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01.08.2009  
  Neft & Kapital,  
 

Against Government Guarantee the debts of “Kazanorgsintez” are restructured by the creditor banks


 
 

In July, the Commission on Improvement of Economical Development headed by the Senior Vice-Premier Igor Shuvalov recognized the expediency of provision of the creditor banks with the government guarantees for 15 billion rubles for restructuring of the enterprise’s debt appeared in the context of the global crisis; it also offered the Russian Federation Government to make a favorable decision on this issue. At the same time the creditor banks were proposed elaboration of a refinancing model in the course of two weeks (a week before the planned finalizing of state guarantees’ formalization). From the perception of the shareholders of “Kazanorgsintez”, debt restructuring implies not only keeping the control over the company but also an opportunity of implementation of the plans announced concerning further development of its production capacities.    
The coma in which Russian financial system slept in the context of crisis provides a devastating effect on the real sector of economy. Once cut off from financial sources, enterprises cannot operate properly and many of them, primarily those having foreign exchange loans, have found themselves on the verge of bankruptcy. Meanwhile there are available funds in order to support them. In autumn 2008 the biggest Russian state-influenced banks of the received subsidized loans amounted to 900 billion rubles for the purpose of financing of the real sector and subject to 2% monthly expansion of the credit portfolio. However they failed to fulfill the task set — the major amount of funds never reached the industry. Upon acquisition of the loan at 10% per annum (such figures were announced in December by the Head of Sberbank German Gref) the banks offered loans to enterprises at overwhelming 18 – 24%, the loans being short-term and subject to the banks having rights to covert the debts into the debtors’ shares in case of delay in payments.
 Taking into consideration the situation on the market, the banks would have become owners of huge business assets in the nearest future. But it would have been pretty much complicated for the bankers to deliver administration over them - management of finances and production are two different areas. Of course, assets may be sold. However at the present day capitalization of enterprises and, consequently, its market value dropped sharply, meanwhile sell-off at low prices cannot always ensure 100% compensation of the debt in question. Besides, the government is not indifferent towards how professional the new owners are in order to safeguard the tax base – experiments are unacceptable here. As a result, in the face of a catastrophic deficit of financial resources experienced by the real sector the funds allocated to the banks for the purpose f its support was not disbursed.  
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From the Dead-Lock

While the government was elaborating the strategy and crisis-proof measures, carrying out financial injections to the selected strategic companies, some information started emerging concerning the defaults on the debts announced by the manufacturers in various industries. Thus any other delay in solving this problem was impossible.

 On June 18 Vladimir Putin adopted a final version of the Russian Federation Government’s crisis-proof program for 2009 valued at 2,3 trillion rubles implying a series of measures aimed to stop recession in the economy. “The government will support efficient enterprises experiencing temporarily difficulties resulting from the deficit of demand and limited availability of credits,” – the program says. In the meeting aimed at preparation of the federal budget 2010-12 Premier requested the largest state-influenced banks (Sberbank, VTB, VEB, «Gazprombank» and «Rosselhozbank») to expand crediting of productions by 150 billion rubles as early as in July and bring it to 450 billion rubles per month by October. For all that, he particularly noted that while expanding crediting of priority industries the banks must lower the costs of credits to the levels acceptable for the real sector.     
The bankers did not like the last part. And this is quite understandable. Today many financial institutions face problems of non-performing of loans given before (for instance, “bad debts” of VTB for the first 4 months amounted to 25,9 billion rubles). With a glance to that, the government is willing to guarantee a repayment up to 300 billion rubles to the banks. Besides, the government is finalizing a bill on provision of loan guarantees; in connection with this the Premier commended to involve also commercial banks, financing strategic enterprises, in the crediting of the industry. The task to ensure efficient performance of the economy’s “circulatory system” was assigned to the Senior Vice-Premier Igor Shuvalov.
Shuvalov reported to the Premier about the course of implementation of the abovementioned commissions as early as on July 8. Enterprises submitted applications for new loans amounting to more than 700 billion rubles to state-influenced banks, 200 billion of which the banks would like to give against state security. Besides that, clients of five banks applied for refinancing of existing loans amounting to 415 billion rubles. In the structure of crediting Sberbank accounts for up to 250 billion rubles, VTB – up to 100 billion, VEB – up to 60 billion, and «Gazprombank» and «Rosselkhozbank» - up to 50 billion. They were ready to provide initial 164 billion rubles as early as in July. As for the provision of additional state guarantees to the credits by the government, that are to be given for sure, their formalization was due to be finalized by August 1.

