Cedar Oxygen: A tale of disillusionment

In March 2020, Lebanon’s central bank governor snapped up $175 million for the fund, which was to provide credit facilities to a crisis-ridden local industry. Two years later, the initial ambitions are far from being fulfilled, both in terms of raising and deploying funds.

Cedar Oxygen: A tale of disillusionment

Alexandre Harkous (center), CEO of Cedar Oxygen, during the launch, on November 25, 2021, of the "joint venture" called Lebanon Economic Empowerment Fund (LEEF), in collaboration with the platform Bamboo Capital Partners (Bamboo). (Credit: NNA)

Cedar Oxygen, a fund designed to help Lebanese industries hit by the economic and financial crisis, was launched with great fanfare in August 2020.

“We are aiming for a minimum size of $750 million and have already engaged with a carefully selected group of players who … want to work with us to … work towards improving conditions in our country,” the fund CEO Alexandre Harkous enthusiastically told Arabian Business, a weekly business magazine, in September 2020.

The fund’s goal was to compensate for the almost total halt in bank credits by offering companies short-term loans to pay their suppliers.

“The project responds to a pressing need in the sector that arose with the crisis by offering a concrete way to finance industrial imports,” said Fady Gemayel, then president of the Association of Lebanese Industrialists, with whom the fund signed a memorandum of understanding.

“The idea was noble,” admitted a source familiar with the matter. “But it was the way the project was managed that was lacking,” the source added.

Indeed, almost two years later, the results are far from the initial aspirations.

The fund has only managed to raise $175 million from a single investor — Banque du Liban.

While the project’s growth has also been hampered by the continuing crisis, some governance failures have discouraged international investors from taking part in the project, which has also experienced difficulties with loan deployment.

Cedar Oxygen is first and foremost the result of an encounter between two men, BDL Gov. Riad Salameh and Harkous in early 2019.

At the time, business was going well: the Lebanese lira was still trading around LL1,500 to the dollar, and Salameh’s image had not been tarnished yet.

Harkous was a model of success in the diaspora, especially for having sold his company BI-SAM Technologies, a financial software company, for the hefty sum of $205 million to an American competitor.

But the good times came to an end with the beginning of the crisis.

In early 2020, Harkous was based in Europe. He received a call from Salameh, who then had in mind to create an investment fund intended to support industrialists at home and wanted to entrust Harkous with the management of the fund.

Both men later agreed on the sum of $175 million, which the governor then committed to raise as seed money to encourage other investors to follow suit.

The fund was then approved in March, but “launching was delayed because of the default on the dollar debt, as well as the coronavirus and the resulting confinements,” Harkous told L’Orient-Le Jour.

However, the fund took shape in the following months with a team made up between France and the United States. In August, documents were finalized defining the main terms of the investment. In May, BDL paid the project set-up fee. In September, the Cedar Oxygen International SARL fund was created in Luxembourg, with its entire $175 million capital paid up by BDL.

Governance issues

During the first few months, Cedar Oxygen multiplied its contacts with international and local investors: This was a crucial step for the fund, whose initial ambition was to raise an additional $500 million, a target it would never reach.

Yet, the team was doing its best to reassure investors of its seriousness and transparency: potential beneficiaries had to go through a lengthy eligibility process, while the fund is based in a European jurisdiction and has an internationalized team.

Despite all this, potential lenders were far from swooping in.

“The economic situation in Lebanon was not conducive to investment,” a potential lender told L’Orient-Le Jour.

Other lenders argued that other reasons were behind their reluctance to get involved in the fund, citing mainly issues relating to governance.

Starting with the awarding of the contract: “Everything was done in a snap of the fingers, without prior consultation with the Central Council of the BDL (composed of the governor, the four vice-governors and the directors-general of the ministries of economy and trade, and finance),” according to a source familiar with the matter, who spoke of the lack a true competitive process, along with many other pitfalls.

“The negotiations between BDL and Cedar Oxygen were swiftly carried out exclusively between the two men, leaving the rest of the team in the dark,” the source added.

