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. Last Updated: 07/27/2016

Government Cancels UES Bond Issue

The government has canceled a planned convertible bond issue for utility giant Unified Energy Systems and replaced it with a share auction, a move analysts said Monday was dictated by the acute revenue shortfall in the federal budget.

An 8.5 percent stake will be offered to local and foreign investors next month at an auction that government officials expect to fetch nearly $300 million. The sale comes instead of a planned convertible Eurobond, which was to have been handled by Western investment banks and which would have been worth 7.5 percent of UES shares.

"This sale is being done in an unprofessional manner because the government is in a hurry," said Gavin Rankin, head of research with Troika Dialog investment bank. "You shouldn't place a major stake in a major utility through retail shops."

But Russia has raised only a fraction of this year's 12 trillion ruble target for privatization revenue. A major planned sale in telecoms holding company Svyazinvest -- to be awarded a controlling stake in operator Rostelecom -- may not bring in money to government coffers until early next year, making money from the UES deal doubly important.

Bids for the UES stake can be made until Dec. 23 at a minimum 500 rubles -- a fraction above the current share price -- and the auction results will be announced Jan. 17, wire services reported.

The Eurobond would have been a better option for UES, analysts said, since some of the money raised would have come to the company.

"UES were pushing for the Eurobond," said Robert Devane, head of fixed income with Troika Dialog investment bank. "They face almost certain privatization and the Eurobond was a less painful way of doing it."

Alexander Lopatin, head of investor relations with UES, said the question of how the company might be privatized was up to the government, but that the company had advised waiting at least a year before taking any steps.

Lopatin denied a report in Segodnya newspaper on Saturday that claimed the State Property Committee had scrapped the convertible Eurobond plan under pressure from Western bankers who felt UES did not meet information disclosure criteria for foreign investors.

He said, however, the Eurobond plan had been delayed by the need to draw up an agreement on confidentiality between UES, the government and CS First Boston, the Western investment bank which was to coordinate the issue."This agreement was prepared, but CS First Boston then refused to sign it for some reason," he said.

Peter Halloran, head of equities at CSFB in Moscow, refused to comment on the UES deal Monday.

The choice of cash auction instead of Eurobond may also be partly dictated by cost factors, since the cash-strapped government now will not require the services of a major foreign investment bank to organize the sale.

"Any advisers they do use will be under pressure to go to the higher end of price possibilities, because the government is primarily interested in how much cash it can raise," said Alexander Kazbegi, an analyst with Salomon Brothers investment bank in London.

The government still owns 64 percent of UES, and it has said majority ownership will be kept at least until the end of 1998. An additional 20 percent circulates freely on the market, making the UES the most liquid of all Russian shares.

An attempted sale of 4 percent of UES equity at the end of last year was aborted because the minimum asking price of 500 rubles per share was twice what UES shares then cost on the market.