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Step-1, believe me, I have no money Step-2, you drop your money in my hand Step-3, I wave goodbye and sail on my way

By John Helmer in Moscow

Far Eastern Shipping Company (Fesco), the listed Russian dry-cargo fleet operator controlled by Sergei Generalov (left image), says it has run into a debt refinancing problem with the Russian state bank, Vneshtorgbank (VTB).

A Moscow report by Kommersant newspaper, quoting from a November 5 letter Generalov sent to the Deputy Minister of Economic Development, Oleg Saveleyev, and a report this week from the Moscow brokerage Finam, indicate that, in order to receive state repayment guarantees of up to Rb2.5 billion ($83 million), Generalov must transfer asset value and shares required by the bank. However, Generalov says he can’t right now; or doesn’t want to.

Instead, Generalov has lobbied the government to change the banking rules for securing bailouts to the companies listed a year ago as qualifying for strategic state support during the crisis. The leak of Generalov’s letter, code N 03-3/2-0511, dated November 5, is notable for its detail and timing: it comes just before the board of directors of the European Bank of Reconstruction and Development (EBRD) meet in London to consider whether to lend Fesco $100 million. That transaction is tied in turn to the readiness of several international banks to lend new money or refinance existing loans to the loss-making transport group.

Generalov’s holding Industrial Investors owns 54% of Fesco; with a current market capitalization of about $1 billion, Fesco is Generalov’s most valuable asset. Asked to authenticate Generalov’s letter as reported, the Fesco spokesman, Stanislav Vartanyan, did not dispute the accuracy of the Kommersant report of the letter.

Generalov started making his fortune as a protégé of Mikhail Khodorokovsky’s businesses. But he has survived the conviction and imprisonment of his patron; business competition with Mikhail Fridman’s Alfa group; and also the war between Russia and Georgia, where Generalov has pursued several lines of business, including gold and copper mining and vodka production. Handling the Generalov group’s Russian and Georgian dealings, according to the group’s website, is an American citizen and US lawyer, Joel McDonald. He claims to have been “the chief foreign advisor to the Russian Government on tax reform between 1994 and 1997”. McDonald is also a director of a London unit of Generalov’s holding, Industrial Investors Capital Management Limited, which has filed in the UK High Court to establish the group’s reputation. A statement, read out in the High Court on July 9, 2008, acknowledged Generalov’s business links with Khodorkovsky’s Yukos oil company and Menatep bank, adding that Generalov “was never associated with corrupt activity during his time at those two companies.” The court statement also declared that “neither Mr Generalov nor Industrial Investors have ever had any corrupt dealings with President Saakashvili of Georgia or any of his family including Timur Alasaniya.” Generalov and his holding “conduct their business affairs in an honest manner”, according to this record. According to the holding’s website, “Industrial Investors endeavors to occupy a leading position amongst Russian investment companies in terms of track record relying on Western principles of corporate governance, accountability and transparency.”

Generalov’s reported letter to deputy minister Saveleyev is unusually transparent. According to the Kommersant citations, Fesco as an applicant for a state repayment guarantee is unable to meet one of the key requirements – presentation to the Finance Ministry of “fully issued and registered documents on the security of 50 % of the sum under the loan contract”. “Unfortunately”, Generalov is reported to have written, “as of today [Fesco] does not have sufficient unpledged shares which can be used for securitisation of obligations under the loan of VTB Bank …for the specified sum”. His letter reportedly suggests that the release of this company stock for a repledging operation is unlikely before January or February of the new year.

Reports of the extent of Fesco’s indebtedness to foreign and Russian banks are not news; disclosure that Fesco’s stock and assets, and possibly those of the holding company and controlling shareholder as well, are insufficient, or are unavailable to secure a state repayment cover for the equivalent of about $40 million, is new. Because the value of the guarantee cover sought is relatively small, the question is — why Generalov is unable or unwilling to offer security acceptable to the state bank? That question was not answered by Generalov’s spokesman Vartanyan, although he is reported as telling Kommersant that there is a shortness of time to arrange the security for the VTB transaction, not a lack of assets available to pledge. What he was quoted as telling Kommersant, Vartanyan added, is his answer to the question.

Other industry sources in Moscow claim the underlying problem is lack of unpledged assets, compounded by the recent financial difficulties of one of Fesco’s international backers, Dubai Port World, and its parent, Dubai World.

The Finam brokerage reports that Russian banking and state regulations allow state guarantees for only half of a loan amount. To secure the remaining half — in this case, Rb1.25 billion ($41.7 million) — the company must pledge existing assets that are not encumbered by prior covenants, cross-default provisions, or liabilities. Although Fesco is worth just over $1 billion in current equity value, and it claims net tangible asset value of $1.7 billion (reported as of June 2008), the value of its fleet is under severe write-down pressure. “In our opinion”, said Finam, “debt restructure problems could negatively affect FESCO stock prices, but we expect the company to solve these problems during the next few months.”

Projections of the company’s losses by bankers for this year have gone from around $1 million reported in January, to $39 million in June, and to $72 million estimated in August. What Fesco has told its banks is likely to be its loss for the year remains undisclosed in public. According to Vartanyan, “the official position of Fesco is that we do not provide numerical forecasts of future results; we rather prefer to report the results achieved.”

Moore Stephens, Fesco’s international auditor, reported early in the year that 49 vessels in the Fesco fleet had already been pledged as security for loans from ING, Calyon, and VTB. The net book value of the pledged fleet was reported at $636 million; according to Moore Stephens, as of June 2008 the asset value of the entire fleet was $675.9 million. This past October, it was reported that Fesco’s railway subsidiary, Transgarant, had received a Rb1.45 billion ($50 million) loan, also from VTB, which the bank secured with liens over its railcar fleet. The asset value of the rolling stock was reported at June 2008 at $409 million.

Total debt is reported to be $840 million, but that is 25% less than Fesco’s debt total reported at the start of the year. Short-term debt, due for repayment by the end of this month, has been estimated at $215 million.

The EBRD, which has been negotiating with Fesco management over many months for a new loan to help reorganize Fesco’s financial position, has disclosed that on December 15, the bank board will consider approval of a $100 million loan to Fesco “as part of a corporate balance sheet restructuring plan, alongside other lenders”. ING, Raffeisen, Citi, and Calyon are the group’s main foreign lenders.

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