By John Helmer, Moscow
The state-owned tanker company Sovcomflot is to avoid the London Stock Exchange (LSE) for its initial public offering (IPO). Instead, it is reviving a decade-old plan of former chief executive Dmitry Skarga and will attempt to list its shares on the New York Stock Exchange (NYSE). A source in a position to know said the NYSE choice had been made a couple of months ago. The move to New York by Sovcomflot follows High Court rulings in London which have judged Sovocomflot’s management to have acted dishonestly in its pursuit of fraud and bribery litigation against Skarga, another former chief executive, and a former chartering partner.
The proposed move also comes after the Fitch ratings agency has issued [1] a downgrade for Sovcomflot, claiming the failure of the company to sell shares — deferred until next year after several earlier postponements — is weakening its ability to cover its debts, as revenues remain under pressure from poor freight rates. Last week Sovcomflot reported it was loss-making in the September quarter – the first loss the company has reported since it began issuing audited reports according to International Financial Reporting Standards (IFRS).
Sovcomflot was asked to confirm the NYSE decision. The company responded: “We consider it is not correct to put this question to the management of the company. The location and the precise timing of IPO are a matter of competence of our shareholders”.
Since the company is wholly owned by the Russian government and its debt is secured by the state, voting by its 9-man board of directors is regulated by senior government ministers. Igor Shuvalov (image left), the first deputy prime minister who chaired the board between 2004 and 2008, was asked to clarify the decision to move to the NYSE. A spokesman said Shuvalov’s office doesn’t deal with Sovcomflot any longer, and referred the question to deputy prime minister Arkady Dvorkovich (centre). There Alan Slushnikov said Shuvalov, not Dvorkovich, is responsible, and referred the question back to Shuvalov’s office. There Marina Romanova was identified as the assistant responsible. She did not respond to requests for response.
Sovcomflot is the only state-owned Russian corporation to have had its internal accounting, corporate governance and management practices examined in forensic detail in the UK High Court. As a result of allegations initiated by chief executive Sergei Frank, the court heard several weeks of witness testimony and examined thousands of Sovcomflot records. The court then ruled against the company on most of its claims. A series of judgements between December 2010 [2] and March 2010 [3] by Justice Andrew Smith was tough on Frank, who was judged to have been “dishonest”, a perjurer in his own testimony and the procurer of the false testimony of others.
The UK Court of Appeal is to hear argument next March on a restricted number of issues not related to this judgement. The lower court will then resume hearing a claim for $180 million in compensation from former chartering partner, Yury Nikitin, who has been acquitted in the court judgements to date of most of Sovcomflot’s allegations against him. Additional claims against Nikitin were tried [4] in the High Court earlier this year; judgement in that case is expected to be issued within days.
In Moscow Morgan Stanley [5] has been awarded the government’s mandate to advise Sovcomflot on the IPO and was for a time represented on the Sovcomflot board. It has not responded to questions about the move to the NYSE.
The Financial Services Authority (FSA), which supervises proposed IPO’s and regulates corporate reporting to the market, may have held an informal consultation with Sovcomflot’s financial advisors already; such communications are normal operating procedure for testing the ground ahead of formal listing applications. For obvious reason the process is highly confidential. That the NYSE offers foreign shareholding companies special exemptions from the regulatory requirements and corporate governance standards applied to US domiciled companies, and relative relief from the LSE stringencies, has been well-known for some years [6]. The compliance exemptions for so-called foreign private issuers in the US have been applied [7] by one of the few Russian companies to list in the US, the Mechel steel and coal-mining company.
Further relaxation of US rules for offshore companies has been introduced to benefit the NYSE in competition for business with the exchanges in London and Hong Kong. This week Shuvalov was at the NYSE to help promote the exchange for Russian companies. The head of international listings at NYSE, Albert Ganyushin, was quoted by Reuters as saying: “For the last three years, it’s been much easier to list in the U.S. as a foreign company than a U.S. company. You can follow your home corporate governance practices, you don’t have to have an independent board, you don’t have to report in U.S. GAAP [Generally Accepted Accounting Principles].” Ganyushin mentioned the Sovcomflot IPO possibility, noting “the global shipping sector is based in New York”.
The plan for a NYSE listing for Sovcomflot is not new. It was first proposed in 2002 by Skarga when he was Sovcomflot’s chief executive. At the time, Skarga commissioned JP Morgan to advise on the sale of a 25% to 45% shareholding as a way of raising cash to fund the construction of new ice-class tankers for the Sovcomflot fleet. The scheme called for a Sovcomflot tanker subsidiary to be spun out of the main company and then listed on the NYSE. Approved in outline by government officials through 2003, the plan was then opposed by Frank.
After he was replaced at the transport ministry, Frank persuaded the Kremlin to substitute himself for Skarga at Sovcomflot in October 2004. His subsequent campaign to pursue Skarga with criminal and civil charges forced Skarga to live in the UK, and reached its climax in the High Court rulings of 2010 and 2011. Sovcomflot has been ordered to pay several million pounds in Skarga’s legal costs.
Frank’s plan for adding to the Sovcomflot fleet has also turned out unfortunately. The company is now facing more than $1.1 billion in new bills for vessels on order and still under construction. Sovcomflot says these include one crude oil Aframax tanker, two multifunctional ice-breakers, two Very Large Crude Carriers, two oil product Aframax tankers (LR2 type), two Panamax bulk carriers, two LPG carriers and four LNG carriers. These are planned for delivery up to October 2014 at a contract price of $1.58 billion. Just $441.5 million of that has been paid so far.
Last month’s Fitch report warned that Fitch “may further downgrade the ratings if the IPO is materially delayed, the proceeds are significantly lower than expected by Fitch and/or shipping sector market conditions are substantially weaker than Fitch’s forecast. The agency may also re-consider its assessment of state support if SCF’s credit metrics continue to deteriorate and re-capitalisation of its balance sheet does not occur.”
Last week Sovcomflot reported worsening financial results across the board in the third quarter. Freight and hire revenues fell 12% from the second quarter to $336.6 million, and time-charter equivalent revenue dropped 10% to $219.7 million. At $22 million, Sovcomflot’s operating profit plunged 42%; and on the bottom line the company has recorded an $8.6 million loss. This compares with a net profit of $45.5 million in the first quarter, and a $5.4 million profit in the second.
The company’s press release omits discussion of the quarterly data. Instead, chief executive Frank is quoted as saying “average industry earnings for all tanker segments remained near their historical lows of the last 12 years. Against this background, SCF Group remained profitable in the first nine months of 2012.” While the company’s crude oil and gas cargoes have earned significantly lower profits in the year to date, the oil product tanker fleet is now loss-making, and the company has recorded that it is selling vessels. Two asphalt chemical carriers have been sold, the company says, for handover next month and in January, “realising an insignificant profit or loss on disposal.”
Cash on hand is dwindling, while loans on the balance-sheet now total $2.3 billion, up 9% from the same time a year ago.