international arbitration clause in Viva Macau’s sub-concession agreement. Getting the case before an international arbitration body such as the United Nations’ International Centre for Settlement of Investment Disputes was also highly unlikely as the US did not have a bilateral investment treaty with either China or Macau, it said.
MKW Capital’s last hope was for the US government to take up the Viva Macau case through diplomatic channels, the report said.
In fact, it’s not the first time that MKW has sought the government’s help to resolve the problem. In April 2010, the private-equity fund reached out to the US Consulate General in Hong Kong and began working on the case with the US State Department and Members of Congress in the summer that year.
Members of the US Congress House Foreign Affairs Committee and Senate Foreign Relations Committee wrote letters to the State Department, saying that the case was a “troubling demonstration of how the Macau Government treats foreign investors”.
However, MKW did not push forward the diplomatic fight as it believed it can win in the courts, which turned out to be a false hope eventually. After spending millions of dollars in Macau’s courts over the last few years, the fund failed to get a ruling in its favor.
As former US Consul General to Hong Kong Stephen Young, US Ambassador to China Gary Locke and Secretary of State Hillary Clinton, who were following the case, have left their positions over the past one year, MKW decided to restart another diplomatic campaign to put pressure on Macau Chief Executive Fernando Chui, who will probably seek another term this year, said a source close to MKW, who did not wish to be named.
MKW plans to seek compensation of up to US$200 million, which is equivalent to Viva Macau’s equity valuation estimated by a group of investors in early 2010, the source said.
A spokesperson for the Macau government, reiterating a statement published on April 3, 2010, said the decision to revoke Viva Macau’s license is lawful as the airline was financially unqualified to continue its operations. It said it has no further comment.
The American Chamber of Commerce in Macau declined to comment on the Viva Macau case.
The whole story began with the issue of sub-concession licenses by Air Macau in 2005 to three low-cost carriers, including Viva Macau, a 75 percent-owned unit of MKW, which was controlled by the airline’s chief executive Reginald Macdonald and partners including Kevin Mckenzie and James Wolf.
The other two carriers that won the licenses – Macau Asia Express and Golden Dragon Airlines – did not launch their services. Macau Asia Express, owned by Air Macau, Shun Tak Holdings Ltd. (00242.HK) and the delisted China National Aviation Co. Ltd, reportedly closed down in 2007. Golden Dragon Airlines, 80 percent-owned by gaming mogul Stanley Ho, also did not take off.
Viva Macau was backed by William Ho, the late brother of Macau’s first Chief Executive Edmund Ho. William also brought in Ngan In-leng, a well-known businessman and leader of Fujianese community in the gaming city. Ngan was then appointed Viva Macau’s chairman. The company began operations in 2006 and managed to overcome the challenge of high oil prices between 2007 and 2008.
However, the carrier faced financial difficulty after the 2008 global crisis and was then granted a US$25 million loan by the government. In early 2009, Kelvin Ho, son of William Ho and an executive director of Viva Macau, told media that the airline could go bankrupt by the end of that year and render 300 staff jobless.
Although the airline saw some improvement in operations in late 2009, it fell into deep trouble due to a fuel dispute with supplier Nam Kwong Group Co. Ltd. on March 26, 2010. Viva Macau said it had pre-paid US$180,000 for fuel deliveries over the coming weekend but the fuel company said it could not deliver the fuel unless it received a letter from Viva Macau chairman Ngan.
The disruption caused cancellation of many flights in the following two days. On March 28, Viva Macau received a notice from Macau Civil Aviation Authority that its sub-concession license has been terminated. Between March 28 and April 1, it cancelled 33 flights, affecting 4,700 passengers.
The revocation of Viva Macau’s license was mainly caused by the company’s deteriorating financial situation, instead of any undercover action that is aimed to favor some other parties, Camoes Tam, an assistant professor in the faculty of humanities and arts at the Macau University of Science and Technology, said in a phone interview.
Ngan’s declining political influence, caused by the stepping down of Edmund Ho from his Chief Executive post at the end of 2009, was a catalyst for the government to revoke the license in March 2010, Tam said. Given the intensifying competition from rivals operating out of the Hong Kong International Airport’s Terminal 2, which commenced operations in 2007, it is reasonable and legally tenable for the Macau government, Viva Macau’s creditor, to reach a decision to stem the losses, he said.
It will be not an easy road for MKW to seek compensation through the diplomatic channel as the US government may not want to ruin its relationship with Beijing for this small deal at a time when Washington enjoys huge tax revenues from the three US gaming license holders in Macau, Tam said. US Congressmen who are receiving political donations from the three casino operators, namely Wynn Macau Ltd. (01128.HK), Sands China Ltd. (01928.HK) and MGM China Holdings Ltd. (02282.HK), may also not want to offer help to MKW, he said.
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