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By John Helmer, Moscow

Interpipe, the heavily indebted Ukrainian pipemaker owned by Victor Pinchuk (left foreground), has defaulted on its pledge to list its Eurobonds on the Luxembourg Stock Exchange by December 27, a notice from Deutsche Bank, the bond trustee, has revealed. This is Pinchuk’s second default in two months. On November 1, Interpipe announced it was unable to pay its international banks $106 million due on at least half a billion dollars in loans.

According to the latest disclosure, Deutsche Bank now has the authority to call for repayment of the face value of the Interpipe bonds plus interest. Interpipe’s last financial report indicates that as of December 31, 2012, the sum owing would be more than $198 million. A repayment call would also trigger repayment demands from Interpipe’s international banks and the Italian export agency SACE. The banks, led by ING of the Netherlands, Commerzbank of Germany, and Royal Bank of Scotland (RBS), are owed more than $543 million; SACE, $156 million.

This means that the Dutch, German, British and Italian governments now hold the power to put Pinchuk into bankruptcy, or save him. The Dutch government has owned a bailout stake in ING since 2008; the German government is the largest stakeholder with 17% of Commerzbank through its Financial Market Stabilisation Fund (SoFFin); and the British government bailed out RBS in 2008 by buying 64% of its shares. SACE is a wholly state-owned shareholding company after its conversion from the Italian Ministry of Economy and Finance in 2012. All four governments have been backing Pinchuk’s lobbying for the Ukraine to join the European Union.

The Russian state bank Sberbank and other Russian lenders, as well as Russian steelmaker Alisher Usmanov, have a countervailing leverage over Interpipe. As reported here, they are holding about $150 million in Interpipe obligations, including $23 million in unpaid supply bills from Usmanov’s Oskol mill, which are now in the Russian courts.

In mid-2007 Interpipe sold $200 million in Eurobonds, initially offering 8.75% interest over a three-year term expiring in August 2010. ABM Amro, the Dutch state bank, and ING were the issue managers, while Deutsche Bank was the trustee for the noteholders. In February of 2010, Interpipe defaulted on a coupon payment of $8.75 million after running a loss at the end of 2009 of $60.5 million. Ernst & Young, Interpipe’s auditors, reported that by the time Interpipe defaulted on its bonds, its current liabilities exceeded its assets by almost $670 million. The accountant reported “the existence of a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern”.

The financial condition of Pinchuk’s operations was so parlous, the bondholders and bank lenders had, as the Interpipe report for 2009 acknowledged, “the rights to demand accelerated or full immediate repayment of the borrowings. Loan portfolio restructuring process commenced in early 2009 was not completed as at 31 December 2009.” Debt restructuring negotiations continued into 2010, and to avert bankruptcy, Pinchuk agreed with Deutsche Bank to offer the bondholders an extension of the repayment term to 2017, an increase of the interest rate to 10.7%, plus a consent bonus of 1.25% on the face amount of the bonds for those holders voting in favour of the deal. The vote was taken, according to Interpipe, on October 29, 2010. By then, market sources speculate, a super-majority of the bonds had been acquired by companies associated with Pinchuk.

The debt restructuring negotiations with the international banks took another year to reach an agreement. The terms, finalized in November and December of 2012 in what is called an Override Agreement, paid a bonus of 1.5% of banks’ exposure to the borrower, half in cash on signing and half when Interpipe completes its repayments.

The deal required Pinchuk, Interpipe’s sole shareholder, to contribute $65 million in cash and another $40 million in letter of credit financing. No payment of dividends was allowed, neither by Interpipe nor by its subsidiaries, and SteelOne Ltd., Pinchuk’s holding company, was explicitly prohibited from paying Pinchuk or his family companies “until all obligation under the SACE facilities are [sic] extinguished.”

The banks also imposed an $82.9 million freeze on Interpipe’s cash as security for repayments according to the new deal. Total liabilities of Interpipe as of December 31, 2011, came to $1.5 billion. For that year the company reported sales revenues of $1.7 billion, and a bottom-line profit of $36.8 million.

Because of the uncertainties, the Luxembourg Stock Exchange, which had accepted the bonds for listing and trading on issue in 2007, decided to delist Interpipe. Company officials claim that took them by surprise.

The following year, 2012, Interpipe’s business of pipes and railway wheels appeared to be taking a turn for the better. Revenues were $1.77 billion; the bottom line showed a profit of $103.6 million; liabilities remained at $1.5 billion. The financial picture would have been far worse if not for the addition of $208.7 million on the line tagged “other comprehensive income net of tax”. The extra money, according to Ernst & Young, came from “revaluation of property, plant and equipment”. The auditors provided no note to explain. But for that, Interpipe would have been obliged to show a loss of $71.7 million in 2012. Nothing comparable had been reported by Interpipe since 2008, when $738.7 million was added on the income side of the ledger, also for “revaluation of property, plant and equipment, net of tax”, in order to reduce that year’s loss from $358.5 million to $96.8 million.