Meanwhile, Harkous denied these claims, stressing that “the contract was signed after a long process of studies and consultation, including a dozen meetings with BDL, in order to determine the most competitive and suitable option, that is to say the creation of a new fund or the agreement with existing international funds.”

BDL did not respond to L’Orient-Le Jour’s requests for comments.

From a purely legal point of view, however, the question of the need to apply a competitive procurement procedure remains difficult to answer.

“BDL has some financial and administrative independence and is not subject to the same rules and controls as the public sector, especially in terms of the award of contracts,” said a lawyer who declined to be named.

“The governor has very broad power, but the limits of the governor’s powers and some of the provisions that regulate the conflicts of interest, for instance, are not laid out in the law. It is difficult to know how precisely these issues are managed by BDL,” he said.

This could also depend on the nature of the contract: “If it is purely an investment decision and not a service provided by a company, BDL would in principle be exempt from going through the process of awarding the contracts,” another lawyer said.

But these legal issues are not the only things that observers and investors are looking into. “They created a fund from scratch, when there are plenty of banks and other financial institutions who have a track record in trade finance with the necessary infrastructure already in place,” financial expert Mike Azar said.

In an attempt to reassure investors, BDL had the ex-post contract validated by the Central Council a month after it was signed. In vain.

“In the midst of the crisis, it was difficult to understand why BDL would entrust such a large sum of money to a newly formed team with no real experience in fund management or trade financing. Moreover, respect for the transparent contracting process is crucial when it comes to institutional funds,” an international investor said.

The ownership structure of Cedar Oxygen International, which is ultimately held by its CEO, is the other source of surprise.

According to the Luxembourg trade and companies register, the company is owned by Star Tech Eus SARL, the majority of which is owned by Harvest Capital SARL Luxembourg.

Some 78 percent of the company is owned by Alexandre Harkous, and the remaining shares are divided between his wife and children. Cedar Oxygen’s CEO said, however, that this structure does not mean that the fund’s potential profits will be entirely his.

“After only five years and repaying BDL the entire amount invested, including all management and start-up costs, Cedar Oxygen’s team could share any remaining profits and finance important lucrative projects for Beirut, according to [the company’s] memorandum of association signed by all the fund’s managers,” he explained

Some experts, however, are surprised by the distribution of risk and profits with BDL. “The whole organizational structure is unusual. BDL, as the only investor and the entity bearing all of the risk, should be entitled to all of the profits. Cedar Oxygen should be acting as a management company entitled to a fee, as its managers bear none of the financial risk,” Azar said.

But instead, “BDL played the role of a high-risk venture capital investor without being compensated for any of the risks it was taking. It funded, using depositor money, the start-up costs of a private enterprise. If the enterprise succeeded, BDL would receive none of the profits.” he said.

In addition, several sources point to the opaque administration of the management fees disbursed by BDL, which amount to more than $2.6 million paid annually in fresh dollars to Cedar Oxygen International’s account in Switzerland.

The question marks this time are related to the payment of salaries of the Lebanon-based team’s employees, which received their income partly in Lebanese lira for an entire year. “It is surprising to pay part of the team in local currency when the management fees are received in dollars,” a financial expert who declined to be named said.

Harkous insists on the presence of safeguards within the fund through governance committees that are composed of internal and external members, which allow strict control over the management of expenses.

Deployment difficulties

The project also encountered significant difficulties in deploying funds in its early stages, and despite many success stories raised in the media, the companies in question ended up not signing up for the loans.

According to several sources, up to the end of 2021, less than 10 percent of the total amount invested had been lent to the industrial sector, which seems to be out of step with the realities of the sector.

“Big companies don’t need the fund because they export and have access to international banks,” an informed source said.

As for the small companies that sell on the local market and could need lines of credit for their imports, “their profiles were too risky, and they did not meet the eligibility requirements,” the source added.

Industrialists were also reportedly reluctant to have BDL involved as an investor. “They found it ironic that BDL makes loans to the sector using money from their own deposits ...” the source said.

