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By John Helmer in Moscow

On July 6, Sergei Generalov, chief executive and controlling shareholder of Far Eastern Shipping Company (Fesco) announced plans to hold a private placement of newly issued shares.

The sales pitch was disclosed by the Finam brokerage in Moscow, and it has yet to be officially announced by the company itself. Moscow sources report that an application for the Russian market regulator is pending for authorization to issue the new shares. Generalov, who controls almost 70% of Fesco’s listed shares, including 13% held by the company as treasury scrip, said the share sale prospectus will be issued sometime before the end of August.

For the time being also, Fesco has yet to release audited financial statements for the past year; or to reinstate Moody’s rating coverage, which was cancelled in May of 2009.

The most recent report on Fesco’s financial performance was issued by Troika Dialog last week. Shipping analyst Kirill Kazanli reports that Fesco had a bottom-line loss of $85 million in 2009, and is expected to suffer losses for 2010 and 2011 of $30 million and $19 million, respectively.

A major signal of the company’s creditworthiness, a $100 million loan to Fesco by the European Bank for Reconstruction and Development (EBRD), was announced on December 16 after protracted negotiating delays cut the principal amount. The EBRD reports the loan approval as “part of a corporate balance sheet restructuring plan alongside other lenders.” Fesco’s release on the financing says “the loan will have a 5 years maturity and the floating interest rate attached to a number of financial covenants, with the base rate of LIBOR + 4%. The raised loan will not increase the overall leverage, replacing FESCO’s short-term debt and significantly improving the balance sheet structure and debt repayment profile. According to Sergey Generalov, FESCO President and CEO, ‘the success in securing the EBRD loan will open up additional opportunities for the company in terms of access to capital, both debt and equity.’ ”

A Moscow investment bank reveals that six months later, this loan has not been drawn. Fesco, according to the source, is uncomfortable with the size of the interest rate and the servicing cost of the loan. There may also have been delays in lining up partner banks willing to participate in refinancing Fesco’s debts. The company is also busy selling off its fleet, so as to market itself, less as a shipping company and high seas fleet operator, and more as a specialist in container movement through ports and on rail, and cargo logistics.

According to Fesco’s last financial report – the report was for the first half of 2009, issue date was June 30, 2009 – the principal lender to the company is ING of The Netherlands; Generalov has used Amsterdam for a number of his financial transactions. Of the total loan amount as of June 30, 2009, $794.8 million, 32% was owed to ING. Citibank came next with 21%; state-controlled VTB held 12% of the debt; Sumitomo Mitsui (SMBC), 11%; and Swedbank of Sweden, 7%. From this lineup, the three biggest – VTB, ING, and Citibank – will get their hands on the bond proceeds first, because they have been appointed lead managers for the rouble bond.

Total debt owing as of June 30, 2009, was $955 million. But the debt required to be paid within twelve months to June 30, 2010, amounted to $422 million in scheduled loans, and an additional $43 million, which had been reclassified from long-term maturity to 12-month payoff, because Fesco’s vessel pledges had fallen below lender limits, and because financial ratios covenanted by the banks had been broken as revenues and earnings fell.

According to an unaudited claim by Generalov, by this past June 30, Fesco’s total debt is $720 million. An estimated $375 million has also been suggested as requiring repayment or refinancing by December 31.

For potential investors in Russian container transportation, there is plenty of potential growth to bet on. But there are only two companies in the container business whose shares are currently listed for sale on Russian and international stock exchanges – Novorossiysk Commercial Sea Port (NMTP is the Russian acronym) , and Fesco, whose container business is concentrated at St. Petersburg. The latest data indicate that in the five months to May 31, container volumes at NMTP jumped 65%, compared to the same period of 2009 (making volume of 162,300 Teu). At First Container Terminal in St. Petersburg, which is part-owned by Fesco, the latest 6-month result indicates year on year growth of 32% (554,072 Teu).

According to Kazanlai’s report of company data for Troika Dialog, Fesco’s container traffic moving by rail jumped 184% in the first quarter of this year (compared to 2009); container volume through ports grew by 34%. Control of the FCT terminal is contested between Fesco and its partner, First Quantum, and Fesco may sell out.

Since April, Generalov and the Fesco management have been promising three options for cutting their debts — sale of the treasury shares (target $156 million); the rouble bond issue ($194 million); and a public share issue ($276 million), intended for a “strategic” purchaser who has yet to materialize. Generalov has signaled that he will not accept a significant dilution of his control stake, and so, even if a strategic investor does appear, Generalov is going to have to put more than $60 million of his own money, or borrowings, into the placement.

If Fesco managed to achieve all three targets ($626 million), the company would be able to liquidate all its short-term debts, leaving $329 million to be cleared over a longer period. The treasury bloc sale and the rouble bond should be completed by year’s end, but the bigger public share sale is likely to be implemented over a year so as to avoid pressing down on the Fesco share price.

Shipping analysts have been reported hearing that a “financial investor” interested in the treasury shares has been doing due diligence on Fesco. They have also heard that the “strategic investor” is someone outside the shipping sector, and also outside Russia. The two are not believed to be one and the same; but then it is taking so long for Generalov to clinch his deal with either one or both, the identities may be changing.

At the moment, says Finam in a report to clients this week, “the company could encounter difficulties in the public flotation of shares at 23.4% of its current share capital. We expect a hefty chunk of the additional issue to be bought out by the largest shareholders of FESCO.”

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