As already reported, release of the 2012 financial statement was delayed by Interpipe until August of 2013. By then, Interpipe executives now acknowledge, there had been a serious turn for the worse in the group’s sales volumes and revenues.

In December Interpipe told bondholders that delays in commissioning its new Dniepropetrovsk pipemill had caused losses of $120 million. Then import restrictions introduced last July by Russia, Kazakhstan and Belarus caused the volume of export sales to fall sharply, with losses estimated by the company at about $100 million for 2013. Anti-dumping action against Ukrainian pipe imports commenced by the US, along with political turmoil and war in Egypt, Libya and Syria, traditional importers of Ukrainian steel products, have compounded the balance-sheet woes.

By June 30, Interpipe claims its before-tax earnings had slipped to $174 million; it is not saying whether the bottom-line had slipped into a loss on December 31. The company acknowledges it owes Danieli, its Italian equipment supplier, and Naftogaz, its Ukrainian gas provider, as much as $100 million. But its available cash at mid-year was substantially less. Its working capital is also dependent on the willingness of the Russian banks to allow fresh disbursements. Because of the defaults , Interpipe sources admit no new financing from European sources is possible.

No audited financial report for 2013 will be released until well into this year, the company now claims. The lack of audited financial statements triggered the default last month on the Luxembourg Stock Exchange because, exchange sources confirm, Interpipe’s promise to relist its bonds on the bourse cannot be met unless it delivers a new prospectus, with financial details the listing department of the bourse can compare to the 2007 prospectus and details of the debt restructurings signed since the delisting.

The combination of defaults, says Deutsche Bank, now gives the trustee the power to go to court and require immediate repayment to the bondholders, or liquidation and sale of Interpipe’s assets. “In accordance with Clause 5.7(b) of the Trust Deed and Condition 14.1,” Deutsche announced on December 30, “the Trustee [Deutsche Trustee Company Limited] is entitled at any time after the occurrence of an Event of Default, if such Event of Default is continuing, to declare, or require the Issuer to declare, all amounts payable under the Loan Agreement by the Initial Sureties to be due and payable and to take proceedings to enforce the obligations of the Initial Sureties thereunder and to enforce the obligations of the Sureties under the Surety Agreements.”

Michael Dunlaevy, a London-based director of Deutsche Bank’s trustee operations, was asked this week to clarify Deutsche Bank’s legal authority as trustee by releasing the text of the provisions of the Trust Deed which give it authority to act to recover the bond money from Interpipe. He declined to respond. Does Deutsche also have a duty to represent the bondholders on the creditor committee SACE and the banks have formed to negotiate with Interpipe? Dunleavy refused to say.

The company reports lists of the assets which Interpipe has already pledged to secure its bondholders and banks, plus cash at the bank, inventories stored at the mills, trade receivables, and “rights arising out of sales contracts”.

How much of Pinchuk’s personal assets is owned by companies contributing to the pool of security pledges taken by the banks and whose solvency depends on Interpipe’s cashflow isn’t known. His motor yacht, for example, named Oneness, has been found berthed at a marina in Palma de Mallorca, immobilized, with its electricity apparently cut off.

Built in 2009, the 45.7-metre vessel is registered in the Cayman Islands. Tracked by its International Maritime Organization (IMO) identifier, Pinchuk usually cruises between Mallorca in the western Mediterranean, Sardinia, the western Italian coast, and Venice in the summer. Monaco and Cap Ferrat have been frequent portcalls in the season.

Constructed by US yacht builder Palmer Johnson, Pinchuk’s boat is one of seven in a design series. To the left is Pinchuk’s Oneness; to the right , M/Y Vantage which was built a year later. Vantage is currently for sale at $24.5 million.


Last month Interpipe told bondholders that it is considering “a number of potential transactions” to raise cash. The assets might be merged with those of a strategic partner, company sources said, or disposed of in a “partial exit”. The assets for these deals are not those already covered by security pledges to the banks, bondholders and other creditors.

What then will be the fate of the Pinchuk yacht? According to the vessel tracking data, it berthed at Palma de Mallorca on September 2, and kept emitting a signal that it was there until December 12. Around the harbour Palma sources say there are five marinas which provide mooring and other facilities for large vessels like Oneness. All but one say the vessel is not moored at their marinas. The vessel tracking reports indicate that Pinchuk’s boat is at Marina La Llotja. This is also corroborated by a satellite photograph (head illustration). This shows the vessel has been wrapped, one of several in the harbour covered in the same way. Local sources say this is standard practice during winter.

The harbour master at Palma and the owner of Marina La Llotja were asked if Oneness is for sale, or if there are liens, unpaid bills, or other restrictions on its movement. Despite the navigational and photographic evidence, they claim the vessel is not in port. Local sources suspect that’s a rap.

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