(Bloomberg) -- CPI Property Group bonds rose after lawyers hired by the company cleared it of allegations from short seller Muddy Waters that majority shareholder Radovan Vitek unduly benefited from deals with the Czech real estate operator.
The review by White & Case uncovered no evidence that CPI Property exerted undue influence over valuation experts or that management acted to the detriment of the business or its bondholders, CPI Property said in a statement Friday. The law firm, hired by the company’s board in the wake of the Muddy Waters criticism, interviewed employees and reviewed documents and data, according to its report.
White & Case did find instances where the company’s corporate governance can be improved, CPI Property said. In response, it’s working to deploy a know-your-customer tool and is appointing a group compliance officer as an “initial step.”
“While focusing on the implementation of the additional recommendations, the group -– following the assessment of White & Case -– will cease any further investigative activities and consider this matter closed,” the company said.
CPI Property’s 3.75% perpetual notes were set for a record gain, surging 10.5 cents on the euro to 67.9 cents, according to data compiled by Bloomberg. Bonds due in May 2029 also rose 1.5 cents on the euro to 100.6 cents.
Carson Block’s Muddy Waters unveiled a short position in the landlord’s bonds in November, sending the securities sinking. Since then the short seller has published a series of reports honing in on transactions between CPI Property and its billionaire owner as well as the valuation of its property portfolio. The company has said the allegations are unfounded.
The short seller’s allegations have been a thorn in the side for CPI Property, which is grappling with the impact of plunging property valuations and a burdensome debt load accumulated through a series of acquisitions. S&P Global Ratings and Moody’s Ratings have both downgraded the company to junk status in recent months, pointing to its level of leverage and the structural complexity of the group.
While some of CPI Property’s transactions with its main shareholder “may appear unorthodox,” they reflect the company’s history as a family-run business, the law firm wrote in an executive summary of its report.
The practice of CPI Property repaying loans to Vitek through the acquisition of properties entailed a “degree of flexibility and subjectivity” in asset valuation, White & Case wrote, and there was “insufficient separation” in some instances between Vitek, his affiliates and CPI Property.
The law firm pointed to overlap between individuals holding management roles at CPI Property and those holding positions in entities outside the group, as well as the use of intermediaries and outside counsels who acted for both CPI and Vitek.
“Although such arrangements may be legally permissible, they do not align with best practices in corporate governance and might not have been known to the market in all instances,” the firm said.
White & Case recommended CPI Property sell assets purchased from Vitek that don’t “fall within the scope” of its core business activities, such as luxury French residential properties, a show jumping team and an Italian yacht supplier.
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