23.12.2008 - MDM Comment: Nutritek, Eurokommerz, Soyuz

Below are the three most important news items of today:

1. Eurokommerz (Caa2), the troubled factoring company, has broken its silence after the surprising defaults on its ruble bonds. Yesterday, the company published a press-release explaining why it had failed to pay on due dates. Eurokommerz claims it had to redeem early some of its loan facilities, while asset recoverability has significantly deteriorated. It is, of course, difficult to judge how honest these explanations were.

(The press-release is available in Russian only here www.eurokommerz.ru/page/events/1/1/0/0/6619.aspx)

Meanwhile, Kommersant daily wrote today that the Eurokommerz management had to pass its stake in the company (71%) to Kazakh businessman Rifat Rizoev, who was a lender to the management in a share-backed financing deal. According to the newspaper, Mr.Rizoev has already appointed a new CEO.

A change of control is often a positive credit event for a distressed company, as it can offer hope to lenders. However, given the fact Mr. Rizoev received the asset due to the shareholders’ default, the bailout of Eurokommerz by the new owner is far from certain. Indeed, it will largely depend on his assessment of the adjusted net worth of the company and its prospects as a business. Eurokommerz has historically pursued what appeared to be an attractive and efficient business model (high interest rates, short-term lending), but the deteriorating loan quality and over-reliance on capital market funding are significant impediments for this model in the current environment.

2. Nutritek (SD), the baby food producer that recently defaulted on its USD50 mn CLN, is planning a USD100 mn share issue, according to Reuters. Reuters, quoting some analysts, reports that Marshall Capital Partners, one of the two major shareholders, could be buying the new shares in order to substantially increase its stake in the company at a low cost (the share price is down 94% YTD).

While formally this should be good news for the bondholders, we recommend investors to avoid increasing exposure to Nutritek bonds unless they are insiders. The reasons are corporate governance concerns, which arise from three areas: First, in the most recent press-release Standard & Poor’s said that at the end of October the company had cash to repay the CLN, which for some unclear reason was subsequently invested in some illiquid assets; second, Nutritek de-listed itself from RTS stock exchange and refused to offer minorities a buy-back; and finally, Nutritek’s latest public IFRS report is covering only the fiscal year 2007.

3. Bank Soyuz (B2/B-) is likely to be sold to one of the entities inside Gazprom Group before the end of the year. The transaction will take place once the shares are released from a repo deal at Sberbank, according to Interfax, which references anonymous sources. We believe that Soyuz bonds are relatively safe now. It has survived a “run on the bank” and is decently supported by both its shareholder (Deripaska’s Basic Element Group) as well as the Central Bank of Russia.

23.12.2008 16:28