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By John Helmer in Moscow

Far Eastern Shipping Company (Fesco) has released through a wire service a set of unaudited financial estimates for the full year 2008. The release was unusual, analysts said, and appears timed to counteract the impact of a downgrade by the Moody’s rating agency in Moscow on Thursday.

Despite better than expected revenues, as well as the earnings figure Ebitda, the shipping, ports and rail group has acknowledged a heavy writedown in the value of its fleet. In a note to clients and investors, Troika transportation analyst, Kirill Kazanli, says “the group’s bottom line is expected to range between breakeven and net loss of around $1 mln.” Fesco’s controlling shareholder Sergei Generalov, the executive chairman, issued a public statement confirming the possibility of this bottom-line loss for the year.

The company has not released a financial report for the year on its website, and spokesmen for the company refuse to answer questions about the calculation of the vessel writedown, which appears to have been taken in the fourth quarter of 2008.

The last financial report, audited by Moore Stephens, was issued for the six months to June 30 last, and posted on November 28. This identifies Raffeisen and ING as the biggest lenders to Fesco for fleet additions. With Citibank and Unicredit (Italy), these banks take up about 66% of the Fesco loan book.

As ships lose their market value, banks which have made loans for their purchase and which hold the vessels as collateral for repayment are likely to raise cash or margin calls from the borrower, or seek additional security. When asked whether it has considered margin-calls on Fesco loans, Raffeisen asked for a written letter of request, and then refused to reply. Unicredit and Citibank refused to talk about loan terms, margin-calls or vessel valuation policy.

Generalov said this week that Fesco’s aggregate debt at the start of this year was $1.1 billion. A note from Moore Stephens says that of this aggregate, $431.8 million is due for repayment before June 30, 2009. The auditor also reports that 49 vessels in the fleet have been pledged as security for loans from ING, Calyon, and the state controlled Vneshtorgbank. The net book value of the pledged fleet was reported at $636 million.But the market capitalization of the entire company in the share market on December 31, when Fesco closed its books on the year, was just $736 million. Today, it is $473 million.

The crash in asset value is bound to put pressure on the company to find more cash to meet bank demands. In Generalov’s statement this week, he skirted the problem. He reported that revenues for 2008 were $1.3 billion, while Ebitda was $407 million. Cash on hand in January, he added, was $198 million. “I think that in general the results for 2008 are good, but they could be better, if it wasn’t for the tough fourth quarter.”

“So far”, Generalov claimed, “no bank has challenged the adequacy of collateral, and even more so, no state [repayment] guarantee has been required.” He acknowledges there are “questions” on credit terms in relation to the valuation of fleet collateral for Fesco’s loans, but declared: “debt has fallen to acceptable levels. This we have done from the [company’s] own resources. From the financial reporting it is clear that in January we had an adequate supply of liquidity.”

In late January, Fesco spokesman Stanislav Vartanyan acknowledged that in negotiations with Fesco’s bankers, the company was “able to add additional security in each of the cases.”

Maritime sources in Moscow say this form of partial disclosure of unaudited financial information has not been undertaken by Fesco before.

This year, according to Kazanli, the prospects for Fesco’s revenues and earnings look “challenging due to low shipping rates, a decline in container volumes and anemic activity in the company’s rail segment.” Cargo traffic through Fesco’s container unit, the National Container Company, fell 34% in the first two months of this year, compared to 2008; at Fesco’s Vladivostok port terminal, the throughput was down 19%.

According to Alexei Bezborodov, “there is only one Russian company which transports boxes by sea. It is Fesco. Others like N-Trans, Globaltrans, and Russkaya Troika work with boxes in ports, and on the railroad. They use international lines for sea transportation. Their rates remain firm, and they will suffer only from the falling volume. Fesco will suffer from the decline of freight rates as well, but nobody knows how it would be able to offset this with other activities of the group.

On Thursday, a statement was issued by Moody’s Investors Service indicating that, after a review of Fesco’s financials, the agency has initiated a downgrade. The Moody’s announcement said its new Corporate Family Rating for Fesco is B3 — a one-notch downgrade from B2; the Probability of Default Rating is now Caa1, down one notch from B3. (one notch downgrade from B3); Moody’s national scale rating is Baa3.ru, a downgrade from A3.ru). The agency said Fesco’s outlook is “negative”. It also quoted a Fesco executive as claiming confidence in the company’s capacity to refinance its debts.

Fesco’s share price peaked at the end of May, last year, when market capitalization was almost $4 billion. Share tradinghas all but ceased since January.

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