Perfect Instance

One day after the report to Premier, Shuvalov left for Kazan where he conducted a meeting in OJSC “Kazanorgsintez” (KOS) – an enterprise claiming refinancing of loans.     
Why KOS? Probably, because this instance perfectly shows which enterprises may count on the support.  Their characteristics were clearly identified by Vladimir Putin in July at a meeting with bankers: “The support must be given to the manufacturers who have realistic operating plans, produce goods in demand, and at the present time through no fault of their own found themselves experiencing difficulties due to prompt changes in market.”  KOS is a leader in national production of polyethylene; the enterprise has actively developed during the past 5 years. The first stage of modernization completed in August 2008 made it one of the most modern petrochemical productions in Russian and Europe.
The capacities introduced here produce commodities, import-substituting and competitive in world markets — bimodal and linear polyethylene and polycarbonates. (see. «At a new level» in «O and C» №9, 2008.).
Despite the crisis, producing capacities are being actively developed and output volumes are growing fast. It is a new production that was the main support for the enterprise in the beginning of the current year: even during the market meltdown it is still in demand thought the prices dropped, of course. Today with continuous rising of the production output it never lies unsold in warehouse. “We have no problems with sale, all new products are immediately marketable and are sold just-in-time”,— said General Director of Kazanorgsintez Leonid Alekhin, - “At the time being, up to 27% of bimodal and linear polyethylene and 65% of polycarbonate are exported, the rest is purchased by Russian consumers, the prices on both foreign and domestic markets being almost equal». According to Alekhin, in the last months prices tend to growth.  In May proceeds from sale reached 93% of the past year’s level, and in June and July - 78 and 96% consequently. The money earned are enough to pay taxes and other obligatory expenditures, salaries, and purchase raw materials, but they cannot cover timely servicing of the foreign exchange debts that became heavier due to devaluation of the ruble.  

