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magic_alscon

By John Helmer, Moscow

United Company Rusal, the state aluminium monopoly run by Oleg Deripaska, is selling the Aluminium Smelter Company of Nigeria (Alscon). Only the Rusal announcement to the Hong Kong Stock Exchange (HKEx) doesn’t put a name to the asset. Rusal is also not accepting that the Nigerian courts have already decided the Alscon asset isn’t Rusal’s property to dispose of.

The decision to sell Alscon was reported to the exchange on April 8. The notice explains that the Jersey subsidiary of Rusal, RTI Limited, has hired Renaissance Securities to provide “financial advisory services in respect of a potential sale of shares of a subsidiary(ies) of the Company.” The services are to cost “up to USD10 million (including a fixed success fee of USD3 million and an incentive fee of up to USD7 million) for the entire term of the Mandate Letter, including any extended period of the term.”

The notice goes into detail on how the $10 million may be disbursed in instalments, including a down payment of $500,000, a success fee of $3 million, and an “ incentive fee of up to USD7 million (which is based on a percentage of either 2% or 3.5% of the transaction value in respect of the Sale of Shares, depending on the actual size of the relevant transaction).” That arithmetic implies that Rusal has told Renaissance Securities its asking price is $200 million, and its wishful price is $350 million.

Rusal’s notice also explains that because Renaissance Securities is part of the Renaissance Capital group, which Mikhail Prokhorov took over from Stephen Jennings in 2012, and because Prokhorov is a 17.02% shareholder in Rusal, Prokhorov’s nominee on the Rusal board didn’t vote on the award of the mandate.

In short, that’s everything a normal corporate governance code would require — except that in not identifying the asset for sale as Alscon, the board is omitting to tell the HKEx it is proposing to sell stolen goods; at least, that’s the judgement of the Nigerian courts, which have assessed Rusal’s privatization of the smelter between 2004 and 2006, and judged it several times over to have been corrupt and fraudulent. The Nigerian Supreme Court, the country’s highest court, ruled in July of 2012 to nullify Rusal’s privatization award. The full story can be read here of how the asset came into Deripaska’s hands at a price below the one offered by the Nigerian-American group, Bancorp Financial Investment Group Divino Corporation (BFIG); how the deal was challenged in the federal US courts until they decided jurisdiction should be in Nigeria; and how Rusal has been challenging the decisions of those courts in the US and in London.

Bloomberg has reported that Alscon is the asset to be sold, according to “two people with knowledge of the situation”. The report is accessible only to private Bloomberg subscribers at link {NSN N3PPW76S972P }. A Rusal spokesman said today he cannot confirm the information.

In Moscow Renaissance Capital and Prokhorov’s holding Onexim were asked to clarify whether the legal status of Alscon allows them to try selling it. Renaissance Capital did not respond. A spokesman for Onexim said they are not commenting on the information.

Rusal has started and halted production of aluminium at Alscon more than once. In 2008, production that year was just 9,000 tonnes; in 2009, 11,000 tonnes; in 2010, 18,000 tonnes; in 2011, 15,000 tonnes; in 2012, 22,000 tonnes. Last year the output was just 2,000 tonnes. Under Rusal management the plant has never reached its design capacity of 193,000 tonnes per annum.

alscon

A potential US buyer for Alscon is unlikely to materialize, not least because the US government has confirmed what the Nigerian courts have subsequently decided. A US Embassy cable from Abuja, dated August 2004 and published by Wikileaks in 2011, told the State Department the Nigerian government’s action towards Rusal had reflected “a lack of transparency in the bidding process, and perhaps some corruption as well.” BFIG is now suing the Rusal group for $2.8 billion in lost or unrealized profits, damages, and costs.

If the legal contingencies aren’t costly enough, Rusal documents acknowledge that the present value of Alscon is nowhere near the $200 million minimum Rusal is asking Renaissance to find. In 2006, when Rusal first proposed to pay for 77.5% of the shares, the deal terms valued the asset at $323 million. Rusal then got the Nigerian government to cut the price – wrongfully and corruptly, BFIG argues — so the asset value dropped to $168 million. In December 2007 Rusal says it bought a 7.5% stake from a German shareholder for $12 million. That indicated total asset value of $160 million. “The impact of acquisition on the financial results of the Group for the year ended 31 December 2007 was not significant,” Rusal’s IPO prospectus of December 2009 claimed. Alscon’s book value then was just $183 million. At the time, the prospectus claimed “the Group is currently considering a disposal of 50% of its interest in ALSCON to a strategic investor.” That came to nothing.

BFIG’s US lawyer, Jimmie Williams, said today no sale of Alscon would be lawful, and any buyer attempting to take over would face the Nigerian courts. Referring to the HKEx notice, Williams says: “this is just another example of how Rusal makes a mockery of the rule of law. BFIGroup is and remains the rightful owner of ALSCON, and any buyer who attempts to purchase this property would be doing so at their peril. We will continue with all legal efforts to enforce our rights, and, as we have demonstrated, will take action against any entity which interferes with those rights.”

On April 30, the Federal High Court in Abuja is scheduled to rule on BFIG’s motion to enforce the 2012 Supreme Court order and strip Rusal of the smelter shareholding. On that day too, BFIG will commence trial of its $2.8 billion damages claim against Rusal.

