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12.12.2008 - MDM Comment: Warning signals from MiG and MMK

While global financial markets are grieving over the US Senate decision to block the bailout of the ‘big three’ automakers, here in Russia we also have discouraging news on the credit front.

1. Our first story today concerns MiG, the fully state-owned producer of world famous jet fighters. The company yesterday defaulted on its RUB3 bn bond issue by failing to buy it back at a put option date. Despite the very vulnerable profile of MiG (apparently zero EBITDA vs. some USD1.5 bn of debt, poor financial transparency, significant volatility of cash flows, low diversification), as recently as a few months ago it was difficult to imagine this company defaulting, given its strategic importance (military aviation has been something of a favorite child for Vladimir Putin).

Our reading of the event is the following: The key channel of financial support, which was used in the past – the loans from Sberbank and/or VTB – has reached its limit. The state banks are apparently unable or unwilling to expand their already gigantic exposure to the defense company. Now the government has to provide direct financial aid in form of equity injections or state guarantees.

Judging from the statements made earlier this week by the Ministry of Finance, senior government officials understand the state of affairs at MiG and are working on equity/guarantees schemes. So apparently (hopefully) we are at least not going to see a repetition of a scenario with AirUnion, an airline majority-owned by the state which defaulted recently and is likely to undergo bankruptcy with assets moved into a new entity.

Still, MiG bondholders may have to wait a few weeks as provision of the direct financial aid from the budget is a more complex and time-consuming exercise (needs various approvals) vs. a request or a command to the state banks’ management.

We would not be surprised to see investors reducing their exposure to the bonds of Russian companies with similar credit profiles (weak on a stand-alone basis with implicit state support) on the back of the news about MiG. Such companies include Irkut, United Aircraft Corporation, GSS, Motorostroitel and some others.

2. Our second brief commentary concerns MMK, one of Russia’s largest steelmakers (the only bond of which was redeemed just six weeks ago). This company yesterday announced its 3Q08 financial results. The results in fact look relatively strong, with sales of USD3.5 bn and EBITDA margin of 30%. What is striking, however, is that MMK management estimates 4Q EBITDA will be close to zero (Source: Vedomosti). Just recently we heard a similar guidance from Severstal. The fact a 30% margin can disappear just like that is quite terrifying and provides rather bitter food for thought.

12.12.2008 14:18
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