Fesco puzzles analysts with tender offer — IFR

01 April Reuters
Russian shipping company Fesco has left some analysts scratching their heads after opening a tender offer on dollar and rouble bonds.

The firm is seeking to buy back for cash a maximum of USD85m across its USD550m 8% 2018s and its USD325m 8.75% 2020s. The company is also undertaking an up to RUB4bn buyback of its series B02 rouble bonds, which have RUB5bn outstanding.
The official reason for running a simultaneous hard currency and rouble cash tender is to treat local and Eurobond holders equally.


However, Sergey Goncharov, analyst at Sberbank, finds the tender exercise «strange» for several reasons, not least the reason behind the deal. «We question the idea that buying back 80% of local bonds and 20% of Eurobonds is 'equal treatment'. We think the move is due either to the recent shifts in the management or Fesco using the restructuring announcement opportunistically as a source of extra gain (the bonds fell from a cash price of 75% to 50% and back even before the restructuring was approved)," he wrote in a research note.

Viktor Belyakov, Fesco’s chief financial officer, who recently moved from potash firm Uralkali, confirms the tender is opportunistic. «The first reason for the tender offer is because right now the discount on the bonds is very high," Belyakov told IFR. He added, though, there were strategic reasons behind the transaction too. «The second reason [for the tender] is because we can raise rouble-denominated financing to perform our buyback, which allows us to exchange the repayment schedule of our debt into roubles. The schedule would be much more comfortable for us." The tender will be financed by a combination of existing cash supplies and a new rouble facility provided by Russian banks.

Goncharov, though, is unconvinced. «Fesco is announcing the buyback without having actually received the funding for it, and the rush is hard to explain in times of declining market rates," he said. Goncharov also questions how much the company’s balance sheet will improve through the tender. «Even if Fesco spends USD85m, it would reduce debt by roughly the same amount. With USD1.1bn in debt and USD160m in Ebitda, it barely makes a difference for the credit, except for the nice trading gain.»

Indeed, he thinks the company will continue to drain resources in making interest payments on its debt. «The company’s key short to medium-term problem — interest payments soaking up all cashflow — will not be addressed (and will actually be exacerbated) by the exercise, as local rates are probably closer to 20% (the Eurobonds are at 8%).»

The terms of the bank loan are private, but Belyakov said that Fesco would not pay 20% for a rouble loan. «We are almost sure that we will be able to raise new funding cheaper than 20% in rouble terms," he said, adding that it was the company’s first priority to meet interest payments. Belyakov also maintained that the buyback would result in lower leverage at the company, even though new debt was being taken on to repurchase the bonds.


The buyback of the dollar bonds will be conducted as a modified Dutch auction process, with those responding in the 10 days after the tender was launched on March 31 getting a minimum offer price of 41c for every USD1 on the 2018s and a maximum offer of 51c.

For the 2020s, the minimum price will be 40c and the maximum offer price 50c. The price then drops 5c over the last 10 days of the offer. Investors are incentivised to sell back at lower prices because it would allow them to offload more of their holdings in an illiquid asset.

«Buying back the bonds at 40%-50% would be equal to a 42%-60% haircut in terms of NPV (assuming maturity is unchanged and the discount rate is 20%), we estimate," said Goncharov. «From a fundamental standpoint, we would prefer a healthy, 40% full-fledged haircut with a certain cash component. Meanwhile, the announced move only allows Fesco to temporarily save face without carrying out real restructuring.»

Fesco’s 2018 bonds rallied by five points on the announcement, and were at 40.50 at 0935 BST, according to Thomson Reuters data. Meanwhile, the 2020s rose a similar amount, from a cash price of 35.25 at Monday’s open to 40 by Wednesday. Morgan Stanley is the dealer manager.

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