No Good Deed Goes Unpunished

High accounts payable of KOS have resulted from the decision of the shareholders, taken when launching the project of its modernization, to implement it within a tight schedule and accomplish it in 5-6 years instead of 12 years. The process was to be speeded up through all the procedures necessary (basis and detail engineering, development of financing plans, purchase of technologies, expertise, order of equipment, construction and etc.) being carried out simultaneously rather than consequently. And financial organizations, both domestic and foreign ones (ABN AMRO Bank N.V. (RBS), ING «Banks Eurasia», VTB, «Raiffeisenbank», «Credit Europe Bank», «Eurofinance Mosnarbank», «Uni Credit Banks», RZB Finance, M&T Trust Bank, «Surgutneftegazbank», «Alpha Bank») supported this decision: they allocated over 46 billion rubles (out of which 30 billion rubles are still not repaid) out of total 54 billion rubles invested in the project.
The debts were supposed to have been repaid from the profit gained from sales. All the calculations made by authoritative expert organizations on the basis of the forecast of market environment suggested that the income would cover not only repayment of the debts but even financing of the next stages of the development of the enterprise. The crisis destroyed these plans. A dramatic decrease of purchasing power caused by the crisis both in Russia and abroad resulted in selling price’s drop in domestic and external markets. This all together with a rise in price of foreign credits created significant problems connected with timely servicing of the debts. And then the most unpleasant thing happened: creditor banks one by one refused to fulfill their financial commitments. According to the information provided to “O and C”by Albert Shigaboutdinov, Head of “TAIF” Group controlling KOS, the agreements in force implied financing of the initial stages of the projects via short-term credits and then, after their implementation and setting of new productions into operation, refinancing by a preliminary opened long-term credit lines for the whole period of the project’s payback.    
Everything went as planned till September of the past year. KOS’s credit portfolio included a set of both short-term and long-term credit lines (the last ones amounted to 10 billion rubles). Then, however, besides refusing conversions of short-term credits to long-term ones, the banks started closing the long-term credit lines opened before, from which the resources were not disbursed. The attempts to agree on restructuring of loans on acceptable conditions with redemption period prolonged failed.
Banks proposed loans’ restructuring at extremely high interest rate and also with repayment of a significant part of credit via additional issue of shares in favor of the third parties, i.e. laid a claim on property. In fact, this condition is unacceptable — with such complicated schemes of guarantee and large amounts of financing this is technically impossible to implement the projects of share issuance in such a short period. The arguments suggesting that full development of the first – priority capacities, planned to be completed by the middle of 2010, will allow producing an output to the amount of up to 60 billion rubles annually and solve the problem of debt servicing even at current prices, and will ensure full settlement of accounts during 5-6 years (in the worst case – in 8 years) made no impression on the creditors.
In order to persuade them, in April an American bank “Morgan Stanley” was invited as an authoritative financial consultant free of any liabilities to KOS. In May it presented its scheme of restructuring of debts. According to some data, this scheme implies unification of all the enterprise’s credits to one with maturity date in 2016 and deferment of payments till 2011. In the course of this time, according to the consultant, KOS will be able to fully settle accounts with creditors with higher interest rate as bonuses to the banks.   
Albert Shigaboutdinov assured that this scheme had been adopted by all the foreign banks and the majority of Russian banks with “some exceptions”. According to the information received by “O and C” these are VTB (1 billion rubles – 3% of the credit portfolio) and Sberbank, the biggest creditor of the company which gave it 8 billion rubles as a loan on the security of the property (25% of the credit portfolio).
The enterprise was literally driven into a corner by the uncompromising position of its main creditors. It managed to sustain till May by servicing the loans by the means of its own funds and the funds of the associated company. This financial flow, however, was not enough for further settling. On May 26 KOS announced the debt servicing default on the debts amounted to $20 million, and offered to restructure them in accordance with the recommendations of Morgan Stanley; after that, international credit rating agencies immediately and sharply lowered its ratings.

VTB needs control

Once aware of the default, the Head of VTB Igor Kostin sent a letter to Igor Shuvalov offering his own plan how to rescue the company. VTB was willing to syndicate a loan amounting to 10 billion rubles subject to KOS issuing an additional emission to the amount of 8 billion rubles. Based on current quotations, the additional emission would have amounted to 63,6% of the share capital increased. If the main shareholders of the company - “Svyazinvestneftekhim” and “TAIF” had refused redemption, their shares would have melted from 28,4% and 53,6% to 10,3% and 19,5% respectively.
In order to avoid it, VTB demonstrated fabulous “generosity”: it offered to provide KOS share holders with a loan so that they may redeem the additional issue and promised assistance in involvement of a new solvent shareholder of the same kind. The observers immediately considered it as promotion of the interests of “Gazprom” and “SIBUR” who have been showing interest to the assets of KOS for a long time (see. «Kazanorgsintez» undergoes a period of change» in «O and C» №7, 2008.) and obviously are willing to purchase it at the current all-time low prices (in 2008, according to the data of RTS, capitalization of the company dropped by 510% - from 25,1 to 4,8 billion rubles).
At the same time Kostin negatively estimated the plan of restructuring offered by Morgan Stanley and said that VTB did not agree with its market rates, two-year deferment of payment, and liquidity of security, impossibility of control over the enterprise’s activity and the lack of any agreement with Eurobonds’ holders on non-presentation to long-term repayment. He expressed anxiety that “non-constructive position of KOS shareholders may lead to the situation when the creditors will have to form a company’s bad debt reserves of approximately 14 billion rubles and a threat of avalanche-like default of “TAIF” Group will emerge with banks closing limits for Tatarstan enterprises”.   
In Tatarstan, the messages of the Head of VTB were taken as blackmail. A press-release published by the results of “TAIF” shareholders’ meeting held on June 26 literary contains the following: “Some organizations make attempts to complicate the work of the enterprise by the means of economical blackmail with the only purpose – to make it bankrupt”. In fact, this is what the President of Tatarstan Mentimer Shimiev told about in one of his interviews, saying that “the creditors, making use of the crisis, infringe on the property of Tatarstan companies instead of assisting them in addressing their financial issues».
In comments on the letter of VTB’s Head, Albert Shigaboutdinov told to “O and C” that these statements, put it mildly, do not represent the facts. Avalanche-like default may threaten the company only in case of a dramatic fall of the demand on the products of “TAIF” Group. In the meantime sales only grow, and so do prices (see «Polymers’ market gradually grows»).  Today up to 95% of petrochemical and oil refinery production of “TAIF” is highly liquid both in domestic and external markets. As far as the change of owners is concerned, it would have hardly improved the situation: there is no enterprise of this kind in Russia developing with more success. The fact that the shareholders’ investments to modernization of KOS exceed 50% of the total volume of investments is an evidence of their interest in successful implementation of the project. Besides, it would have been basically impossible to acquire approval of the additional issue from all the group creditors and all the shareholders from all the enterprises within the Group that made VTB’s proposal initially unworkable.
Shigaboutdinov expressed understanding of the position of the state banks, as they must address the issues of the unpaid debts of less promising borrowers. And they want to do it at the expense of the wealthiest enterprises experiencing temporary problems. At the same time he emphasized that it was important for “TAIF” to keep good relationships with banks that had been being established for many years.  That’s why the company “does its best to come to an agreement and guarantees repayment of all the debts along with all interests however within a longer period than those agreed when signing the loan agreements».
In May the situation grew so dangerous that Mentimer Shaimiev decided to resort to the President. Dmitry Medvedev assigned a task to the respective ministries «to sort things out and report», as such appeals used to come from the heads of other regions as well. Since that time the process of solution of the most painful problem of the real sector was significantly speeded up. And direct involvement of Vladimir Putin finally put the matter into motion.  

