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21.08.2008 - MDM Comment: AirUnion on edge of bankruptcy; Government bailout uncertain

AirUnion on edge of bankruptcy; Government bailout uncertain
AirUnion alliance, one of Russia's largest air carriers, is reportedly in severe financial distress, a situation that has led to major disruptions of operating activity this week. Most AirUnion flights were cancelled yesterday as unpaid gas suppliers and other counterparties declined to provide services to the company. The sector regulator has warned that certificates and licenses may be withdrawn.
At first glance, problems for an air carrier are no surprise. It is a common knowledge that most of the world’s airlines have severely stretched financial profiles due to low margins, strong competition, cyclical demand and high investment requirements. Further deterioration of their balance sheets is expected to come on the back of high oil prices.
However, this particular case, in our view, deserves a closer look for investors in Russian debt. The reason is that the key companies shaping the AirUnion alliance are majority-owned by the government (although management control was and largely still is with private shareholders), and Russian president very recently signed a decree prescribing a transfer of AirUnion ownership to the megalithic state-controlled conglomerate Rostekhnologii. The state corporation already made public statements that it will support AirUnion, viewing it as one of its strategically important assets, as it was supposed to play the role of key competitor to former monopoly Aeroflot. However, as newspapers report, Rostekhnologii have thus far de facto failed to provide any significant aid to the troubled air alliance. In fact we believe that this may well be due to the fact that Russian state-controlled banks are almost unable to add to their already huge exposure to Rostekhnologii-like assets.
With this in mind, we believe the AirUnion case is a litmus test of the "government support" factor, which is a key component in the credit profiles of dozens of Russian bond issuers, particularly in the local bond market. If AirUnion is allowed to go bust – something we believe is still not the base case – investors will have to re-price the risk on a number of weak credits that are believed to count on the support from the Russian government and/or the key state corporations or banks.

21.08.2008 12:53
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