Why UWC has no money to pay off bonds

by time news

OVK Finance (part of the United Carriage Company, UWC) on the 24th made a technical default on bonds totaling more than RUB 16 billion.

On November 24, the company had to pay the coupon yield on the 01 series bond issue for the 15th and 16th coupon periods. Also, “OVK Finance” had to fully repay the bond loan itself. The total amount of planned payments – 16.3 billion rubles, of which obligations to pay coupon yield – 1.34 billion rubles, to repay the par value of bonds – 15 billion rubles.

OVK Finance is an SPV company that placed bonds in the interests of UWC. According to the representative of UWC, OWK Finance does not have the funds to fulfill its obligations to the bondholders. “Currently, negotiations are underway with bondholders about the timing and options for debt settlement,” he said. The default of UWC Finance does not create risks for UWC’s production activities and the fulfillment of the group’s obligations to customers and suppliers, ”the source said.

After the announcement of a technical default, UWC shares fell by almost 12% on the Moscow Exchange. At a minimum of 12:13, the paper traded at around 87.5 rubles. per share, but then the decline slowed. At 16:30 the share price was 91.6 rubles. a piece. According to the law, since UWC has so far allowed only a technical default, the company has another 10 working days to fulfill its obligations. After 10 days, the default will acquire a full-fledged status.

The outstanding issue of bonds was placed on December 4, 2013. In May 2021, the general meeting of bondholders of this series already allowed OVK Finance to postpone payments on the 15th coupon to November 24 (the date of payment of the 16th coupon), according to the company’s statements …

Back in June 2016, the Central Bank of the Russian Federation registered changes to the decision on the issue and the prospectus of these bonds: the company extended the circulation period of the securities to 8 years. They have 16 semi-annual coupons. The 15th coupon rate is 5.34% per annum.

This is not the only restructuring of UWC Finance’s liabilities. The company’s exchange-traded bonds of the BO-01 series for RUB 11.25 billion are also in circulation, initially placed in September 2014 for RUB 15 billion. In August 2019, their owners agreed to extend the circulation period of the securities for another 5 years, until September 3, 2024, with a quarter of the par value redeemed on September 30, 2019.The 11-30th coupon rate was set at 9.55% per annum …

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In February 2021, the holders of these bonds agreed to postpone payments on coupons 16-21. OVK Finance had to pay 9.55% per annum for the 16th coupon on March 9. Under the new conditions, payments have been postponed to June 7, 2022. Moreover, the rate of the 16th coupon will remain at the same level, and the rate of the 17-21st coupons will be 75% of the key rate of the Central Bank.

The structures of the banks “Trust” and “Otkritie” (both banks are owned by the Central Bank) control 52.03% of UWC, owning 27.76% and 24.27% of shares, respectively. Among the minority shareholders is Emil Pirumov (previously headed by Leonid Mikhelson’s GES-2 LLC and Skolkovo Management LLC), he owns 14.99% of the shares. Uralvagonzavod (part of Rostec) has 9.33%. Another 4.97% belongs to Region Trust LLC. Free float – 18.2% of shares.

At the moment, a plan of anti-crisis measures is being developed to resolve the situation, said the representative of the bank of non-core assets “Trust”. According to him, the company was operating with high accumulated debt at the time of the change in shareholding in 2019. Trust will make every effort to further develop the asset. The ongoing anti-crisis measures allow us to cover the basic production needs, ”he added.

As one of UWC’s shareholders, Otkritie Bank is also closely following the situation around UWC Finance and the group itself, a representative of Otkrytie said. “Together with other UWC shareholders and creditors, we are working on options for debt settlement,” he said.

According to IFRS statements for the first half of 2020, FC Otkritie had bonds of OVK Finance worth 20.2 billion rubles. NPF Otkritie (its indicators are consolidated at the parent bank) at the end of the year sold OVK Finance bonds to FC Otkritie with a total par value of 17.5 billion rubles, which were later concentrated on Trust, Kommersant wrote. If at the end of the first half of the year Trust had bonds worth 3.4 billion rubles, then after the transfer of debts from FC Otkritie – already by 20.1 billion rubles.

