By John Helmer in Moscow
The promoters of United Company Rusal at Bloomberg have kicked off a new marketing campaign for Oleg Deripaska’s heavily indebted aluminium company, disclosing this week that “Rusal is planning Russia’s first offering of bonds in China, spurred by McDonald’s Corp.’s debut sale in yuan.” A roadshow to test whether the Chinese taste for McDonald’s will carry over to an appetite for Deripaska risk products is planned with investors and banks in about a fortnight’s time. Yuriy Humber, Bloomberg’s ace reporter on Rusal’s affairs, found a source in Frankfurt, Germany, who says: “For Hong Kong-based investors, this issue will be a great diversification play with significant yield pick-up compared to the majority of local bonds.”
McDonald’s has a current market capitalization of $80 billion and a net debt of $10.6 billion. Rusal’s market cap is $16 billion, and its net debt is $12.2 billion. McDonald’s revenues, earnings and profits dwarf Rusal’s by magnitudes of 2 to 3.
An influential European investment fund manager, who has been a target of Rusal pitches in past roadshows, suggests that although there was Russian government backing for Rusal’s restricted share sale in Hong Kong last January, the politics in Beijing of supporting a yuan-denominated bond on Deripaska’s behalf have yet to be tested. “I am puzzled that they are issuing yuan bonds, and they are unlikely to be cheap,” the source said. “The bonds will have to be priced attractively to attract sufficient demand.”
That’s market talk for raising the interest rate or coupon cost of the proposed Rusal bonds, so that they may end up costing the company as much, if not more than its current bank loans. The charge to Rusal, according to the source, “will depend on the structure of the bonds, and particularly where the bonds will rank relative to the bank debt. But the bonds will almost certainly be lower ranking in the event of default than the bank debt. Therefore, the bond holders would demand a high yield to compensate. One mitigating factor may be that Rusal’s bank debt was restructured at the height of the financial crisis and market bank and bond debt yields have generally fallen since then.”
As he approaches Forbidden City for favour, the big test facing Deripaska is whether he can afford the price of admission. “If I were lending money to Rusal,” says the European fund source, “I would demand a junk bond type of yield because of where it would rank among creditors, i.e. just above equity holders.”
Even if that price is unusually high, there may be a reward for Deripaska if he pulls off his kow-tow. “I don’t think this issue is just about the yield which Rusal might have to pay on these bonds,” said the source familiar with the matter. “If the issue is $500 million, it would still be small relative to the size of Rusal’s debt. It is more about the high profile Rusal expects to obtain by being one of the first issuers of yuan-denominated bonds.”
With arranging by Standard Chartered Bank, McDonald’s Corporation sold 200 million yuan (US$29.5 million) of 3-percent notes, with a three-year term, on August 20. The Hong Kong market bond sale was the first by an international non-financial corporation to raise Chinese money since Beijing allowed such foreign debt issues in February. McDonald’s said the purpose of the money-raising was to pay for another 170 or so restaurants in China, to add to the 1,100 it already operates.
Rusal has already had a signal failure with Chinese investors when it sought strategic equity investment from them in 2008. The subsequent approval of the Hong Kong market regulator and the stock exchange listing committee was a close run thing: the small share listing in January came with unusual restrictions on the marketing of the shares; special waivers and qualifiers attached to the prospectus; and the guarantees of several anchor share-buyers, who included the Russian state banks and Nathaniel Rothschild. A Wall Street Journal reporter called the share offer “about as enticing as an invitation to invest in Bernie Madoff’s boys’ latest venture”.
If Deripaska’s success in selling unsecured Rusal equity since January is measured by the downward share price trajectory – minus 25% at the close of Hong Kong trading today — the risk of a bond sale to a bigger market will be gauged by the price to be offered in the weeks to come.
While the Hong Kong institutions are at their counting-frames on that one, there have been mixed political signals from other parts of the world on the creditworthiness of Rusal risk.
The good news is in Jamaica, where in July the Mining Minister James Robertson presided at a ceremony to reopen Rusal’s Ewarton alumina refinery at half-capacity. This followed two years of close-down and the loss of 2,000 jobs. Robertson said publicly he is looking to Rusal to produce new investments in Jamaica. “With the restart, the retooling of these plants, we are looking at at least US$1/2 billion worth of investments,” he was reported as saying in the Jamaican press.
