Interview by Andrei Yashchenko, Corporate Finance Director to 'Vremya Novostei' on the outcome of Basic Element's loan restructuring
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 25.12.2009 |
Vremya Novostei
The last year has been a fateful one for many Russian companies - some of which have been on the brink of bankruptcy. The year was certainly anything but simple for the 'Basic Element' group of companies, whose debt totals approximately $20 billion. However, in December it was reported that all the group's companies had succeeded in coming to agreement with their creditors on debt restructuring. Andrei YASHCHENKO, Basic Element's Corporate Finance Director, has related the story of the process to Irina TSIRULEVA, Commentator of 'Vremya Novostei'.
- The market has been following Basic Element's assets throughout the year, now and then placing bets on their survival. What is your assessment of 2009 and what are the results?
- The year has indeed been very difficult - a lot had to be undertaken within my sphere of responsibility and within the group as a whole. We were not the only ones, with the economy and financial markets really struggling. However, personally I am quite satisfied because we have managed to do practically everything we planned this year. Most importantly, as of today we have either restructured and signed or agreed in principle on restructuring more than 95% of our companies' debt - debt that was either problem or could potentially become a debt problem next year.
- And what falls under the outstanding 5%?
- All that's left is minor. We do have agreement in principle and everything is in the process of execution. Issues remain open with those companies, whose main creditors are not members of syndicates but act on their own.
- Is everything resolved with Alfa-Bank, your most implacable of creditors?
- With Alfa-Bank we have been through many months of rather arduous negotiations. They put us in quite a tough situation, because initially 'Alfa' wanted to sign agreements on all the group's companies at once. Later we decided on a stage-by-stage approach. Today many of the issues we wanted to sort out are resolved, and most of the debt to the bank has been repaid. At the start of the year indebtedness to the bank was approximately $1 billion - although this amount was not critical bearing in mind the size of the group. The problem was that when you agree to restructure with creditors, under global rules they must all get equal treatment, i.e. you can't repay somebody on an individual basis. But Alfa-Bank behaved in such a way that we were forced to do so, because they were threatening a number of companies with bankruptcy.
- Are all of the bank's claims to your companies withdrawn now?
- Today the claims that are not withdrawn have been suspended and are awaiting the signing of a number of agreements.
- But generally, why has it taken so long to come to an agreement with Alfa-Bank?
- I don't fully understand why. We continue to have a sufficiently businesslike relationship with them and they are offering us loans again. I guess that Alfa-Bank just chose that kind of strategy. They did not treat us alone like that, behaving in the same way with all the other companies they dealt with.
- It's common knowledge that the government came to the rescue of some of the Russian companies. How did the government help your holding?
- I am not aware of any direct government aid to us. Everybody knows, of course, about Vnesheconombank's loan to RUSAL of $4.5 billion. But it should be remembered that it was an arm's length loan granted on the basis of exceptionally sound security. It was done in the initial phase of the crisis when the government approved a policy of refinancing problem loans that could potentially result in the loss of Russia's strategic assets. Talking about government guarantees, we are expecting that in the near future we will be able to get one for the syndicated loan to GAZ. Then again, Alfa-Bank has not yet signed the required addendum, but I believe it will happen by New Year's Eve. Direct state backing is limited to just that. Indirect support, aimed not at an individual company but various industries as a whole, has indeed been provided. Had it not been for the wise position taken by the government and the constructive attitude of most of the banks to manufacturers, we would have a much more difficult overall situation than the one we have now. The global catastrophe that some expected in late 2008 has been averted, and the idea that it could still happen now seems very unlikely.
- In your opinion how much longer will such crisis situation last?
- I don't think it will be limited to the next year. The word ‘crisis' is a misleading word, having great impact on the one hand, while not meaning anything on the other. If we were, for example, to take the oil market, what kind of crisis is there? There is none. But the crisis has been very hard on other industries. At present the economic situation has not recovered either in Russia or the world, and it most certainly will not rebound to pre-crisis levels next year. Much will depend on how the state will act. Another important factor is expectation. If most people, who are also investors in the market, expect positive trends, then those expectations will push the situation towards improvement. And the third factor is the crisis management efforts undertaken by many of the companies. We also had to do a lot in that respect: bring production volumes in line with market demand, cut down costs while raising production efficiency to the maximum. It's a wide-ranging program, the implementation of which started in all the group's companies at the very onset of the crisis.
- Getting back to the restructuring of Basic Element companies' debt. It is quite substantial: $20 billion. Please, tell us, how did you manage to persuade the creditors?
- Yes, $20 billion at first glance is a lot, but in the context of our group's overall size the debt is not so heavy. Before the crisis we certainly believed that such indebtedness was quite normal and that on the whole all our debt ratios were fine. However, the slump hit the markets by affecting the profitability of all our companies, shifting us immediately into the risk zone. Restructuring of companies, in terms of its staging, was taking place independently. We practically have no loans that are leveraged on the cash flows of related companies. Our teams in each of the companies were working in parallel under a single algorithm, but each on its own schedule, and towards the end of the year everything worked out. The common objective was to prove to the creditors the viability of our business model in the mid-term perspective of 3-5 years. After that, all it took was spelling out the terms of restructuring in a way that would satisfy both us and the creditors. And the latter took more time than proving the viability of our businesses.
