Russian oil giant launches $ 500 million in unsecured debt ahead of High Court ruling

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Sovcomflot (SCF), the state-owned oil company and currently the world’s 5th largest energy shipper, made its first detailed public disclosure to investment markets in a multi-million dollar debt prospectus. Deutsche Bank, JP Morgan and VTB are the arrangers.

SCF operates a fleet of over 147 vessels; it reports annual revenues of $ 1.3 billion and assets of nearly $ 6 billion. It is part of the vast Russian concession of energy production and export which is overseen by Deputy Prime Minister Igor Sechin, shipping these volumes of oil and gas around the world every day:

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The new debt instruments, the full value of which has not yet been announced, must be issued by a newly created Irish subsidiary of Sovcomflot, and they are not guaranteed. However, the risk of default is guaranteed by the Russian parent company. The company says its total debt is $ 2.6 billion, almost entirely in the form of secured bank loans. The new debt securities will be sold to replace this secured debt with unsecured securities and will cover what the prospectus describes as “the general objectives of the business, including the repayment of existing secured debt”.

A disclosure from rating agency Moody’s says Sovcomflot’s goal is to sell around $ 500 million in debt securities. But Moody’s announced that it was downgrading SCF’s issuer rating from Baa2 to Baa3. This change, according to Moody’s, “reflects the contractual subordination of the proposed bond issue in the group’s capital structure, which currently only includes senior secured debt (which after the issuance of the notes will decrease to about 80% of the debt. total).” But for this, Sovcomflot benefits from an improved outlook, according to Moody’s, due to the “expected stabilization of the operational performance of the company in the near future, which will allow SCF to further strengthen its financial profile”.

Moody’s analyst Marco Vetulli also told investors to ignore the growing debt burden – debt-to-earnings ratio – of the company as it continues to pay for new ships as it is owned by 100 % to the state and is of strategic importance to Russia. the state as an oil and gas carrier. As a result, reports Vetulli, “the default dependence between the Russian government and the company is low.”

But what if unforeseen circumstances arise in which the government is forced to keep SCF and its current leaders at bay, or even decouple government policy from management conduct?

According to Moody’s, the isolated picture of SCF – ignoring government support – is much riskier because financial results are “relatively weak in the first half of 2010; and [there is] the hope that a full recovery of its financial profile will be slow enough and will not occur until the end of 2011. ”

SCF, government ministers on its board of directors and its chief executive, Sergei Frank, former federal transport minister, have already decoupled the company from previous management and operations. What if it happens again, this time following an upcoming UK High Court ruling?

The new prospectus is the first time Frank has released investment market details of the 5-year High Court lawsuit he launched against his predecessor, Dmitry Skarga, and former SCF charter partner , Yury Nikitin. The SCF prospectus is 333 pages long. A single page refers to the litigation, one of the costliest ever before an international tribunal by a Russian state corporation. Lawyers involved in the case say trial judge Judge Andrew Smith has been reviewing the documents for seven months and may deliver his judgment in days or weeks. There is no mention of the Smith lawsuit or judgment in Moody’s assessment of the risks currently facing Sovcomflot’s creditors.

According to the SCF prospectus, “the Procedure concerns allegations that Messrs. Skarga and Nikitin, who were former colleagues, allegedly engaged in dishonest conduct following the appointment of Mr. Skarga as CEO of Sovcomflot. This behavior has led certain subsidiaries of Sovcomflot to enter into transactions, relating to the sale and leaseback of vessels, with companies affiliated with Mr. Nikitin. These transactions took place under conditions unfavorable for the Group and, consequently, seriously prejudicial to the interests of Sovcomflot and its subsidiaries, and consequently to the benefit of Mr. Nikitin and the companies he owned or controlled. The plaintiffs in the proceedings also allege that millions of dollars were paid by Mr. Nikitin, to Mr. Skarga’s knowledge, in the form of bribes to Mr. Privalov and Igor Borisenko, who was at the time executive vice-president and chief financial officer of Sovcomflot. Both Mr. Privalov and Mr. Borisenko admitted to receiving such payments. It is also alleged that bribes or other illegal benefits were paid or conferred on Mr. Skarga.