On the balance sheet of “Trust” is about 80% of bonds of “OVK Finance” of both series, a representative of the bank of non-core assets told “Vedomosti”.

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UWC is the largest manufacturer of freight cars in Russia. Sales of railcars and components for them account for 91% of the revenue structure at the end of 2020. According to Infoline-Analytics, in 2020 UWC produced 16,600 railcars, 20% less than a year earlier (all production in Russia fell to last year by 28.7% to 56,200 cars). According to UWC financial statements under IFRS, the company’s assets as of June 30, 2021 amounted to 96.3 billion rubles. Revenue at the end of 2020 amounted to 80 billion rubles, net loss – 22 billion rubles. For the first half of 2021, UWC’s revenue decreased by 35% year-on-year to RUB 25.3 billion, EBITDA – by 79% to RUB 1.6 billion.

According to Igor Galaktionov, an expert at BCS World Investments, the companies of the UWC group are guarantors and offerors for the bond issues of OVK Finance. This means that the group itself will be responsible for the daughter’s debts, he says. “Enterprise default is a very serious problem that, in the worst case, leads to bankruptcy of the organization. In this scenario, the shareholders of the company formally have the right to a share in the assets of the liquidated company after the claims of all creditors have been settled. In practice, even lenders often receive only a small fraction of the funds lent to the issuer, ”Galaktionov explained.

The general director of Infoline-Analytics, Mikhail Burmistrov, believes that a technical default will have a relatively limited impact on the company itself and will not affect the production and financial activities of the carriage building plant. According to him, the amount of debt is large enough for the company and it was more logical to restructure earlier. “At the moment it looks like a solvable problem. But the existing debt load and technical default somewhat worsen the company’s position in terms of the negotiation process on debt restructuring, ”he notes.

“The amount of unfulfilled obligations is about a quarter of the group’s revenue for the last 12 months under IFRS. The amount is significant and the company is overwhelmed with debt. The negotiations on restructuring were started in advance, but, apparently, were not completed on time, ”Galaktionov says.

In his opinion, if you do not take into account the possibility of external support from shareholders, related companies or the state, the most positive way out of the situation would be debt restructuring. In this case, the shareholders will keep their business, and the creditors will have a chance to return a larger amount than they would have received in the bankruptcy scenario, the expert notes. But, according to him, the process of negotiations on restructuring is lengthy and does not always lead to positive results. “This means that the company’s shares and bonds currently have an increased investment risk,” he summed up.

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The BDO auditor warned about UWC’s problems with bond payments in the first half of 2021. According to his estimates, the company did not have sufficient free funds to pay off the debt, either as of June 30, 2021, or at the date of approval of the statements.

In a June release, Expert RA downgraded the rating of UWC’s subsidiary to ruBB- (“moderately low level of creditworthiness / financial soundness / financial stability” compared to other Russian issuers). The agency also negatively assessed the liquidity of the group “due to the large volume of short-term loans and borrowings and the protracted generation of negative operating cash flows.”

According to Aleksey Kovalev, an analyst at FG Finam, the UWC problem does not help to defuse the negative background in the bond market, which was provoked by the situation with Rusnano. “After all, now every new case will, willy-nilly, be associated with this case, although the issuer who made the technical default may not have anything to do with the state at all,” he says.

In general, according to Burmistrov, the situation in the car building market is now difficult. After the decline in demand for railcars in 2020, the situation is now complicated by the rise in metal prices. This hit the marginality of some long-term contracts that were concluded in previous years, the expert explained.

According to Rosstat’s operational data, 51,000 freight cars were produced in January – October 2021 (+ 9.4% over the same period in 2020), and in October – 5300 cars (up 2.9% on October 2020). and 7% less than in September 2021). According to the IPEM forecast, 61,000-62,000 freight cars will be produced by the end of the year (+ 7-8% by 2020).

There is now a demand for UWC’s products, says Burmistrov, the company now has a fairly high level of capacity utilization and good contracts.

In its July release, Expert RA also noted the increased stability of UWC among other manufacturers in the industry due to specialization “in the production of cars with increased axle load (so-called innovative cars. -“ Vedomosti ”) while increasing diversification in favor of the least surplus type of rolling stock. composition – specialized “.

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