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10.11.2008 - MDM Comment: Market Color, More Bail-Out Measures, Mirax
Russian equities are rallying today along with the rest of the world on the back of China’s announced stimulus package. Even the bond markets are ignoring Fitch’s decision to revise Russia’s sovereign rating outlook from ‘Stable’ to ‘Negative’. By the way, Fitch’s outlook revision was part of a wider EM rating action, which affected 21 countries. The ruble remains stable against the basket, while devaluation speculation has been brought onto the TOP page by Bloomberg.
Below are our key news and comments for today:
1. Russia’s government has approved a new package of measures to support the financial sector and wider economy. The package includes both “cash” and “non-cash” stimulus instruments (available in Russian here: www.government.ru/content/governmentactivity/mainnews/a3c3e66bbf034fd79fa99a3001e6be35.doc). Many of the initiatives are neither urgent nor ‘breakthrough’ in nature and have been discussed before. Below we list and comment on the most important out of the 55 proposed measures.
- Simplification of M&A transactions; enforcement of collateral and bankruptcy procedures. Specifically, the government has proposed removing the legal provision which requires every borrower to grant a put option to all creditors if a legal entity is merged or “reorganized” in any other way. It is, in our view, clear that this should be a discretionary decision agreed between the borrower and the lender on a case-by-case basis. The law has been an obstacle for several full mergers (into one legal entity), including the merger of URSA Bank and Vostochny Express Bank. The need to remove this very discomforting law is particularly acute now, when consolidation processes are heating up, while the probability of puts being executed is close to 100% and refinancing is hardly available.
- Strengthening of control over banks that receive the funds from the Ministry of Finance or the Central Bank of Russia (CBR). It is proposed that a special CBR representative be appointed to each of the banks receiving cash from the state. The document also says that it will be ‘recommended’ that such banks use the available funds for lending to car-makers, agricultural companies, airlines and housing construction. We hope that the regulators will avoid direct interventions in banks’ lending policies. Also, interestingly, the list of priority sectors has now been shortened from 6 to 4 (retail and defence have “fallen out”, potentially as a result of retail receiving loans already from state banks, while defence being taken care of separately).
- The re-capitalization of strategically important enterprises via the acquisition of new share issues. There is no reference to any specific companies. We believe that Russia’s defence enterprises such as MiG, Irkut etc. should be at the top of the list. They can hardly remain solvent in the long term without new equity injections.
- Refinancing banks’ SME loan portfolios at VEB. We view this instrument as more efficient than administrative measures for pushing liquidity from banks into the economy.
- An enlargement of the investment declaration of VEB’s asset management, which manages the state pension fund. To date investments have been restricted to Russia’s sovereign bonds. Of course, this is exactly what Russia’ financial market is lacking – a bid from a long-term local investor.
- Buy-out of certain residential economy-class housing; interest-rate subsidies; simplification of issuance of state guarantees; institutionalization of bondholders’ meeting. No details are provided with regard to these proposals.
We believe that most of the proposals make sense. However, in order to start speculating extensively on their potential impact on Russia’s economy and specific companies, we need to see the detailed profile of each of the proposals as they approach the execution stage, as well as understand the timing of such execution.
2. Mirax (B2/B) has given an update of its financial standing via an interview in business daily Vedomosti with its chairman and key shareholder Sergey Polonsky. According to Mr. Polonsky, the company has approximately USD170 mn of cash on the balance sheet vs. some USD770 mn of debt. From now and until March 2009 the company will redeem approximately USD430 mn of debt (Including a put on the USD180 CLN, out of which USD20 mn has been bought back already). It will then be left with a RUB3 bn ruble issue (put in Sept 09) as well as USD100 mn maturing in May 2010 and some bank loans. While Mirax is uncertain about future sales dynamics, it had very successful October sales (over USD100 mn) and has approximately USD1 bn of receivables on already signed contracts. The company has frozen all new projects and tightened its relationships with suppliers (delaying payments). Mr. Polonsky sees some Russians still viewing real estate as a safe heaven investment in an uncertain environment. He also said that he doesn’t plan to invite a strategic investor into Mirax and only sees the state as the new owner of the company in a stress-scenario.
