INTERVIEW: "We realize that creditors' concerns are growing" - Sistema CFO
MOSCOW. July 18 (Interfax) - Sistema JSFC , which appeared to have put the matter of Bashneft behind it, has run into a whole new set of problems in recent months due to a claim of 170.6 billion rubles filed against it by Rosneft regarding the restructuring of the oil company the conglomerate once owned.
At the request of the claimant, a court has frozen Sistema assets, including a 31.76% stake in mobile service provider MTS , 100% of shares in Medsi and 90.47% of shares in Bashkirian Power Grid Company (BPGC). Furthermore, the court bailiff has barred Sistema from receiving dividends on the frozen shares.
On Monday morning, Sistema announced that a technical default has occurred on its credit obligations totalling about 3.9 billion rubles due to the ongoing freeze of its shares in subsidiaries. Credit agreements included covenants stipulating that a freeze on assets worth upwards of $25 million is a technical default event.
Sistema's senior vice president for finance and investment, Vsevolod Rozanov spoke with Interfax about whether this event will trigger new risks for the company's obligations and about the company's general financial condition against the backdrop of the huge claim filed by Rosneft.
Q: MTS is supposed to pay dividends to shareholders soon. If the situation with the asset freeze and freeze on income from the frozen shares does not change by then, how will this affect Sistema's financial position?
A: The time period for receiving dividends has not run out yet. We, as you know, have appealed to the Prosecutor General's office, the Justice Ministry and Federal Bailiff Service with a request to take control of the cancellation of the illegal decision of the bailiff [to bar receipt of dividends on the frozen shares]. We're waiting for a response. We have a month to receive the dividends on our account.
Q: MTS dividends were known, but were Medsi and BPGC planning to pay dividends, and if yes, what amounts are we talking about?
A: Medsi was not planning to pay dividends; the company is now actively investing in its own development. Dividends from BPGC were supposed to total about 1 billion rubles.
Q: The technical default occurred as a result of the breach of covenants. At what specific period in time are covenants on agreements with creditors tested - at the end of the first half, at the end of the year?
A: Covenants are tested at the moment the event occurs. They're not quarterly or semiannual. The technical default occurred because a freeze was imposed on a substantial portion of the company's assets that was not lifted within 21 days. Our attempts to challenge the freeze did not have the desired result and a technical default occurred on two loans.
Our corporation is very responsible about all corporate procedures, about cooperation with the market and exchanges, including disclosure of information. In the event of a technical default on other obligations, we will announce this to the market. At the moment, there is a violation of the covenant on these instruments in particular. There are no violations on Eurobonds and ruble bonds, or other instruments.
We see that the excessive actions of the claimants are resulting in the situation gradually beginning to deteriorate. And this is fairly obvious. Depending on their actions, further deterioration is possible.
Q: How are your creditors and counterparties conducting themselves in this situation?
A: Of course, our creditors and partners are very concerned about what's happening. To a lesser degree about the freeze on assets, to a greater degree the prohibition against receiving dividends. At the moment, the situation is not affecting our financial condition, our ability to service our obligations. We're confident that we will service them on time, but the actions of the claimants are leading to this becoming more difficult to do.
There are quite a large number of serious financial institutions among our creditors - Russian state banks, Chinese state and private banks, European banks, and we realize that their concern is growing. One should also understand that we have obligations to the Federal Property Agency [a put option on a stake in Indian operator SSTL where Russia is selling a minority stake in the company to Sistema and payment is being made by installments], under which we are planning the next tranche in the coming weeks. We're talking about the payment of a substantial amount this year, about 25% of the whole amount of obligations to them. We also have upcoming payments on a put option to state company Rusnano [on the purchase of Rusnano's stake in Micron]. In principle, we have many obligations and, of course, such actions by the claimants cannot but cause concerns among our partners in the current situation. The negative development of the situation could cause significant growth of concerns going forward.
Q: Do you need to hold negotiations with any creditors about a covenant holiday or lifting of covenants due to the freeze on assets?
A: Of course, we've talked to all of our creditors - financial institutions and banks, as well as rating agencies. We are now holding negotiations about covenant holidays or cancellation of covenants. In the current situation, a creditor is unlikely to agree to such a cancellation, for this is not a very common action even in standard cases. For credit agreements where covenants have been violated, we will hold negotiations on further joint actions.
Q: Might the dividend policy of Sistema or its key subsidiaries be changed against the backdrop of the litigation?
A: At present, it's pointless to adjust our dividend policy. We, like in the past, will adhere to our standard cycle, based on which this issue can be considered no earlier than April 2018. As for MTS, the company's dividend policy is approved for three years; the last time this happened in April last year. The company's dividends are paid based on the 'primacy' of its own development strategy and investment program and we don't have grounds to make any changes to them.