KOS got a chance

Before the meeting in Kazan Igor Shuvalov took a tour around the enterprise and could assess the results of modernization: “Huge work has been done over the last years; the Government of the Republic and the shareholders were fulfilling the task set by the Russian Government: they   organized refinery of domestic raw materials to high-added value products». He noted the completion of the investment-and-innovation project as well as the fact that in such a hard period the enterprise neither fires nor dismisses its specialists but, to the opposite, increases production capacity and do not decline plans for further development. If the crisis prevents the company from servicing the debt accrued to credit organizations under the same conditions then, according to Shuvalov, it must be supported in order to“prevent it from being destroyed by the burden of debts and experiencing hard pressure from credit organizations for repayment of the debt”.    
Vice-premier reported that the Government Commission on Improvement of Economical Development, of which he is a Head, decided to propose for the Government’s consideration the question of provision of KOS with guarantees to the amount of 15 billion rubles (i.e. the amount of the payments to be done during this year). «We count on a positive decision», — Shuvalov said. As he said, state-influenced banks along with the shareholders and KOS management were offered to elaborate a financial model in a 2-week period which “will make it possible to repay the debt during the period of validity of the state guarantee at the current market costs and provided the enterprise operates successfully”.
At the same time it became known that restructuring of the credits of KOS will be most probably carried out by Sberbank. It may be assumed that determination of refinancing conditions still remains the key question, in particular, that of interest rates and the periods of loans’ prolongation. As it is known, 14% per annum rate offered by the Government with the current interest rate of Central bank are considered to be too low by banks though KOS, on the contrary, counts on maintenance of the previous rates with regard to the agreements concluded —about 6%.
It was reported on July 20 that «Alfa-Bank» is ready to enter the game, responding to the call of Vladimir Putin addressed to commercial banks to contribute to the process of support of the real sector. It offered “TAIF” its own model of refinancing of debts. No details were reported about the model and its conditions.  Meanwhile it is known that “Alfa-bank” has long been a partner of “TAIF” crediting the projects of “TAIF-NK”. And so far the parties have managed to find a common language. There are offers from other financial institutions as well. So the debtor has options.   