A number of beneficiaries have benefited from the project: “Cedar Oxygen supports compliant Lebanese industrialists by financing their importations at very decent rates despite Lebanon’s country risk, thus taking over from banks that no longer have the capacity to finance their clients,” said Samer Chehab, managing director at Demco Steel Industries SAL, Lebanon’s leading steel company, and one of the first beneficiaries of the loans (for an undisclosed amount).

Cedar Oxygen said it has now entered the acceleration phase of the project after a first year as a start-up. According to the fund, nearly $60 million in credits were approved for a utilization rate ranging from 60 to 80 percent depending on the company.

“We are very proud of our results,” said Harkous, who has not given up on his ambition to raise the amount initially announced.

In November 2021, Cedar Oxygen announced the creation of a joint venture, the Lebanon Economic Empowerment Fund, in collaboration with the investment platform Bamboo Capital Partners, which is still waiting for its first investors.

This article was originally published in French in L'Orient-Le Jour. Translation by Sahar Ghoussoub and Joelle El Khoury.

Right of reply

To our readers,

Following the publication of this article, we received a response from Cedar Oxygen :

"In accordance with the provisions of article 4 and the follow-on decree-law 104 of 3/6/1977, Cedar Oxygen intends to exercise its right of reply to the article published in L'Orient-Le Jour on May 23, 2022 under the title: "Cedar Oxygen: A tale of disillusionment"

We would like to highlight the following clarifications: Regarding the remarks attributed to a familiar source with the matter who points the finger at "the lack of a true competitive process", Cedar Oxygen affirms that the investment decision of the Banque du Liban was taken after a long process of meetings and discussions that also involved 5 international funds who were, in the final outcome, considered expensive and rigid. The option of creating a new, more competitive and flexible structure, making it possible to recall the sums invested every six months, was the adapted solution. An anonymous investor quoted by the article referred to a “newly formed team, with no real experience in fund management or trade financing”. Cedar Oxygen was surprised by the statement as no investor approached had made this comment knowing that our team brings together professionals with between 10 and 25 years of experience in fund management, fintech and "trade finance". This team is supported by international independent experts. Each quarter, a report is provided to the BDL with a follow-up meeting with its central council.

The article refers to the ownership structure of “StarTechEUS Capital”; Cedar Oxygen affirms that such structure is only a classical “portage”. The accounts of Cedar Oxygen and StarTechEUS Capital are audited by Deloitte and filed annually with the Luxembourg authorities. It should be noted that the BDL has been receiving a semi-annual coupon since inception of the fund."

The article implies that there’s a lack of transparency in the management of the company’s expenses and fees. (NDLR: with regards to management fees, our article raises the questions of experts on “salary remunerations of the team based in Lebanon who have earned their allowances partly in LBP for a whole year” and the reasons thereof.) Cedar Oxygen contests these insinuations as the management of the fund is voluntarily optimizing the management fee with the directive of preserving the invested capital and prioritizing investor interests. All the economic benefits are retained in the fund and are not distributed.

In reference to the statement about deployment challenges in the initial phase, it is imperative to emphasize that the crises in Lebanon oblige us to ensure that international criteria are respected and that the money deployed is secure. Following the lifting of subsidies, the demand from Lebanese industrialists increased considerably.

Finally, in relation to the lack of funds raised to date, it should be noted that last year, international investors, including Lebanese expatriates, remained in a wait and see mode pending the legislative elections and a possible agreement with the IMF. However, in pursuit of its initial plan, Cedar Oxygen has entered into a joint venture with an international fund and the fundraising is now conducted in a structure managed by Bamboo and deployed by Cedar Oxygen who best understands the industrialists’ ecosystem."

Cedar Oxygen, a fund designed to help Lebanese industries hit by the economic and financial crisis, was launched with great fanfare in August 2020.“We are aiming for a minimum size of $750 million and have already engaged with a carefully selected group of players who … want to work with us to … work towards improving conditions in our country,” the fund CEO Alexandre Harkous...