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Russian aircraft manufacturer MiG became the first completely state-owned borrower to miss a put on its bonds on 11 December, two credit analysts told Debtwire. The company will likely fund the put of the RUB 3bn (USD 115.7bn) before a 30-day grace period expires but the delay triggered alarm bells for investors, they added.
MiG’s failure to cover the put is a warning to investors who assume the Russian government will always step in to help historically strategic businesses, according the two analysts and a research report by UralSib.
A company source said MiG, which makes jet fighters, has applied for state funding to cover the put. The market took a dimmer view on that eventuality as bids for the RUB 3bn bond, MiG-Finance-2, dropped 20 points last week to around 59/87, according to Moscow Interbank Currency Exchange (MICEX) data. MiG also has a RUB 1bn 7.85% domestic bond maturing in June 2009.
“This is the first [missed put] by a directly state-controlled company and it signals that even these companies are not immune to market risks, and that investors should view them carefully,” said one of the analysts.
Bondholders are now likely to re-examine their exposure to state-controlled United Aircraft Corporation, for example, and subsidiaries such as Irkut and Sukhoi Civil Aviation, said a second analyst in Moscow.
The Russian government is reviewing MiG’s application for funding – reportedly up to RUB 20bn worth – and the matter should be resolved within a month, said the company source. An injection of funds would enable MiG to settle its obligations on the RUB 3bn 12% bond, he added.
A source at state-owned lender Sberbank, the payment agent on MiG-Finance-2, said MiG has outlined its predicament to the bank but declined to elaborate.
MiG has total debts of around RUB 40bn (USD 1.44bn) – mostly loans from government banks – and generated sales of just RUB 3.2bn in the first nine months of 2008, estimated both analysts. That puts MiG on track to generate revenues of RUB 4.3bn for FY08, down 25% from the RUB 5.2bn of sales it reported in 2007.
MiG bought the entire RUB 3bn bond back from investors in March and promptly resold the notes on the open market, confirmed the Sberbank source. Investors opted to put substantially all of the five-year issue back to MiG again last week.
MiG is wholly owned by the Russian government. As well as supplying Russia’s Ministry of Defence through state contracts it can sell aircraft to foreign buyers, bypassing state-owned arms exporter Rosoboronexport.
Irkut, another Russian aircraft and components manufacturer, has a USD 125m issue of credit-linked notes issued via MDM Bank in 2006 and maturing next March. The 8.25% issue is quoted in the 90s, according to Renaissance Capital data. Irkut also has a RUB 3.25bn domestic bond that matures in September 2010. That bond pays an 8.74% coupon and is quoted in the mid-80s, according to MICEX data.
Sukhoi Civil Aircraft, which is part of the UAC-owned Sukhoi Company, has a RUB 5bn bond putable in September 2009. The paper is quoted at 87/94, or a yield of 23%-mid to next year’s put option.
Kremlin consolidation
While state funding would enable MiG to pay back its bondholders, it might not solve the company’s longer-term problems, said the first analyst. “[MiG] is on the verge of bankruptcy and even with state support it would be hard to make it profitable again,” he said. “The state is now facing a dilemma: let down the manufacturer of Russia’s trademark jet fighters, or keep feeding it state money.”
The game theory behind that decision depends to a large part on Russia’s execution of a strategy it launched in 2007 to consolidate the country’s military production and aviation sectors using state-controlled companies such as Oboronprom and Rostechnology.
In April this year, Oboronprom was given 15 months to acquire controlling stakes in nine of Russia’s aircraft engine makers and fold them into a single holding company called ODK. The government has opportunistically used rescue loans in the sector to speed that process.
NPO Saturn, a Russian aircraft engine manufacturer, missed a coupon payment on a RUB 2bn domestic bond on 22 September but found the money within days. Then, in advance of a put option on the same bond exercisable on 9 December, Saturn received a loan from state-owned bank VTB that it used to cover the payments. The catch was that the company had to agree to be folded into Oboronprom, which already owns 37% of NPO Saturn.
UMPO, the only other engine manufacturer that was resisting the state’s overtures, has to make a RUB 61.08m coupon payment on 18 December on a RUB 4bn Euroclearable issue from 2006.
AirUnion, which comprises five regional Russian airlines, some of which are majority-owned by the government, has missed a coupon payment on one domestic bond and a put option on a second. Both issues were guaranteed by KrasAir, which is 51% owned by the state.
Government vehicle Rostechnology is working with the City of Moscow to set up RosAvia, an operating company that will take over AirUnion airlines and combine them with carriers operated by Moscow-run Atlant-Soyuz. But it remains unclear how AirUnion’s bondholders would fare in that reorganisation, said the first analyst.
MiG was due to be folded into state-controlled United Aircraft Corporation, which in July this year priced a USD 200m bond due 2010 at 10.25%. Information circulated to investors during the marketing period for the bond said that UAC would be given control over all Russia’s civil and military aircraft manufacturers. The Russian government owns 90% of the company and state ownership is not allowed to drop beneath 75%, as reported.
In July, UAC increased its stake in Irkut to 80.09% from just under 40%.
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