04.02.2008 - MDM Comment: Marta and IzhAvto

For those of you who is trading Russian high yield or distressed ruble bonds, the following news and comments may appear interesting:

1. Marta Holding (NR) sold its 35.7% stake in a listed real estate developer RTM in order to enable itself timely meet its bond-related obligations (Source: Interfax).

Marta has already bought back portions of its 1st and 2nd bond issues at earlier put option dates. The put on the 3rd issue with outstanding size of RUB2bn (USD80m) is due at the end of this week.

To remind, Marta is an investment holding, which has historically been pursuing a very aggressive financial policy (high leverage). Its core assets were stake in RTM and a food retail chain Grossmart. The latter is apparently on sale now as well, and in fact Grossmart sale proceeds were initially earmarked for bond repayments. However, the Grossmart transaction is for some reason taking too much time to execute.

It seems that in the new environment of tougher credit conditions unsecured financing is available to Marta only at prohibitive rates, so the holding is forced to sell its crown jewel assets in order to repay the bonds.

We think that the news about RTM stake sale somewhat reduces the credit risk on Marta's bonds. To those who hold the bonds we recommend to keep holding them until the put date or take profits before the put if there is a bid close to par. However, we don't recommend to increase exposure to Marta bonds (YTW 17-19%) for the following reasons: a) they are short-dated and price upside is very limited; b) credit risk is still material. We don't know the exact numbers of Marta's financial profile (the group hasn't been disclosing anything for a while), but we just would like to point out that RTM's shares were quite likely sold at a discount to market value (USD140m), and they were already largely or fully pledged under certain bank loan agreements.

2. IzhAvto (NR), the car assembly plant in Volga region, has been put up on sale by its core shareholder, SOK Group and the offer has been made to AVTOVAZ (NR) to acquire IzhAvto for less than USD500m. AVTOVAZ confirmed that it is now studying the proposal (Source: Kommersant). We think that it may make sense for AVTOVAZ to get another production facility in its attempt to upgrade quality and model range. We assign a 50% probability to this deal. AVTOVAZ has solid financial profile and state support behind, USD500m should not be critical (that is less than the company's estimated cash position). AVTOVAZ bonds are short-term and for that reason they will unlikely react to the news. IzhAvto issue is far more interesting from a trading standpoint - it is now offered at around 96.6, which corresponds to a yield of 14.5% to put in Dec 08.

29.02.2008 15:30