By John Helmer in Moscow
Far Eastern Shipping Company (Fesco, ticker FESH)), the Russian dry-cargo fleet operator, plans to make a public issue of new shares to pay down debt. A total of 659.6 million new shares will be issued, the Fesco spokesman Stanislav Vartanyan told Fairplay; this bloc of shares makes about 23% of the company’s present charter capital. Vartanyan denies the move signals that recently disclosed plans to sell a substantial stake in the company to a non-Russian strategic investor have not materialized. But a Fesco report to investors a month ago did not mention the public share sale as an option.
The current market capitalization of Fesco is $1.1 billion, and a new share issue at the current price would amount to about $253 million. Short-term debt for coverage or refinancing this year is about $333.5 million, so it is unlikely the new share option, if fully subscribed, would clear this debt entirely. It is also unclear from Fesco spokesman Vartanyan how much cash the share sale is intended to raise, because no share price has yet been fixed.
Existing shareholders include the control shareholder Sergei Generalov with 56%, East Capital Fund of Sweden with 6.6%, the European Bank for Reconstruction and Development with 3.8%, and the Temasek fund of Singapore, with 3.1%. There is a free float of the publicly listed shares of 17.7%. According to Vartanyan, “it is, of course, impossible to tell the percentage of shares the shareholders will own before the placement takes place, it depends on the extent to which they will use their priority right.” But he added: “we can say with certainty that Industrial Investors [Generalov] will keep the controlling stake.” In order to do that, it is estimated that Generalov would be obliged to buy about one-quarter of the proposed new issue, paying roughly $64 million.
In April, Fesco said it was planning to refinance $456 million of long and short-term debt with an issue of at least Rb6 billion ($194 million) in three-year unsecured domestic bonds, and a further sale of 13% of the existing stock, held as treasury shares by Fesco, to a foreign investor for a raising of about $150 milllion. If Fesco is having trouble finding a new strategic stakeholder, Generalov and the other existing shareholders are having to put their money into the debt gap.
Generalov has attached his comment to the announcement of the new share issue, saying the move is “one element of the group’s financial strategy group to raise equity capital to improve the balance sheet structure, further reducing the debt burden and finance the team’s activities.”
Vartanyan told Fairplay the company is retaining all its options, and has yet to decide which of them it will exercise and when. “Preparation for placement of 690 million new shares does not affect the decision on bonds and (or) the sale of treasury shares. It is incorrect to speak about the sale of treasury shares to a strategic investor – the choice of potential buyers is wide, and will more likely include financial investors. The three-year ruble bond issue plan is at the stage of prospectus registration. It is wrong to affirm that placement of the new issue of shares is intended to replace anything of the mentioned above. We have formed a diverse set of tools for the implementation of our financial strategy. It is the subject of individual management decisions, which of them, in what order and when we will use [them]”.
One possible reason for Fesco’s refinancing difficulties is that the audited financial results of the company for 2009, and its key banking covenant for the debt to earnings ratio, remain undisclosed for the present. On May 14, the company released an unaudited partial summary of financial results for last year. The presentation indicates that revenues for the Fesco group fell from $1.3 billion in 2008 to $649.6 million last year. Earnings (Ebitda) dropped from $356 million to $102 million. No net income or loss figure was disclosed.
The company document — apparently available to selected investors in April, one month before it was released on the company website — also claims that total net debt currently stands at $674 million, down from $845 million on January 1, 2009. The company document also adds this note: “In addition, 2009 IFRS accounts will show US$333.5 million of ‘short-term debt’ reclassified from long-term facilities due to technical breaches of covenants and waivers.” Fesco reveals in the presentation that it is seeking a waiver of its debt to Ebitda covenant for this year.
According to Fesco’s presentation to investors, in April there were just two new fund-raising options in the company’s strategic plan — the sale of the 13% bloc of treasury shares, whose value was estimated at the time between $140 million and $160 million; and the rouble bond issue, for which, according to the Fesco document, VTB Capital, ING, and Citibank have been appointed as lead managers.
The latest announcement of a public share sale reflects an apparent change of mind on the part of Generalov and his lenders. It also indicates that the value of the Fesco treasury shares is falling. The principal lenders holding Fesco debt are also those identified as arranging the rouble bond.
A report by the Moscow brokerage Troika Dialog suggests that the debt rollover problem for Fesco depends now on “the placement price [which] is likely to be set closely to the current market level: on one hand, the open subscription is to prevent FESCO from overrating the price; on the other hand, focus on investors will not permit the company to float the shares at a huge discount to the current price.”
Renaissance Capital, another Moscow brokerage, says in a report today that the recent recovery in Russian container volumes will help lift Fesco’s revenues, but qualifies the assessment because of doubts about box rates and Fesco’s debt refinancing options. According to Alexander Kazbegi of Renaissance Capital, the first-quarter rise in import flows of container goods “will be most beneficial for FESCO (FESH), which generates two-thirds of its revenues from container-related business…In 2010 we expect 4.2% GDP growth and a 5.1% increase in disposable income, and with non-food retail sales already at the 1Q08 level, we see container traffic remaining strong in 2010-2011.”
At the same time, Kazbegi warns: “shipping rates have not increased much since 2009, and [Fesco] debt restructuring may only be finalised in one-to-two months. The visibility of financials has improved, but we think FESH’s profits will not return to the 2008 level until about 2012.”