MOSCOW - The promoters of United Company Rusal have kicked off a new marketing
campaign for oligarch Oleg Deripaska's heavily indebted aluminum company,
disclosing this week that "Rusal is planning Russia's first offering of bonds
in China, spurred by McDonald's Corp's debut sale in yuan". A roadshow to test
whether the Chinese taste for McDonald's will carry over to an appetite for
Deripaska is planned with investors and banks in about a fortnight's time.
Sergey Dergachev, a fund manager in Germany, believes that "for Hong Kong-based
investors, this issue will be a great diversification play with significant
yield pick-up compared to the
majority of local bonds," according to Bloomberg.
Perhaps - and perhaps not. McDonald's has a market capitalization of US$80
billion and net debt of $10.6 billion. Rusal's market cap is $16 billion, and
its net debt is $12.2 billion. McDonald's revenues, earnings and profits dwarf
Rusal's by magnitudes of two to three.
An influential European investment fund manager, who has been a target of Rusal
pitches in past roadshows, suggests that, although there was Russian government
backing for Rusal's restricted share sale in Hong Kong last January, the
politics in Beijing of supporting a yuan-denominated bond on Deripaska's behalf
have yet to be tested.
"I am puzzled that they are issuing yuan bonds, and they are unlikely to be
cheap," the source said. "The bonds will have to be priced attractively to
attract sufficient demand."
That's market talk for raising the interest rate or coupon cost of the proposed
Rusal bonds, so that they may end up costing the company as much, if not more,
than its current bank loans.
The charge to Rusal, according to the source, "will depend on the structure of
the bonds, and particularly where the bonds will rank relative to the bank
debt. But the bonds will almost certainly be lower ranking in the event of
default than the bank debt. Therefore, the bond holders would demand a high
yield to compensate. One mitigating factor may be that Rusal's bank debt was
restructured at the height of the financial crisis and market bank and bond
debt yields have generally fallen since then."
As he approaches the Forbidden City, the big test facing Deripaska is whether
he can afford the price of admission. "If I were lending money to Rusal," says
the European fund source, "I would demand a junk bond type of yield because of
where it would rank among creditors, that is, just above equity holders."
Even if that price is unusually high, there may be a reward for Deripaska if he
pulls this off. "I don't think this issue is just about the yield which Rusal
might have to pay on these bonds," said the source familiar with the matter.
"If the issue is $500 million, it would still be small relative to the size of
Rusal's debt. It is more about the high profile Rusal expects to obtain by
being one of the first issuers of yuan-denominated bonds."
With arranging by Standard Chartered Bank, McDonald's sold 200 million yuan
(US$29.5 million) of 3% notes, with a three-year term, on August 20. The Hong
Kong market bond sale was the first by an international non-financial
corporation to raise Chinese money since Beijing allowed such foreign debt
issues in February. McDonald's said the purpose of the money-raising was to pay
for another 170 or so restaurants in China, to add to the 1,100 it already
operates.
Rusal has already had a signal failure with Chinese investors when it sought
strategic equity investment from them in 2008. The subsequent approval of the
Hong Kong market regulator and the stock exchange listing committee was a
close-run thing: the small share listing in January came with unusual
restrictions on the marketing of the shares; special waivers and qualifiers
attached to the prospectus; and the guarantees of several anchor share-buyers,
who included Russian state banks and Nathaniel Rothschild. Wall Street Journal
reporter Patience Wheatcroft called the share offer "about as enticing as an
invitation to invest in Bernie Madoff's boys' latest venture".
If Deripaska's success in selling unsecured Rusal equity since January is
measured by the downward share price trajectory - minus 25% at the close of
Hong Kong trading on Tuesday - the risk of a bond sale to a bigger market will
be gauged by the price to be offered in the weeks to come.
While Hong Kong institutions are at their counting-frames on that one, there
have been mixed political signals from other parts of the world on the
creditworthiness of Rusal risk.
