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23.05.2008 - MDM Comment: Marta in technical default

According to a report on Reuters yesterday, the payment agent for the Marta-1 bond issue, which was due to be redeemed yesterday, has not received cash from Marta. Russian business daily, Vedomosti, quotes Georgy Trefilov, the company's head and core beneficiary, saying that the money has been transferred and payment is likely to be made today. This morning the payment agent confirmed arrival of a "significant" part of cash due.
To remind, Marta Holding, which has historically developed aggressively in real estate and retail, is now facing serious difficulties in obtaining refinancing, and therefore has had to sell assets. Its most liquid asset – a stake in the listed development company RTM – was reportedly disposed of earlier this year. However, problems have arisen with the sale of food retail chain Grossmart, Marta’s core remaining asset. The Grossmart chain, with over 100 of food stores, was built up in cooperation with German REWE Group, and therefore REWE was seen as the most likely buyer, and could have theoretically bid at the best price. The sale was reportedly in process, but in April 2008, REWE said it is no longer interested in buying Grossmart.
While we hope that Marta will remain due on its bonds, we think that risks are high and recommend investors stay on the sidelines (Marta-3 bond is still available at 88% of par, put in Aug 08). Because of the very poor financial disclosure from Marta, we do not have any up-to-date information on the debt position of the company, or the value and performance of Grossmart.  Still, we estimate that Marta's debt is likely continuing to mount, as we assume that debt financing is only available for the company at 25-30%, while margins do not allow the covering of interest payments on a significant debt position (USD 500m was referenced by Vedomosti). On the other hand, time pressures and serious litigation processes (several lawsuits have been reported by media regarding non-payments, ownership of Marta, etc.) diminish the chances of successfully executing the sale of Grossmart without a deep discount to its fair price. On top of that, Grossmart itself is experiencing operating difficulties due to conflicts over shopping space with lessor (RTM).
For aggressive investors fishing in the Russian distressed debt pond, we instead recommend taking a look at the ruble issue of cosmetics retailer Arbat Prestige. Following the arrest of the company's founder on accusations of tax fraud (the amount was negligible) the bonds have dipped to 65-66% of par (put in less than 1 month). As a result of the commotion surrounding the company, some suppliers and manufacturers have temporarily suspended cooperation with the cosmetics retailer. However as newspapers reported, management has been successful in restoring the business flow. Also, Arbat Prestige has a large real estate portfolio and some of that is being or will be disposed of to repay the debts. We have to say, though, that given the company's very low transparency, there is no reliable audited information available to us on the actual state of affairs.

23.05.2008 13:22
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