In the court trial, which began on October 1 and ended on March 31, Skarga and Nikitin counter-charged Frank and his associates, including senior Russian government officials, with lying to cover up. their own corrupt oil transportation system. . Evidence was presented in court by Moore Stephens, the international maritime auditors commissioned by Frank, who dismissed the allegations of wrongdoing in the ship’s transactions. During cross-examination by lawyers and Judge Smith, Frank’s main witnesses, Yury Privalov and Igor Borisenko, admitted that before testifying in court they were threatened with jail and then employed as consultants by Sovcomflot .

During his appearance on the witness stand of the High Court, Frank attacked this correspondent for having accurately reported on the proceedings. The archives of these reports are available here.

Financial reports detailing the costs and expenses of operating SCF’s fleet – the most detailed since testimony was presented to the High Court by former company executives and accountants – indicate it won less money with its tankers than in 2007, while its costs and charges increased:

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This year’s big jump of $ 61.2 million in travel expenses and commissions is apparently not an operating cost, like fuel for ships, but rather an increase in commissions. The company explains the change as follows: “This increase is mainly due to the increase in the Group’s exposure to the spot market, as explained above, and to the increase in fuel costs of around 60% over the course of the six-month period ended June 30, 2010 was caused by the rise in world prices for petroleum and petroleum products.

To understand behind the scenes how and for what purposes commissions are paid for ship charters, the transcript of High Court proceedings is unprecedented in Russian shipping history. According to Frank’s allegations, Skarga had designed the charter arrangements to feed his own pocket. The proof admitted by Privalov and Borisenko is that they lined their pockets.

Privalov and Borisenko told the court that despite their confession and the repayment of $ 3 million between them to the company, they were employed by Frank as paid consultants, at least until 2009. The prospectus does not enter in the details of the article, “general and administrative costs”, where the staff paid by the company headquarters, and the legal and associated costs of the London trial, should be included. In 2007, well before the start of the lawsuit, SCF said the item stood at $ 84.9 million. In 2008, when fees for attorneys, detectives and other litigation soared, the item stood at $ 103.3 million dollars, up 22%. In 2009, that figure fell to $ 80.1 million. In the first half of this year, the figure was $ 42.6 million, up 5.5 million dollars (15%) compared to the same period last year.

However, lawyers familiar with the lawsuit said the combined legal fees for Sovcomflot and their targets were around $ 100 million.

Sovcomflot told its creditors in the prospectus: “As of June 30, 2010, the Group had recovered more than US $ 80 million through settlements, and the balance of claims under the Procedure was around 810 U.S. dollars. million and $ 880 million. The judgment is expected before the end of 2010. The Group has obtained security and freezing injunctions covering the assets belonging to the defendants in the Procedure for a total value of US $ 602 million to secure the payment of any damages compensation. -interests within the framework of the Procedure.

Although not detailed in the prospectus, the recovery estimate of $ 80 million probably comes from an out-of-court settlement in June 2008 by the London broker Clarksons (27 million yen, $ 54 million) and the return money from Borisenko and Privalov.

It is customary in the prospectus reports of these high stakes and high cost litigation to estimate and provision the liability that might be owed by the plaintiff – in this case, the debt securities issuer – in the event. case where the court would rule against him. Sovcomflot’s prospectus only says: “In connection with the freezing injunctions, the Group was required to pay the court a total of US $ 7 million in damages. However, after having sought advice from a lawyer, the Group’s management does not believe that it is probable that these commitments for damages will be invoked.

It is common in Russia for influential businessmen or state officials to enjoy a high degree of confidence in the decisions of Russian courts in advance. President Dmitry Medvedev has publicly called it by its popular name – “justice by telephone”. It is not common for plaintiffs in the UK High Court to inform their shareholders and creditors that there is no chance that they will lose their judgment. If Skarga and Nikitin’s legal defense is justified by the court’s decision, they are required to counterclaim against Frank and Sovcomflot for at least $ 50 million in costs, plus tens of millions of dollars in financial losses caused by freezing of assets. , plus damages.

The $ 7 million set aside will be clawed back by Frank and his board if Judge Smith rules in their favor. But if he favors the defendants, Sovcomflot faces a much greater liability. The detail of the decision will also provide the first comprehensive independent assessment of how Sovcomflot is being managed.


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