A Rusal source reports that sentiment inside the company is sceptical of any interest to buy Alscon from Rusal. “Before Rusal bought it, the smelter was idle for about ten years for good reasons. There is a huge technical problem with alumina delivery due to the unusual draft problem requiring extensive and expensive dredging every year, while local fishing tribes also request a high penalty/tax to be paid every year, as dredging at the river mouth would allegedly affect their fishing.”

That leaves one possible buyer for Alscon – Deripaska himself. The control shareholder ploy of buying back loss-making and depreciating assets from the balance-sheets of their listed metals companies has been tried by Alexei Mordashov at steelmaker Severstal, and most recently by Roman Abramovich and Alexander Abramov at Evraz.

BFIG suspects the Renaissance Securities mandate is a cover for a deal between Prokhorov and Deripaska. According to Williams, “it is obvious that Rusal is attempting to shed this liability in anticipation of our court rulings. So you would have to ask, what legitimate buyer would agree to take on such a risk? Presumably one who would serve as a front to allow Rusal to launder this liability. Thus, Rusal should not assume that any purported sale would relieve it of its liabilities for the role it played in interfering with our rights.”

Rusal has acknowledged in recent days that it is under intense pressure from the government-owned China Development Bank (CDB) to produce cash, reduce its indebtedness, and bring its balance-sheet into line with the loan covenants required by CDB and other international lenders.

cdb

The Chinese are not alone. Rusal’s auditor KPMG issued a solvency warning on March 28 in the presentation of Rusal’s 2013 financial report. The report indicated a bottom-line loss of $3.2 billion for the year, and accumulated liabilities of $13.9 billion. Net debt was $10.1 billion. According to the auditor, “unless the Group is able to restructure the terms of its debt facilities, there is significant uncertainty as to whether the Group will have sufficient liquidity to meet its scheduled principal repayments of debt in 2014. Management also expects that the Group will breach certain loan covenants for existing debt facilities which will be measured on 31 March 2014 following the expiry of a covenant holiday… There can be no certainty that a mutually acceptable restructuring of the syndicated facilities will be achieved in which case a demand for the immediate repayment of the majority Group’s debt could be made which may then result in settlement through a transfer of collateral.”

Today Rusal issued a revision of its financial reports to take account of its falling share of Norilsk Nickel’s dwindling profit, announced on April 7. The new Rusal loss for 2013 is $3.32 billion.

These financial reports fail to mention that Alscon is for sale. They do mention the Nigerian litigation, claiming “the Company does not expect the case to have any material adverse effect on the Group’s financial position or its operation as a whole.”

Rusal’s report admits that to manage the $4.75 billion loan from international banks, which was issued in September 2011, it must obtain “unanimous consent from the lenders”. CDB, or any other bank in the syndicate, is thus in a position of vetoing Rusal’s refinancing, and pushing Rusal to the brink. Rusal does not disclose the identity of the banks in this loan syndicate.

Exactly what CDB has been refusing to accept in Deripaska’s offer of terms has not been revealed by either Rusal or the Chinese. Their disagreement was the subject of negotiations by Rusal executives in Beijing at the end of March. The outcome of the negotiations is unclear, however. Rusal told Bloomberg on March 31 “the one holdout is a small institution in Europe…declining to identify it.”

According to Rusal on April 9, it is still unable to report unanimity of its bank lenders. Instead, it has proposed to postpone its compliance with loan terms for three months. But even this, expressed as a “forbearance request letter”, has secured the support of no more than a “majority” of the banks. Between the number comprising this majority and the number short of unanimity there appear to be several international banks, including CDB, which have been threatening to accelerate Rusal’s loan repayments, call in security pledges, and start insolvency proceedings.

“If the Company” — note the if — “is successful in obtaining unanimous Lenders’ approval for the Amendment Agreement and the Amendment Agreement becomes effective, then the Forbearance Request Letter will cease to apply and will be overriden [sic] by the Amendment Agreement.” This acknowledgement from Rusal is plain — there is not yet agreement among the banks for the refinancing terms, nor agreement to hold off on foreclosure for more than 12 weeks.

Rusal has told Bloomberg one of the conditions it has agreed with the international banks is the sale of non-core assets. If these can be sold, Rusal has also announced, the proceeds must be paid to the international lenders until the ratio of net debt to earnings before interest, taxes, depreciation and amortization falls to 3. The ratio currently stands at 4.9, according to data compiled by Bloomberg.

Even if there were a buyer for Alscon and if the deal survived legal challenge, it is unlikely that an Alscon sale can make a difference in the short run; or that CDB and others in the foreign bank syndicate believe that Deripaska can mend the Rusal loan covenants by paying $200 million to $350 million for the Nigerian smelter. The one asset some bankers are believed to be insisting on is the sale of Rusal’s 27.82% shareholding in Norilsk Nickel. At today’s market price, that would be worth almost $8 billion. But Deripaska has refused, repeating as he has for several years now, that such a deal is possible only over his dead body.

If the Chinese Government is behind the CDB demand, then Deripaska’s life expectancy is likely to be on the agenda when President Vladimir Putin meets President Xi Jinping in China next month. If Putin backs Deripaska and refuses to agree to the sale of Rusal’s stake in Norilsk Nickel, then the Chinese may insist that Russia’s state banks buy out those foreign banks which refuse to prolong their loan agreements beyond the July deadline.

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