LDN - Business

Exclusive: Carlyle's Brazil developer battles mounting client, creditor lawsuits

[February 13, 2017] By Guillermo Parra-Bernal

SAO PAULO (Reuters) - A Brazilian land developer controlled by Carlyle Group LP <CG.O> investment vehicles is buckling under mounting client and creditor lawsuits and an unsustainable debt load, highlighting legal risks facing global buyout giants in Latin America's No. 1 economy.

The survival of Urbplan Desenvolvimento Urbano SA increasingly depends on creditors' willingness to restructure 450 million reais ($145 million) of asset-backed securities, and the unlikely reversal of hundreds of rulings allowing clients to cancel land purchases.

Urbplan, which develops residential lots by laying out basic infrastructure, is the target of more than 2,000 lawsuits nationwide, half of them in São Paulo state. Most of them come from clients who want their land purchases annulled, saying Urbplan halted work during a two-year shareholder dispute.

As creditors question a three-year, Carlyle-led turnaround that has prepared about 70 delayed projects for delivery, bankruptcy protection could be the only solution for Urbplan to cope with Brazil's harshest recession ever and onerous debt servicing, two people familiar with the matter said.

The situation highlights how global private-equity firms have struggled to navigate Brazil's complex legal and business environment. Courts tend to hold executives and shareholders personally responsible for corporate tax and labor claims.

In recent months, at least one creditor has asked a São Paulo judge to declare the developer insolvent due to alleged fraud, while another has sought to publish the names of Urbplan and Carlyle's Brazil executives in newspapers, as a way to expose their links to Urbplan's woes, documents reviewed by Reuters showed.

A spokesman for Washington, D.C.-based Carlyle told Reuters the fraud accusations "are false, baseless and reckless" and would be disputed and defeated if pursued in court. Urbplan and Carlyle declined to comment on a possible creditor protection filing.

PROMINENT PLAYER

The recession has magnified the risks facing investments by private equity funds. Reuters reported in October that KKR & Co Inc's <KKR.N> first-ever investment in Brazil has turned into a battle over mismanagement allegations.

Perhaps the most prominent among the buyout titans that planted flags during Brazil's boom a decade ago, Carlyle has had setbacks too. Reuters reported in July that it sold lingerie maker Scalina SA after a failed debt restructuring effort.

A web of Carlyle-run real estate investment funds bought Urbplan when valuations were stretched, the currency was overvalued and interest rates were falling.

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The buyout giant paid Brazil's Scopel family about $100 million for a 60 percent stake of Scopel Desenvolvimento Urbano Ltda in 2007 in its first foray into the country. Five years later, Carlyle took full control of Scopel and renamed it Urbplan, following a $100 million capital injection.

Under Carlyle, Urbplan embarked on an ambitious debt-fueled expansion, often running afoul of complex local urban development rules, two former employees told Reuters. Between 2007 and 2012, Urbplan raised about 700 million reais from the sale of real estate receivable-backed bonds.

The rift between Carlyle and Urbplan creditors has escalated since then, even after the Carlyle investment vehicles, clients and co-investors injected $160 million in fresh equity, lent the developer about $91 million and advanced more than $110 million in additional funding, one of the people said.

The money has proved insufficient to revive Urbplan, which remains mired in high debt and litigation costs, the same person added.

The Carlyle spokesman said Urbplan has "substantially completed its pending projects and fulfilled these obligations" largely thanks to investment from the private equity firm.

RECESSION

As of the end of last year, about 50 percent of client receivables that Urbplan had packaged into debt were more than 90 days overdue, the first person said.

Creditors, who earn annual returns of around 30 percent on some of Urbplan debt, claim the company's woes are due to mismanagement, fraud and embezzlement, according to some of the lawsuits to which Reuters had access.

One of the lawsuits demanding that Urbplan be declared insolvent alleges the Carlyle-backed management shakeup prevented the developer from staying current on payments to bondholders.

Another claims that Urbplan's management sold a pool of property receivables to several Carlyle-controlled distressed debt funds at below-market prices.

Carlyle denies the accusations.

According to José Luiz Bayeux Neto, an attorney representing creditors led by securitization firm Gaia Securitizadora SA in the lawsuits, "related-party transactions between Urbplan and vehicles controlled by Carlyle Group in the past couple of years need to be thoroughly explained."

($1 = 3.1200 reais)

(Editing by Christian Plumb and Bernadette Baum)

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