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Hong Kong faces Rusal dilemma
By John Helmer
MOSCOW - Oleg Deripaska, the controlling shareholder and chief executive of
Rusal, Russia's aluminum monopoly, appears to be prepared to run the gauntlet
of international courts and Hong Kong stock exchange investigators, as time
runs out for him to meet his cash-or-list obligations to his shareholding
partners, Russian oligarchs Mikhail Prokhorov and Victor Vekselberg.
They, like Michael Cherney, Deripaska's founding partner in the aluminum
business, hold signed undertakings from Deripaska that if their private shares
in Rusal do not achieve a public market listing by a deadline of December 31
this year, Deripaska must buy back their shares for cash.
And as Russia's most indebted man, with at least US$20 billion in
obligations, not counting the share value, Deripaska has no money to spare.
The pressure on the Russians may have turned into an unprecedented problem this
week for the Hong Kong Exchange (HKEx) listing division, headed by Mark
Dickens; and the Hong Kong government market regulator, the Securities and
Futures Commission (SFC), headed by Martin Wheatley. Dickens, an Australian
with three decades of Australian and Hong Kong market experience, has had no
investigative involvement with Russian companies. Wheatley, an Englishman, was
with the London Stock Exchange until 2005, before the Russians started to list
there.
Rusal's board gave conditional approval to the initial public offering (IPO)
plan last week, the Wall St Journal reported on Sunday, citing "people close to
the situation". Similar reports were carried on Reuters and elsewhere,
initially in London's Sunday Times. Rusal did not respond to questions
regarding the IPO.
Until now, no Russian company has been listed to trade its shares on the Hong
Kong Exchange. The capacity of the two Hong Kong organizations, one commercial
and one state, to investigate Rusal, which is currently in a standstill debt
default position with 74 international lenders, is limited, although more than
US$8 billion in foreign bank debts, and about $5 billion in Russian bank debts,
are known to be outstanding.
There is also the possibility of serious conflicts of interest. As a Hong Kong
securities lawyer points out, the HKEx and SFC have limited investigative
resources and are likely to rely on the financial institutions supporting a
Rusal application. These include Credit Suisse, Goldman Sachs and BNP Paribas.
A source at Credit Suisse points out that BNP and Credit Suisse are also
holding substantial amounts of debt, which Rusal admits it cannot repay. The
Credit Suisse source told Asia Times Online that instead of calling a default,
and applying for bankruptcy administration of the company, the banks have
agreed on a "standstill", which has been extended several times, the latest
until October 31.
This means the creditors have agreed not to go after Rusal's assets in
bankruptcy action while the company negotiates a restructuring and repayment
scheme. However, by advising a HKEx listing, which would require a prospectus
to be written to advertise the shares for sale to investors in Hong Kong,
Credit Suisse and BNP are in effect trying to persuade them to pay Rusal cash,
which could then be used to repay the banks.
Deripaska currently owns between 49% and 54% of Rusal's privately incorporated
shares; Prokhorov between 18% and 23%; Vekselberg and his associates, 19%. The
exact figures are uncertain because Deripaska has been swapping some of his
shares to his associates in exchange for reducing or clearing his cash debts to
them. Cherney holds a contract with Deripaska for the equivalent of 13% of
Rusal shares, or at least $4 billion in value. Rusal's website indicates a
shareholding lineup that conflicts with the website posting of Prokhorov's
holding, Onexim. The shareholding contract between Cherney and Deripaska is in
the High Court on Fleet Street, London, and in testimony before the Court of
Appeal last July.
Unable to get a major financial institution to underwrite a listing of Rusal
shares in London in 2007, in Shanghai in 2008, or on another European or North
American exchange, and without cash to pay out the minorities, Rusal has now
mandated Credit Suisse and Goldman Sachs to draft an application to the Hong
Kong Exchange. An advance ruling can be sought before a formal application is
lodged, leaving scope for deniability in the case of a rebuff.
A local securities market expert says the minimum share issue for the Rusal IPO
would be 20%. The Reuters report said Rusal hoped to raise around $2 billion,
citing "a source familiar with the matter"; the Wall St Journal said the
company would sell a 10% stake in the offering, without directly citing a
source.
In 2007, when the aluminum business was booming, Rusal said its target value
was $30 billion. Before the crash last year, it was aiming at $50 billion.
Given the collapse of the aluminum price and revenues, Rusal's debts, and the
set-aside for Cherney's case, no one can confidently say what Rusal's market
value would be now. Buying into the company is also a wager on the Kremlin not
nationalizing it to reclaim what Deripaska owes - a contingency that also
preyed on the calculations of institutional investors in London two years ago.
A spokesman for the HKEx told Asia Times Online the exchange "does not usually
comment on individual situations, media reports, rumors or speculation".
Regarding London reports of the Rusal plan to sell shares in Hong Kong, the
spokesman said it will not "comment on whether a company has applied for
listing". Asked whether the listing division will approve an application, if
one is lodged, the spokesman said there is "a dual filing regime, the Exchange
passes copies of materials submitted by listing applicants to the SFC. The SFC
may object to a listing if the disclosure in the listing materials appears to
the SFC to contain false or misleading information."
Both agencies are governed by Hong Kong's Securities and Futures Ordinance.
This sets out the qualifications for applying companies and their executives;
as well as the criteria for disqualification. Referring to rulings by
international courts involving Deripaska and Rusal's business practices, as
well as recent Swiss government rulings on Vekselberg, who is chairman of the
Rusal board, the HKEx spokesman told Asia Times Online, "Where a judgement by a
competent court is relevant to the listing of a security/company in Hong Kong,
HKEx normally takes into account such information, as it does with respect to
other relevant and useful information, in its decision-making process."
The SFC's Wheatley is keeping mum on the process. Asked how he responds to
reports in the London financial press that Hong Kong will be a softer touch for
Deripaska than London, he refused to comment. Two Credit Suisse executives have
been identified as supervising the Rusal paperwork - Jan Przewozniak, head of
risk in London, and Vikram Malhotra, head of new equity issues in Hong Kong.
They also declined to answer questions.
Lawyers in London say that because the UK High Court Justice Christopher Clarke
has ruled that Cherney's pending claim to Rusal shares has "a reasonable
prospect of success" - a ruling recently endorsed by the UK Court of Appeal - a
substantial stake in the company must be reserved, and cannot be sold or
diluted, until the trial is concluded. If Rusal is allowed to make its IPO, a
Hong Kong securities lawyer told Asia Times Online, then this is likely to take
the form of an issue of new shares, which may dilute the value of the existing
stakes. He said he expects the banks preparing the Rusal prospectus will
disclose the Cherney claim.
According to one London securities lawyer, "The Hong Kong Exchange is no better
position to violate the law on fraud than the London Stock Exchange."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
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