30.01.2009 - MDM Comment: Color, AFK Sistema, GAZ & state support

The Russian bond market is quiet today, with volumes in local bonds standing at virtually nil, and some soft profit-taking in corporate Eurobonds after the recent rally and ahead of US GDP data. All eyes are still on ruble fluctuations against the basket, which currently stands at RUB40.10 and is getting very close to the officially announced upper band of the corridor (41.00) that the Central Bank of Russia is committed to defend unless oil price declines further.

Below are our comments on what we view as the key news stories of the day.

1.  The CEO of AFK Sistema (Ba3/BB/BB-), the Russian conglomerate with key assets in the telecom sector (MTS being the crown jewel in the empire), said yesterday at a forum in Davos that the group intends to undertake acquisitions worth a several billion dollars as early as in 1Q09, according to RIA Novosti and Vedomosti. Rumors abound that the Sistema CEO (and the principal owner) is referring to oil & gas assets in the Russian Republic of Bashkortostan, where Sistema is a minority shareholder with intentions of taking over. It is our view that unless the company changes the plan, or fails to find financing for the deal, creditors and rating agencies will have something to worry about. Sistema’s consolidated Debt/EBITDA leverage as of 3Q08 was approximately 2X. Credit strength is mostly concentrated at MTS, while other parts of the group, like Sitronics or Sistema-Hals are in trouble. Ruble devaluation in combination with a deteriorating operating environment will certainly damage leverage ratios even without new acquisitions.

There are bonds outstanding at the parent company level (ticker AFKSRU), MTS (MOBTEL) and Sitronics (SITFIN). According to Sistema’s bond documentation, a default of its material subsidiary triggers a cross-default, therefore a 2-month bond of Sitronics trading at 87% of par could be worth looking at (but only if you believe ruble devaluation cycle is over).

2. GAZ (NR), one of Russia’s largest automotive groups, controlled by Oleg Deripaska’s Basic Element group, may reportedly receive state support. The government commission chaired by first vice-premier Igor Shuvalov is due to discuss this topic at its hearings on February 3. Meanwhile, GAZ’s RUB5 bn bond is trading at 65-75% of par, despite a put date in just a couple weeks, indicating that investors price in a material probability of default/restructuring.

GAZ is facing a dramatic fall in sales and a massive build-up in inventories as demand for cars has been undermined by economic crisis and low availability of leasing financing or car loans. The group employs over 100,000 people.

Despite the fact the group is on the government’s list of 295 systemically important companies, and inaccurate media reports about state guarantees already approved for GAZ, it is our understanding, based on a conversation we had yesterday with a company representative, that GAZ hasn’t yet received any firm support from the state. We failed to garner any comments on whether the company is ready for the bond put option or not.

Indeed, on February 3 Mr. Shuvalov’s commission may decide that the state should bail the company out and command state banks to provide necessary funding: We have seen such a scenario already (e.g. with NPO Saturn). However, the probability of such bailouts is reducing as time goes on and the gap between the available reserves and appetite for support is increasing. In that regard, it is important to note the change in the tone and rhetoric of government officials. Kommersant quoted Mr. Shuvalov as saying, “Some companies and entrepreneurs have a false understanding that the state will provide support under any circumstances. In fact, we will only bail out if we hear a constructive plan of improving competitiveness. Tens of thousands of employees is not an argument”.

30.01.2009 14:26