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By John Helmer in Moscow

The Russian government has decided to underwrite the refinancing of pipemaker TMK’s loan portfolio with state repayment guarantees. TMK is controlled by Dmitry Pumpyansky (see right figure).

A curt statement, issued Tuesday by Deputy Minister of Industry and Energy, Andrei Dementyev, said “the necessary papers are being processed by the Finance Ministry”. What the official didn’t say was how much debt the guarantee (and taxpayer obligation) will cover; and whether it will be limited to Russian state bank loans, or TMK’s entire loan portfolio. At present, TMK’s debt is more than $3.6 billion, of which $2 billion is short-term, and must be repaid within six months.

In mid-October, a report by auditors Ernst & Young, attached to TMK’s financials for the first half of the year, indicated that after posting a net loss in the first half-year of $204 million, TMK’s net debt had risen from $3.1 billion in January to $3.56 billion at June 30. In a letter accompanying the financial results, the auditors said that TMK’s current liabilities exceeded current assets by $952 million. The financial report indicated, according to Ernest & Young, “the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.”

Yesterday’s announcement by a mid-level government official has been designed to plug this uncertainty about TMK’s future, and to reduce the risk premiums that might otherwise be charged for TMK’s loans. The company’s financial reports indicate that this year it has been progressively reducing its foreign indebtedness, and replacing those debts with money from Russian banks. In August, the company borrowed $450 million from state-controlled VTB Bank to redeem $416 million in maturing Eurobonds. In September, another $300 million in Eurobonds were paid off by money from VTB. The pipemaker has also agreed with partially state controlled Gazprombank to stretch a $1.1 billion loan from a 2.5 year term to 5 years. That financing was required to cover foreign bank obligations stemming from TMK’s costly takeover last year of the American pipemaking units of IPSCO. Moscow bank reports suggest that negotiations are now under way to extend loans from Sberbank, the state savings bank, and from VTB, to a 5 to 7-year term at an interest rate of between 10% and 13%.

IPSCO, now renamed TMK OPSCO and TMK North America, was Swedish owned until TMK made its takeover offer for the group’s pipemaking mills in the US. There are ten of them spread out over the states of Pennsylvania, Texas, Arkansas, Iowa, Nebraska, Oklahoma, and Kentucky, and with headquarters in Illinois.

The offer was issued in March of 2008; the price agreed was $1.7 billion. On May 30, TMK borrowed $1.2 billion to make its deal. The initial bank syndicate lending included ABN AMRO Bank (now Royal Bank of Scotland), Bank of Tokyo Mitsubishi, Barclays Bank, BNP Paribas (Suisse), ING, Natixis, Nomura International, and Sumitomo Mitsui Finance of Dublin. This was refinanced, and then at the end of January of this year, repaid by money from TMK’s new Gazprombank loan.

Security demanded by Gazprombank was a bloc of TMK holding shares, but exactly how many hasn’t been reported and isn’t clear. On January 29, when Pumpyansky made his new Russian financing arrangement, the entire market capitalization of TMK was just $805 million. Pumpyansky’s stake of 77% was thus worth just $620 million. Never mind that before Pumpyansky paid a premium to buy into the US, the year before, TMK’s market cap had been almost $10 billion; or that when Pumpyansky signed his loan for IPSCO on May 30, the market cap was $8 billion; his stake, $6.2 billion.

By the time the piper had to be paid, Pumpyansky’s shares were worth only half of the loan amount. The problem of how Pumpyanksy secured foreign bank loans with Russian assets classified as strategic to the Russian economy has not been disclosed in company reports, nor discussed in Moscow investment bank analyses. Nor is the company acknowledging what it has done.

What is near certain, however, is that when Pumpyansky’s shares weren’t sufficient to secure the switchover to Russian state bank loans, he has had to give up the four Russian pipemills located in the southwestern Volga region, which comprise the group’s domestic assets. They are now held hostage by the Gazprom group for debt repayment on the US mills. But these are deadbeat liabilities now. According to TMK’s financial report for the six months to June 30, they ran an operating loss of $94.3 million. This has overwhelmed the Russian mills, which turned in an operating profit in the same period of $54 million. The TMK group as a whole is thus depending on Russian subsidies to cover American losses, and pay for Pumpyansky’s $1.7 billion miscalculation.

The bad leg which the Russian government is propping up with the state-funded crutch is thus the North American mills.

The Pumpyansky pipemaker, Russia’s largest, has also been granted indirect state aid through a preliminary order for 29% protective duties on Chinese oil and gas pipes. This was confirmed by the Ministry of Economic Development and Trade in October. But it has yet to be implemented by the prime ministry. From the Chinese perspective, their pipes are cost competitive in both the Russian and US markets, but are being penalized in Russia, because Pumpyansky cannot afford to cut Russian prices to compete – and that’s because he must cover the cost of his American folly.

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