A few days later, according to a Jamaican source, Robertson was flown on a private visit to Australia, where he was given a tour of the Queensland Alumina Refinery, which is part-owned by Rusal. He was hosted there by John Hannagan, the Rusal Australia chairman and a well-known lobbyist for the aluminium industry in that country. Robertson hasn’t responded to questions about the purpose of his Australian trip, and who paid for it. Queensland Alumina confirms that Robertson was taken to the refinery on August 10 “by two members of Rusal, John Hannagan and Geoff Blatch”. Blatch, QAL said, is general manager of Rusal Australia, based in Brisbane. The refinery source said the purpose of Robertson’s visit to Australia was to meet with Rusal.
Hannagan, who is the principal of a small publications relations firm in Melbourne, said he would not respond to questions about the purpose of Robertson’s trip, who had paid for it, and what Australian government or Queensland state officials Robertson may have met. “Sorry, the questioning is quite odd. I’ve got nothing to add”, he said by telephone. Regarding whether Rusal had paid for Robertson, Hannagan said that asking the question and publishing the non-response is “an inappropriate and unacceptable standard of journalism”.
The position of Rusal in Australia has been threatened by the results of the national parliamentary elections which returned a hung parliament on August 20; no party holds a majority of seats to wield power. In subsequent negotiations with several independent members of the new parliament and with the Australian Greens party, outgoing prime minister Julia Gillard has secured a one-vote majority in parliament to continue governing. The future of Rusal in Queensland, which had been discussed with the Australians when Deripaska visited the country in April, before the election was called, now depends on the leader of the Greens, Senator Bob Brown. His attempts to question Gillard and her ministers on their contacts with Deripaska have so far been rebuffed by Gillard’s ministers.
One of the issues which Deripaska is believed to have discussed with the Australian government, and its lead mining company, BHP Billiton, is their backing for a new system of pricing global alumina trades, particularly to China. For Rusal, the hope is that with backing from Canberra, it can extract a higher sales price out of Chinese buyers. According to a financial report and commentary issued by Rusal on August 31, “we anticipate that the market will introduce an alumina index, which will track spot price sales, and we expect this could happen next year. Currently, other global aluminium and alumina producers support a new pricing index for alumina.”
As told to Bloomberg by Rusal’s investment director, Oleg Mukhamedshin, China is “going to be one of the largest markets for Rusal. We need to grow our presence on this market.” Again, the price at which Rusal may conduct its business with China is in the balance.
In the west African republic of Guinea, where about 20% of Rusal’s bauxite assets are located, including the biggest bauxite reserve in Rusal’s current portfolio, the news has not been positive. There the Chinese have their own ambitions to mine bauxite and produce alumina for shipment back to their aluminium smelters.
According to Guinean sources, there has been a renewal of Rusal’s campaign against Guinea’s Mining Minister, Mahmoud Thiam. Thiam has led his government’s efforts to revoke Rusal’s operating concession for the Friguia alumina refinery, and to claim up to a billion dollars in proposed fines and compensation for alleged violations of the company’s concession agreements. Thiam has also warned Rusal that it faces revocation of the Dian-Dian bauxite mining concession. Rusal’s Hong Kong Stock Exchange prospectus reported Dian Dian’s importance to the company. “The Dian Dian deposit is located 350 km north of Conakry in the Boke province, and is a unique deposit containing around 1 billion tonnes of bauxite ore with a high aluminium content and insignificant amounts of hazardous impurities.”
Negotiations between Thiam and Rusal have been going on for more than a year without resolution of these conflicts. In June, following a flying visit to Guinea himself, Deripaska announced that “our negotiations were held in a friendly and constructive atmosphere, which enabled us to reach a number of specific decisions.” The election of a new Guinean president and of a new parliament are still pending. However, the friendliness appears to have deteriorated. According to sources in Conakry this week, the company has attempted to start a local media campaign against Thiam, and encouraged Guinean reporters to participate. Thiam declined to comment.