If saving on raw materials

At the meeting in Kazan another questions was raised with Vice Premier, which, when solved, will help KOS to timely repay the loans. The question is the appropriateness of use of the tolling scheme for supply of ethane to KOS by “Sibur-holding” and “Gazprom dobycha Orenburg”  (see. «Big maneuvers» «O and C» №7, 2007.) which makes up 35% of the raw material consumed by the enterprise. 50% out of the total volume is supplied on the basis of the tolling scheme and another 50% - at the price agreed. In 2008 realization of this scheme resulted in 4 billion rubles of losses KOS suffered. Meanwhile, as some data suggest, profitability of this tolling scheme amounted to 84% for “Gazprom” while for KOS this index was negative (minus 3%).
In June the President of Tatarstan in the letter to Vladimir Putin asked for “a real assistance in cancellation - for the period of reconstructuring of the debt — till 2016 —  of the tolling scheme of ethane processing and transition to supply of this raw material on the basis of the sale agreement at the price not exceeding the existing one bound to gas market value ”. Igor Shuvalov admitted the existence of the problems mentioning that the scheme of ethane supply Orenburg-Kazan “is not quite transparent” and it implies interaction of a monopolist-supplier and monopolist-buyer and promised to analyze it soon, after that he would “give recommendations” (see “Real alternative”).
In the end of July the position of KOS in respect of processing gained support from FAS which insisted on exclusion of the tolling scheme from the agreement on ethane supply by “Gazprom’s” structures to KOS. The Head of FAS Igor Artemiev told that a respective letter has already been sent to Igor Shuvalov.


State Duma premitted

In July the State Duma adopted a law on speeding up of realization of state guarantees provided to banks with regards to crediting of the strategic enterprises.   
In accordance with them state guarantees are valid 70 days longer than the credit payment period. The period of the guarantees’ validity may be from 6 month to 5 years, and the amount of each loan – from 150 million to 10 billion rubles. In case the borrower does not fulfill the obligations, the government will reimburse the amount of debt guaranteed to the creditor. Funds for this purpose are included in the budget 2009 in the amount of 300 billion rubles.

Real Alternative

The problem of supply of ethane to KOS is urgent not only today but it is also a mater of future. Launch of the second stage of modernization of KOS is scheduled for 2010. Setting new capacities into operation will require additional volumes of raw materials (up to 1 million tons of ethane). It is known that there is a signed agreement between KOS and “Gazprom Dobycha Orenburg” company about increase of ethane supply by the means of intensification of natural gas refinery from current 36% to 90%. Today this would have given an opportunity for production of additional 150 thousands tons of polyethylene per year.   
Meanwhile, however, an option of provision of second priority productions with another raw material is considered – straight run gasoline (or liquefied gas produced in the process of oil refinery). By the launch of a new ethylene complex of KOS Tatarstan will have a sufficient amount of its own straight run gasoline. “TAIF-NK” that already produces over 2 million tons of this product per year may become the main supplier.   
If the oil refining unit’s capacity increases from 7 million to 10 million tons per year and the processing depth exceeds 95% this figure may increase up to 4 million tons per year.
Besides, about 1 million tons of straight run gasoline will be produced by “TANECO” oil refinery that is under construction. As known, “Tatneft” announced that construction of a petrochemical block is postponed while forcing organization of primary oil processing. With the launch of the plant expected in 2010 a necessity of production distribution will arise. As Albert Shigaboutdinov revealed to “O and C”, this issue has been addressed already in favor of republican petrochemistry:  “TANECO” has already submitted applications for a guaranteed supply of all the straight run gasoline and liquefied gases to the units of “TAIF” Group on a long-term basis. Finally, the government of Tatarstan adopted a decision about construction of the second oil refining unit within “TANECO” complex framework having a capacity of 7 million tons per year for refinery of oil produced by minor oil companies; a part of its production may also be raw materials for KOS.  
The switch of the raw material guidance line may significantly weaken the dependence of the petrochemical complex of Tatarstan on the external suppliers. This issue has not been solved though. According to Shigaboutdinov, the decision will depend on the choice of a strategic partner for the second and the third stages of modernization of KOS, his preferences and facilities. In the current year “TAIF” is intended to make new proposals to potential parties of the project, both domestic and foreign ones, in particular, to “Gazprom” and “SIBUR”; the agreements made with these companies in the past year were not implemented. The proposal also will imply a possibility of purchase of more than 2 million tons of ethane fraction per year, that is equivalent to purchase of more than 8 billion cubic meters of natural gas, by KOS on a stable long-term basis.  

 

 
 
 

 

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