US companies stopped from selling to Chinese phone maker ZTE for Iran sanctions violations

Visitors pass in front of the Chinese telecoms equipment group ZTE Corp booth at the Mobile World Congress in Barcelona, Spain, on February 26, 2018. (REUTERS File Photo)
Updated 17 April 2018
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US companies stopped from selling to Chinese phone maker ZTE for Iran sanctions violations

LONDON/NEW YORK: The US Department of Commerce has banned American companies from selling components to Chinese telecom equipment maker ZTE Corp. for seven years after breaking an agreement reached after it was caught illegally shipping goods to Iran, US officials said on Monday.
The US action could be devastating to ZTE since American companies are estimated to provide 25 percent to 30 percent of the components used in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.
The ban is the result of ZTE’s failure to comply with an agreement with the US government after it pleaded guilty last year in federal court in Texas to conspiring to violate US sanctions by illegally shipping US goods and technology to Iran, the Commerce Department said.
The Chinese company, which sells smartphones in the United States, paid $890 million in fines and penalties, with an additional penalty of $300 million that could be imposed.
“If the company is not able to resolve it, they may very well be put out of business by this. Many banks and companies even outside the US are not going to want to deal with them,” said Eric Hirschhorn, a former US undersecretary of commerce who was heavily involved in the case.
As part of the agreement, Shenzhen-based ZTE Corp. promised to dismiss four senior employees and discipline 35 others by either reducing their bonuses or reprimanding them, senior Commerce Department officials told Reuters. But the Chinese company admitted in March that while it had fired the four senior employees, it had not disciplined or reduced bonuses to the 35 others.
ZTE, whose Hong Kong and Shenzhen shares were suspended on Tuesday, said it was assessing the implications of the US decision and was communicating with “relevant parties.”
The Commerce Department order quoted a ZTE official’s letter admitting it “had not executed in full” some disciplinary measures and that there were “inaccuracies” in a 2017 letter. But, the Commerce order said, ZTE “argued that it would have been irrational for ZTE to knowingly or intentionally mislead the US government in light of the seriousness of the suspended sanctions.”
Under terms of the ban, US companies cannot export prohibited goods, such as chip sets, directly to ZTE or via another country, beginning immediately.
Shares of big US ZTE suppliers fell sharply on the Commerce ban. Optical networking equipment maker Acacia Communications Inc, which got 30 percent of its total 2017 revenue from ZTE, tumbled 35 percent, hitting a near two-year low. Acacia said it was suspending affected transactions and assessing the impact.
Shares of optical component companies including Lumentum Holdings Inc. fell 8.9 percent and Finisar Corp. dropped 4.0 percent. Oclaro Inc, which got 18 percent of its fiscal 2017 revenue from ZTE, lost 14.1 percent.
ZTE “provided information back to us basically admitting that they had made these false statements,” said a senior department official. “That was in response to the US asking for the information.”
The ban on supplying ZTE comes two months after two Republican senators introduced legislation to block the US government from buying or leasing telecommunications equipment from ZTE or its Chinese rival Huawei Technologies Co. Ltd. , citing concern the companies would use their access to spy on US officials.
“China does not play by our rules, and we must be vigilant against Chinese threats to both our economic security and national security,” said Republican Representative Robert Pittenger after the Commerce announcement. Pittenger is sponsoring legislation that would strengthen the US national security review process for foreign investments.
Meanwhile, Britain’s main cybersecurity agency said on Monday it has written to organizations in the UK’s telecommunications sector warning about using services or equipment from ZTE.

'Devastating'
Douglas Jacobson, an exports control lawyer who represents suppliers to ZTE, called the ban highly unusual and said it would severely affect the company. “This will be devastating to the company, given their reliance on US products and software,” said Jacobson. “It’s certainly going to make it very difficult for them to produce and will have a potentially significant short- and long-term negative impact on the company.”
ZTE has sold handset devices to US mobile carriers AT&T Inc, T-Mobile US Inc. and Sprint Corp. It has relied on US companies including Qualcomm Inc, Microsoft Corp. and Intel Corp. for some components.
Shares of Taiwan’s MediaTek Inc, which sells smartphone chips and competes with Qualcomm, were not trading when the announcement was made.
The US action against ZTE is likely to further exacerbate current tensions between Washington and Beijing over trade. After the US placed export restrictions on ZTE in 2016 for Iran sanctions violations, China’s Ministry of Commerce and Foreign Ministry criticized the decision.
A five-year federal investigation found last year that ZTE had conspired to evade US embargoes by buying US components, incorporating them into ZTE equipment and illegally shipping them to Iran.
ZTE, which devised elaborate schemes to hide the illegal activity, agreed to plead guilty after the Commerce Department took actions that threatened to cut off its global supply chain. The US government had allowed the company continued access to the US market under the 2017 agreement.
The new restrictions stem from a Jan. 16 report by a US monitor appointed by a federal judge in Texas who accepted the guilty plea in March 2017. Although Commerce Department officials would not discuss the report, they said the department followed up in February.
The US government’s investigation into sanctions violations by ZTE followed reports by Reuters in 2012 https://reut.rs/2H3p0Vl that the company had signed contracts to ship millions of dollars’ worth of hardware and software from some of the best known US technology companies to Iran’s largest telecoms carrier.


Gulf companies challenged by debt and rising interest rates

Updated 22 April 2018
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Gulf companies challenged by debt and rising interest rates

  • Debt restructurings on the rise, but below crisis levels
  • Central Bank of the UAE has raised interest rates four times since last March

There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.

 

Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”

FACTOID

Four

The number of interest rate rises in the UAE since March 2017.