PIK Could Default on $700M

PIK Group, one of the country's largest residential construction companies, plunged as much as 43 percent in London on Monday after JPMorgan Chase & Co. downgraded the developer to "underweight" from "overweight" on concern that it may default on some debt.

The developer may be unable to repay $700 million of debt due this year as the Moscow city government seeks to overturn housing orders PIK won in October and renegotiate prices, Elena Jouronova, a property analyst at JPMorgan in Moscow, wrote in a note to clients Monday.

PIK lost 75 cents, or 43 percent, to close at $1.00 in London, the largest drop since the shares were listed in Britain in June 2007.

"We see a serious risk that the company may not meet some of its debt obligations, raising questions about the company's ongoing viability in its current shape," Jouronova wrote. "Timing is crucial."

PIK said last month that it won about $1 billion of apartment orders from the city. The contracts provided for the city to buy up the apartments from the company at retail prices ranging from $2,700 to $3,100 per square meter, PIK Group said in a statement issued when the deal was announced last month.

Kommersant reported on Friday that the city wants to cut prices by 17 percent.

PIK filed a complaint against the city with the Federal Anti-Monopoly Service two weeks ago but on Thursday retracted its complaint.

JPMorgan cut its earnings per share estimates for PIK for 2008 to 2010 by between 55 percent and 75 percent as the ruble weakens and demand for real estate dwindles, Jouronova said.

"The social importance of PIK's operations means the company is likely to be bailed out," Jouronova said. "We are concerned that this may be a non-economic rescue that results in a significant change in shareholder structure."

The bank removed its price estimate for the shares because of questions about how PIK will repay its debt, she said.

Bloomberg, MT