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By John Helmer in Moscow

Far Eastern Shipping Company (Fesco), the third largest of Russia’s fleet companies and the dry-cargo leader, reveals plummeting profit for last year will be followed by loss-making this year.

The bad news has taken some time to be disclosed by the publicly listed shipping company, which operates a fleet of 63 vessels, with an aggregate 866,000 tonnes in deadweight. A writedown of $166 million was taken in fleet value for the year. 52 of the vessels are mortgaged to secure loans from ING, Calyon, Citibank, and Vneshtorgbank. In all, Fesco’s liabilities total just over $1 billion, with $541 million classified as due for short-term repayment.

The company said it is planning on a $150 million loan coming through from the European Bank for Reconstruction and Development (EBRD). However, Richard Wallis, an EBRD spokesman, revealed to Fairplay that there is no sign of loan approval or the required preliminaries. “The EBRD cannot disclose confidential information about due diligence that might have been carried out regarding any company”, Wallis said. A year ago, the London-based EBRD paid $120 million for a 3.77% shareholding in Fesco. The EBRD has now lost most of its investment on paper: the stake is currently worth $32 million. After verifying that nothing new has been posted on Fesco since then, Wallis added: “I am declining to comment on any potential project until it appears as such on the EBRD website.”

Fesco’s audited financial report for 2008 was issued on July 15, three months later than the April reporting deadline Fesco has stuck to in the past. Controlled by majority stockholder and chief executive Sergei Generalov, the company’s revenues for 2008 were $1.3 billion, up 43%. But costs jumped 57%; there were $21 million in bad debt writeoffs; $67 million in foreign exchange losses; $44 million in impairment losses; and net profit shrank 81% to $20.1 million. Generalov owns Fesco through the eponymous SVG holding company, registered in Luxembourg.

A Fesco source explained the rise in costs as “proportional to the growth of FESCO’s administration. FESCO launched a container terminal in the Far East, founded the managing organisation in Moscow (January 2008), and in the first six months of 2008 the group set up new offices.”

The company has told analysts it is expecting up to 35% less revenue for this year, and up to 45% less in earnings before tax. According to Troika Dialog, a Chinese-funded investment bank in Moscow, Fesco will run a $39 million bottom-line loss for 2009. Worst hit in the Fesco group’s divisions, a Troika Dialog report claims, will be the rail division, followed by containers and ports, with shipping performing better, if only relative to the other business divisions in the group. The loss projection is substantially larger than has been predicted by Generalov. “Time charter contracts entered into by the group’s shipping segment in 1Q09 (when the Baltic Dry Index was still hovering around the 2,000 below mark), coupled with notable declines in vessel utilization, will weigh on the segment’s results in 2009,” reports Troika Dialog analyst, Kirill Kazanli.

Moore Stephens, the auditor who reviewed Fesco’s reports, has attached a notice to the latest disclosures, which differs significantly from the wording of its opinion for 2007. In the earlier report, Moore Stephens expressed “an unqualified opinion on the financial statements…[which] are consistent, in all material respects, with the financial statements from which they are derived.” This month Moore Stephens reports: “we believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group.” A Fesco spokesman dismissed the change, claiming “requirements for auditors have changed. Now they include the list of auditor’s responsibilities.”

A report this week by Moscow brokerage Finam warns clients to sell Fesco shares, noting that “the company has breached covenants on its debt obligations, which gives creditors the formal right to demand early the repayment of debts. We do not rule out that creditors may take advantage of the situation.”

Fesco’s share price has lost 12% in market trading so far this week; 23% over the past month.

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