- When was it initially planned to complete the restructuring?
- The plan was to have everything completed in the autumn. But it turned out to be more complicated than that because there were a large number of banks involved in lending. Now we are pleased that it has been possible to wind everything up by the end of the year, even though this date was not an end in itself. It was down to the mutual desire of all of us, not least the creditor banks which needed a good closure of their books. I can tell you, by the way, that prior to the restructuring more than 80% of our debt was maturing at the end of the 2008-2010 period, and eventually we will be repaying only 8% in 2010. That, of course, is more comfortable for our business and opens up new opportunities for us.
- In your view, what is generally happening on the money market? At what rates are banks ready to lend today?
- Strange as it may seem, in the past few months the market has started recovering. The banks have a lot of liquidity and it needs to be applied somewhere. Lending rates have gone down because the Central Bank substantially lowered the discount rate. Comparatively inexpensive money has appeared, but the banks have become more discriminating and are trying to lend primarily to lower-risk companies. Compared to the pre-crisis period, the risk premium is now more diversified. Whereas earlier the interest rates on Rouble loans for all borrowers were more or less the same, currently the rate for a good borrower can be 12% and lower, closing on 20% for the less stable ones. Today our companies have no problems raising loans and get financing at low interest rates.
- What are those companies?
- Various companies, not least in the energy sector. For instance 'Evrosibenergo' is actively borrowing on the market. Another example - the project financing market is also recovering. In particular, we have agreed with Gazprombank recently to expand the loan facility for project financing and for the construction of the Serebryansky cement plant. Naturally, the banks have become choosier and are asking for government guarantees, the more so now that the government is prepared to grant them for good projects. It is standard practice for any company.
- What about liens? Basic Element is known to have quite a number companies pledged against loans?
- Yes, lien requirements have grown. And as a result of restructuring collateral value has been increased. In some of the companies, such as 'Soyuzmetallresource', even controlling stakes have been pledged because the larger the collateral, the better the lending terms. Naturally, we didn't want to raise the interest rates because that impacts the business economics and complicates loan repayment. What's left is a pledge, but I see no big problems because we intend to repay our loans.
- When will the holding start reducing its debt and what are the stages in the process?
- Each of the companies has totally different restructuring terms and conditions. In some instances we asked for a two year grace period on principal repayment, in others companies are capable of paying right away. The main objective is not just to repay the debt, but rather to prove our ability to do it. Strategically we intend to reduce debt through repayment of expensive loans because the spread in rates is quite large.
- Is it planned to raise new loans next year?
- If we talk about raising finance, it is for specific projects only. We don't need money for core operations. There have been instances this year when we received such financing.
- Incidentally, it has become known recently that a minority shareholder in 'Avtodiesel' (part of GAZ Group), namely 'Rostekhnologii' blocked a loan to the plant from VEB. How do you now intend to handle this matter, since the loan was necessary to launch production of a new truck engine?
- We will negotiate, and I don't think this issue is finally closed yet. I hope that the state-owned corporations will come to agreement.
- In late December last year, Oleg Deripaska said that soon all businesses within his group would get partners who would bring in either new assets with different debt leverage, or capital. At the close of the year what has happened in that area?
- Active negotiations are under way in various areas. We are open for long-term cooperation with partners who are ready to contribute with new competences, investment and technology to businesses such as airports, or within construction or the financial sector. In such case partnership does not necessarily consist of equity acquisition. It may be in the form of project cooperation, like the one we have with Strabag. Our businesses are coming back to generating profit due to timely and efficient crisis management efforts, and we are already witnessing growing interest in a number of our assets on the part of investors from Russia, China, Singapore, Middle East and Western Europe. It is important to understand that selling stakes in businesses, to say nothing of controlling ones, is not the objective of engaging partners.
- Over the last year, resources were applied to debt restructuring, while partnerships will more likely be an issue for next year. Moreover, in general terms I would characterize the next two years as years of partnerships and raising equity investments; and, of course, as another stage in continued efficiency improvement and business development.
- Talking about negotiations: with what companies and in what sectors?
- I don't want to comment for the time being.
- To mention one, recently Minister Victor Khristneko stated that soon another automotive holding with foreign participation will appear in Russia. It is believed on the market that the main players in such alliance would be Russian GAZ and German Opel. Could you give us some details?
- I am afraid that is outside my domain.
- Are there any ideas regarding business areas expansion?
- We have programs in different parts of the group to dispose of non-core assets. But if we were to talk about the companies that are frequently mentioned, it is more likely to be partnership and IPO than divestiture of assets. This does not rule out the sale of individual assets, but such deals will not be numerous since on the whole we are happy with the formed portfolio of assets. I would like to say once again that 2010 will not be a year of acquisitions for us, but a year of pinpoint investments in individual projects and partnerships, including through IPO and private placements.
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