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By John Helmer, Moscow

The international ratings agency Fitch has downgraded its assessment of the Ukrainian pipemaking group Interpipe, owned by Victor Pinchuk, warning that Russian action since July to impose penalty duties on Ukrainian pipe imports is causing a serious loss of sales and a grave shortage of cash for Interpipe. If that continues, a release from Fitch says, the company “is unlikely to be able to meet its scheduled debt repayments.” The Fitch report was issued in London on Monday. It comes just three months after the agency had reported that the outlook for Interpipe as stable, confirming at the time Interpipe’s B- rating.

In the latest action Fitch says it is downgrading Interpipe to CCC. Sources close to recent talks between Fitch and Interpipe describe the triple-C rating as indicating, according to the Fitch methodology, the high probability of default.

The reason, according to Fitch, is “the operational and financial uncertainty created by two current trade matters involving the export of pipes to the Customs Union involving Russia, Kazakstan and Belarus – Interpipe’s largest pipe export market accounting for approximately 25% of total pipe sales in 2012 – and the US respectively.” From July 1 the Russian action imposes a prohibitive 19.4% duty on pipe imports from the Ukraine.

The threatened US import penalty duty is even worse. American action, announced on July 23, is an anti-dumping inquiry under way at the International Trade Administration (ITA) of the US Department of Commerce; the target is imports of Oil Country Tubular Goods (OCTG). Ukraine is one of nine countries under investigation for allegedly exporting its pipes “at less than fair value” and as a result causing “material injury” to the US industry. According to the ITA announcement, Ukrainian exports of the pipes under investigation jumped in value from $42 million in 2010 to $130 million in 2012. The US investigators estimate that the penalty duty which may be imposed on the Ukrainian imports would range from 26% to 31%. That decision is scheduled for early in 2014.

One of the complainants in the case is TMK-Ipsco, the North American subsidiary of Russia’s pipemaking group TMK, owned by Dmitry Pumpyansky.

Interpipe’s latest financial report, released in August, covered the year 2012. By year’s end, Interpipe said its debt totalled $1.1 billion. The largest single creditor owed money by Interpipe is the Italian Government: a least $300 million is owed to the Italian export credit agency SACE, which has covered funding for mill production equipment supplied by Danieli for the new 1.3-million tonne capacity electric arc furnace which Interpipe started last October.

Bondholders, including Eurobond, rouble and hyrvnia issues, are owed more than $300 million, while a syndicate of international banks is owed about $550 million. Interpipe has declined to provide more recent debt data or identify its bank lenders. According to a SACE release of May 2008, two of the international banks are Barclays Capital and Citi.

In its June 14 report, Fitch reported that Interpipe was in negotiations with its bank lenders to increase its credit limits and waive “expected leverage covenant breaches over the remainder of 2013.”

According to this week’s report from Fitch, Interipe is now running short of cash because of the loss of sales to Russia. Also according to Fitch, they represent between 25% and 30% of Interpipe’s export volumes. According to the company’s 2012 financial report, pipe sales to Russia amounted to $497 million, 28% of total sale revenues; sales to other CIS countries came to $278.4 million, or 16%; and sales to North America, $172.8 million, or 10%. The Russian import duty will also be applied by other members of the CIS Customs Union – Kazakhstan and Belarus. Domestic Ukrainian pipe sales amounted to $531.1 million in 2012, or 30%.

Fitch reports that a debt repayment of just over $100 million was made by Interpipe in May; another $106 million is due in November. But according to Interpipe’s balance-sheet, it appears to have insufficient free cash to meet the obligation. Without a change in Russian and CIS import policy, Fitch warns that restructuring of the debt by SACE, the banks, and the bondholders will be required to head off default. Next year another $304 million is scheduled for repayment.

Sources in Kiev report that Interpipe has already defaulted on a payment of 570,6 million hryvnias ($68.5 million) owed to local gas supplier Naftogaz, and ordered by a string of Ukrainian court rulings last year. Other gas bills are also pending for Interpipe in the Ukrainian courts. A source in the office of Prime Minister Mykola Azarov claims the prime minister recently urged Naftogaz to buy more pipes from Interpipe; Naftogaz reportedly refused.

Kiev sources also report concern at the departure of Interpipe’s chief financial officer, Alexander Chernyavsky (Oleksandr Cherniavskyi), during the preparation in April of the audited financial results by Ernst & Young. His exit was not announced by the company. His replacement according to Interpipe’s website is Vladislav Shulga, an executive formerly with Russian aluminium producer, Rusal.

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