The good news is in Jamaica, where Mining Minister James Robertson in July
presided at a ceremony to reopen Rusal's Ewarton alumina refinery at half
capacity. This followed two years of close-down and the loss of 2,000 jobs.
Robertson said publicly he was looking to Rusal to produce new investments in
Jamaica. "With the restart, the re-tooling of these plants, we are looking at
at least half a billion dollars worth of investments," he was reported as
saying in the Jamaican press.
A few days later, according to a Jamaican source, Robertson flew on a private
visit to Australia, where he was given a tour of the Queensland Alumina
Refinery (QAL), which is part-owned by Rusal. He was hosted there by John
Hannagan, the Rusal Australia chairman and a well-known lobbyist for the
aluminum industry in that country.
Robertson hasn't responded to questions about the purpose of his Australian
trip. Queensland Alumina confirms that Robertson was taken to the refinery on
August 10 "by two members of Rusal, John Hannagan and Geoff Blatch". Blatch,
QAL said, is general manager of Rusal Australia, based in Brisbane.
Hannagan, who is the principal of a small publications relations firm in
Melbourne, said he would not respond to questions about the purpose of
Robertson's trip, who had paid for it, and what Australian government or
Queensland state officials Robertson may have met. "Sorry, the questioning is
quite odd. I've got nothing to add," he said by telephone.
The position of Rusal in Australia has been threatened by the results of the
national parliamentary elections that returned a hung parliament on August 20;
no party holds a majority of seats to wield power. In subsequent negotiations
with several independent members of the new parliament and with the Australian
Greens party, outgoing prime minister Julia Gillard has secured a one-vote
majority in parliament to continue governing.
The future of Rusal in Queensland, which had been discussed with the
Australians when Deripaska visited the country in April, before the election
was called, now depends on the leader of the Greens, Senator Bob Brown. His
attempts to question Gillard and her ministers on their contacts with Deripaska
have so far been rebuffed by Gillard's ministers.
One of the issues Deripaska is believed to have discussed with the Australian
government, and its lead mining company, BHP Billiton, is their backing for a
new system of pricing global alumina trades, particularly to China. For Rusal,
the hope is that with backing from Canberra, it can extract a higher sales
price out of Chinese buyers. According to a financial report and commentary
issued by Rusal on August 31, "We anticipate that the market will introduce an
alumina index, which will track spot price sales, and we expect this could
happen next year. Currently, other global aluminum and alumina producers
support a new pricing index for alumina."
As told to Bloomberg by Rusal's investment director, Oleg Mukhamedshin, China
is "going to be one of the largest markets for Rusal. We need to grow our
presence on this market." Again, the price at which Rusal may conduct its
business with China is in the balance.
In the west African republic of Guinea, where about 20% of Rusal's bauxite
assets are located, including the biggest bauxite reserve in Rusal's current
portfolio, the news has not been positive. There the Chinese have their own
ambitions to mine bauxite and produce alumina for shipment back to their
aluminum smelters.
According to Guinean sources, Guinea's Mining Minister Mahmoud Thiam has led
his government's efforts to revoke Rusal's operating concession for the Friguia
alumina refinery and to claim up to $1 billion in proposed fines and
compensation for alleged violations of the company's concession agreements.
Thiam has allegedly also warned Rusal that it faces revocation of the Dian-Dian
bauxite mining concession. Rusal's Hong Kong Stock Exchange prospectus reported
Dian Dian's importance to the company. "The Dian Dian deposit is located 350 km
north of Conakry in the Boke province, and is a unique deposit containing
around 1 billion tonnes of bauxite ore with a high aluminum content and
insignificant amounts of hazardous impurities."
Negotiations between Thiam and Rusal have been going on for more than a year
without resolution of these conflicts. In June, following a flying visit to
Guinea himself, Deripaska announced that "our negotiations were held in a
friendly and constructive atmosphere, which enabled us to reach a number of
specific decisions".
The election of a new Guinean president and of a new parliament are still
pending.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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