The bond yields of Poland’s second- biggest vodka maker surged to a record and Standard & Poor’s cut its credit rating after billionaire Roustam Tariko threatened to walk away from a deal designed to save the company from default.
The yield on Central European Distribution Corp. (CDC)’s 430 million euros ($557 million) of bonds due in December 2016 soared 676 basis points this week to 32.41 percent today, according to data compiled by Bloomberg. That compares with an average yield of 4.84 percent on JPMorgan Chase & Co.’s emerging market consumer industry corporate bond gauge and 7.15 percent on its index for high-yield companies from developing nations.
Tariko, owner of the Russian Standard vodka brand and CEDC’s largest shareholder, is “no longer obligated to complete the pending strategic alliance” after CEDC restated financial results on Oct. 6, he said in a letter published by CEDC on Nov. 13. The agreement, reached after CEDC said it would not be able to pay back its debt without help, envisaged Tariko buying as much as $210 million of the distiller’s notes and shares.
“It may lead to potential risk for the deal with Tariko, and is an indication that the company has an unreliable reporting system,” Victoria Petrova and Irina Karacharskova, analysts at Credit Suisse Group AG, wrote in a research note on Nov. 15. “However, Tariko has already invested more than $100 million in CEDC and we see a deal cancellation as unlikely.”
CEDC, the maker of the Zelyonaya Marka, Bols and Zubrowka vodka brands, revised down its financial statements for 2010 and 2011 last month and said in a regulatory filing (CEDC:US) to the Warsaw stock exchange that it has exceeded “certain thresholds” in its strategic agreement with Tariko’s Roust Trading unit.
Tariko said in his letter that after a $59 million hit to CEDC’s earnings before interest, tax, depreciation and amortization, the distiller is “in breach of its agreements with Roust Trading,” which allows it walk away from the deal.
Anna Zaluska, a spokeswoman at CEDC, and Oleg Yegorov, a spokesman for Russian Standard, both declined to comment when contacted by e-mail yesterday.
CEDC’s shares have tumbled 65 percent in Warsaw this year, compared with an 11 percent advance for the WIG20 Index of Poland’s largest and most liquid stocks. The Warsaw Stock Exchange suspended trade in the shares today at the request of Poland’s financial markets regulator. In New York, they slid 3.5 percent to $1.64 today, according to data compiled by Bloomberg.
The yield (CEDC:US) on its 2016 euro bonds fell as low as 15.2 percent on Feb. 8, after Tariko offered to swap his holdings of the company’s bonds into equity.
Tariko seeks to “increase his control and stake” in CEDC, Martin Svaerdborg, an analyst at Silkeborg, Denmark-based Jyske Bank A/S, said in a research note on Nov. 14. “It’s important to bear in mind that Tariko, in the current situation, benefits from a lower share price” which makes it cheaper for him to acquire the company, Svaerdborg said, maintaining his buy recommendations on CEDC’s 2016 euro and dollar bonds.
S&P cut CEDC’s rating by one level to CCC and kept it on “creditwatch negative” for potential further downgrades, citing “increasing uncertainties” about the refinancing of about $270 million of outstanding convertible notes due March 15, 2013, the company said in a statement today. A CCC grade means CEDC is “currently vulnerable” and “dependent upon favorable business, financial and economic conditions to meet its financial commitments,” S&P said.
Moody’s Investors Service in October downgraded CEDC’s rating by one level to Caa2, eight steps below investment grade, while keeping its negative outlook.
The extra yield investors demand to hold Poland’s dollar bonds rather than U.S. Treasuries was unchanged at 131 basis points at 7:25 p.m. in Warsaw, JPMorgan’s EMBI Global index shows. The spread between yields on Poland’s 10-year zloty bonds and German bunds increased two basis points, or 0.02 percentage point, to 287 while the zloty weakened less than 0.1 percent to 4.1600 against the euro, data compiled by Bloomberg show.
Poland’s credit-default swaps fell one basis point to 89 today, according to data compiled by Bloomberg. The swaps cost 98 basis points less than the average for countries in eastern Europe, the Middle East and Africa that are included in the Markit iTraxx SovX CEEMEA Index, compared with an average difference of 78 basis points in the first half of 2012.
The default swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.
CEDC has struggled to regain its licenses in Russia, the world’s biggest market for vodka, after new rules last year forced companies to reapply for permits and restricted advertising in a bid to curb consumption.
The vodka maker missed its second-consecutive quarterly result filing deadline with the Securities and Exchange Commission on Nov. 9, and is “currently targeting” to publish results on Nov. 19, CEDC said in a statement on Nov. 13.
Tariko said that David Bailey, CEDC’s interim chief executive officer, and the company’s board were “either unable or unwilling” to overcome the “critical financial and operating challenges” CEDC faces.
“I have significant doubts as to whether we will be able to complete a transaction, as it is simply impossible to negotiate in the absence of trustworthy management, credible financial information and effective board oversight,” Tariko, who owns 19.5 percent of CEDC, said in his letter.
Mark Kaufman, CEDC’s second-largest shareholder, with a 9.5 percent stake, said in a letter sent on Nov. 14 to the members of CEDC’s board of directors, that he shares “Tariko’s profound concern and deep frustration” after the vodka maker “suffered a number of stunning and inexcusable setbacks.”
“We don’t expect the terms of Russian Standard-CEDC deals to be revisited, but perhaps should expect replacement of the interim CEO,” Natasha Zagvozdina, an analyst at Renaissance Capital in Moscow, said in an e-mail on Nov. 14. “Tariko will go ahead with the deal.”
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