Tristan Oil re-commits to using sale proceeds to repay bond, including controversial USD 111m tap

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When Tristan Oil investors left work last week (19 June) they were exposed to a USD 420m bond; upon returning to work on Monday the issue had increased in size by USD 111m, Debtwire reports. When faced with a barrage of questions concerning the origin of the additional exposure during a conference call on 25 June, Tristan Oil’s management team reiterated their commitment to using proceeds from a trade sale of main production units to repay the USD 531m deal in full.

During the call, management said they continue to defend their Kazakhstan-based operating subsidiaries against tax claims and the threat of criminal prosecution. The company aims to complete a sale of the units as quickly as possible. The tax claims and criminal cases are without foundation and politically motivated, the company said.

Up for sale are production units Kazpolmunay (KPM) and Tolkynneftegaz (TNG). Tristan Oil was formed for the purpose of attracting funding via the bond market to fund the subsidiaries in 2006. Tristan Oil raised an initial USD 300m of 10.5% 2012 bonds, before tapping the issue for an additional USD 120m in mid-2007.

Tristan Oil does not own KPM or TNG. The would-be sellers are current shareholders Ascom and Terra Raf, controlled by Moldovan businessman Anatol Stati. Ascom is registered in Moldova, Terra Raf in Gibraltar. Tristan Oil is registered in the British Virgin Islands.

On 25 June, Tristan Oil CFO Artur Lungu said sale proceeds would only be released to shareholders after satisfying noteholder obligations. Certain investors argue there is no formal provision for this in the bond indenture.

Documents for the USD 420m issue give holders no direct recourse to funds raised from an asset sale, said one bondholder. There is sizeable risk sale proceeds will not be made available to creditors, added a credit analyst. Under a worst-case scenario, Tristan Oil bondholders could be left with a company loaded with more than USD 500m of debt but controlling no discernible assets following the sale of KPM and TNG, the analyst speculated.

While the company is due praise for being open with investors, there is no firm view on sale proceeds reaching noteholders before shareholders, a second bondholder agreed.

KPM and TNG this month settled excess profit taxes with Kazakhstan’s finance ministry, as reported. The units still face other tax claims and pipeline licensing problems. During the call on 25 June, Lungu said the company had “never dreamed of such pressure”.

Anatol Stati previously stated proceeds from a sale of KPM and TNG would be used to repay bondholders. The USD 111m tap was completed last week without informing the entire bondholder group. Because of the increase in the previous USD 420m issue, some investors asked Stati to reaffirm the group’s intentions with proceeds.

The new notes have a notional value of USD 111m, but were issued for just USD 30m to Laren Holdings, a charitable trust in the British Virgin Islands. The discounted tap was linked to a USD 60m loan to Laren Holdings provided by a group of lenders organised by Renaissance Advisory Services Limited.

Laren will on-lend USD 24m to Montvale Invest, KPM and TNG’s oil and condensate trader, according to a Tristan Oil statement last Friday (19 June). Laren’s obligations under the credit facility are secured by, among other assets, the equity of the entities owning KPM and TNG.

The six-month loan to Laren pays 35%. Tristan Oil expects the USD 111m new notes to be included with the USD 420m bond on the Luxembourg Stock Exchange within around 30 days. A London-based hedge fund assumed an integral role in the fundraising, according to both hedge funds.

Some investors have discussed challenging the validity and querying the fungibility of the new notes with the Luxembourg Stock Exchange, the first and a third bondholder said. The new issue complies with the bond indenture and is fungible, two sources close to the situation said.

Two potential buyers are in advanced negotiations to buy KPM and TNG. Two further parties have expressed an interest but are further behind in the process, said Tristan Oil representatives during the call on 25 June.

A fifth potential buyer could be waiting in the wings – state-owned energy company KazMunaiGaz. In March, Kazakhstan’s Ministry of Energy and Mineral Resources (MEMR) asked TNG to resubmit the 2007 paperwork used to obtain a waiver of the government’s pre-emptive rights to the Tolkyn oil field.

If the Kazakhstani government refuses to waive its pre-emptive rights to TNG, it has the right to match the highest bidder, most likely through KMG, which has already expressed its interest in TNG and KPM, as reported.

A source at the MEMR said the Ministry is waiting for a recommendation from KMG regarding the assumption of pre-emptive rights. Tristan Oil resubmitted paperwork for Tolkynneftegaz by the March deadline and has received no further requests from the MEMR.

While the company presses ahead with a trade sale, it prepares to defend itself in court against additional taxes and penalties of USD 60.5m, and claims of operating pipelines without the necessary state licences. The Department for Fighting Economic Offences and Corruption of the Mangistau Region of Kazakhstan, which is handling the case, contends all income earned by KPM and TNG in connection with production transported via the pipelines was done so illegally.

Tristan Oil’s management made it clear during the conference call it regards these actions as political pressure designed to oblige it to sell at the lowest possible price.

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