By John Helmer in Moscow
Sovcomflot, the global tanker group run by Sergei Frank (left) and Russian government officials, received a negative rating report from the Moody’s international rating agency this week, as proceedings in the company’s half-billion-dollar claim against the former management wind up in the UK High Court in London. According to Moody’s latest report, Sovcomflot’s outlook has been changed from stable to negative.
Closing submissions from lawyers for the shipping company and for Dmitry Skarga, the former CEO (right), and charterer Yury Nikitin, reach the High Court in London this week, and oral argument will be concluded by March 31. Justice Andrew Smith is expected to rule by July. If Sovcomflot loses, it may face an order to pay defendant costs and penalties of more than $50 million, plus legal costs of its own, which are believed to be even greater.
The timing of the London court case, which has revealed the secret workings of the Russian shipping administration to an unprecedented degree, is likely to affect the Kremlin’s plan to privatize a bloc of Sovcomflot shares, either in a share auction open to foreign bidders, or by administrative assignment to a ‘strategic’ domestic investor.
In a market of falling tanker rates, the sale of a state stake of 20% to 25% may be targeted at book value of $1.2 billion, but the minister in charge, Elvira Nabiullina, isn’t saying that a target price has been decided; or the size of the shareholding to be offered; or the timing. Some maritime industry analysts believe a sale this year would require a substantial discount, and accordingly don’t believe the government will go through with the sale until later. There are also market observers who believe an early sale, at a discount price, is exactly what a Russian buyer of Sovcomflot shares would want.
The wholly-owned state company does not publish standard financial reports, audited and noted according to International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles. However, these reports are prepared confidentially for the company board, and they have been the subject of detailed disclosures and testimony in the Sovcomflot trial, which commenced before Justice Smith on October 1.
The last financial summary publicly issued by Sovcomflot appeared in September, and reported on the half-year ending June 30. Earnings (Ebitda) were reported at $305.9 million, down 26% on the year earlier, while net debt was at $2.1 billion. This indicated a debt-to-Ebitda ratio – a key indicator for Moody’s ratings and for Sovcomflot’s bankers – of 6.9.
Moody’s latest report implies that in the second half of last year, this ratio may have deteriorated even further, if earnings dwindled and net debt grew. The report, signed by Mario Vetulli, says: “Sovcomflot’s position in its BCA [Baseline Credit Assessment] category had weakened throughout 2009, given the negative condition of the tanker market; Moody’s therefore anticipates that credit metrics at year-end 2009 could be weak for the current rating category…Immediate downward pressure on the BCA will occur if, during 2010, SCF [Sovcomflot] fails to take the necessary steps to restore its credit metrics, showing a clear trajectory towards a debt-to-EBITDA ratio approaching 4.5x and if the EBIT to interest coverage ratio does not improve towards 3x.”
Sovcomflot company spokesman Andrei Kechashin told Fairplay the financial report for 2009 has not yet been presented to the board of directors. He declined to estimate the current debt-to-Ebitda ratio.
Over the short to medium term, Moody’s report claims, “the rating agency expects that SCF [Sovcomflot] will be able to reduce Debt to EBITDA towards 4x and improve the EBIT interest coverage ratio towards 3.5x. Furthermore a RCF to Net Debt not improving beyond the high teens, would be considered problematic for maintaining the current BCA.”
Moody’s last reported on Sovcomflot in April 2009, when it reduced its issuer rating by a notch from Baa1 to Baa2. The agency explained at the time that “the rating action reflected Moody’s decision to lower the government support assumptions for the company in the framework of Moody’s rating methodology for government-related issuers.” Since then Moody’s has not reported on the financial accounting manipulations that have emerged in the evidence and testimony of the UK High Court proceeding.
But Sovcomflot’s CEO Frank disputed the meaning of the 2009 Moody’s downgrade, claiming in the High Court during his cross-examination: “I think you are not quoting Moody’s, you are quoting the statements of [a] local tiny journalist in Moscow.…They [Moody’s] have simply downgraded us because Russian [sic] has been downgraded, and just to follow this track, they did it.” The journalist Frank was referring to was John Helmer. The Moody’s report Frank claimed to interpret said: “the [SCF] outlook could be revised or the rating could be adjusted downward in the event of weaker-than-expected market conditions and/or operational problems.” The new Moody’s report of March 9 is this downward adjustment.
According to Vetulli, there is more to come: “the rating agency will assess the effect of the proposed privatisation once it is implemented and its details fully disclosed.”
One indication that timing of the Sovcomflot sell-off is drawing near is the announcement, last week, that the board of Novorossiysk Shipping Company has authorized the funds for a buyback of shares of the main company that are presently in the hands of subsidiaries or affiliates. The move is a preliminary for consolidating all Novoship shares in the holding structure of Sovcomflot, which merged with Novoship in 2008, and now controls directly 75% of Novoship shares. At present, 23.2% of the Novoship shares are held by subsidiaries, and a free-float of 1.8% remains. The buyback offer is Rb80 per share ($2.68), just under the pre-crisis peak of Rb81.82.
The deadline for the Novoship buyback, and hence for the consolidation of Sovcomflot, is in mid-May. A sale of Sovcomflot shares cannot take place, therefore, before June or July.