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. Last Updated: 07/27/2016

KamAZ Set for Key Vote On Debt-for-Equity Swap




The management of KamAZ, Russia's perennially troubled truckmaker that is a stone's throw from bankruptcy, is gearing up for a crucial meeting at which shareholders will be asked to approve a convertible bond issue that would wipe off most of the company's $1 billion in bad debt.


If shareholders approve the convertible bond Dec. 1, KamAZ, Russia's biggest maker of heavy trucks, will effectively become state-owned, since the federal and regional governments possess a large part of the company's debt.


"It's a way to de facto nationalize the company," said Kim Iskyan, manufacturing and banking analyst at MFK Renaissance.


When the bonds are converted to shares one month after the issuance, the government of Tatarstan and the federal government will own 25 percent each of KamAZ, and Russian banks will own another 25 percent.


Analysts see the issue as unfair to the company's shareholders and commercial creditors.


Shareholders will be asked to approve an issue of 125 million convertible bonds with a face value of 6.25 billion rubles. At the current exchange rate, this translates into a $375 million equity issuance.


However, the management wants to wrap the company's entire $1 billion debt into the proposal, so that in effect each creditor will have to accept one convertible bond for roughly $3 of debt. The bond can then be converted into one share in KamAZ. The truckmaker's stock is illiquid at present, and a KamAZ share fetches $0.10.


"It is definitely detrimental to creditors," said Alexei Labovsky, manufacturing analyst at CentreInvest Securities. "They are getting shares based on book value of the company and not the market value." The book value itself, according to Labovsky, is artificially high and based upon a recent revaluation of the company's assets.


The European Bank for Reconstruction and Development, which loaned $100 million to KamAZ in 1995, is reportedly the only creditor that is reluctant to agree to the debt-for-equity swap. The bank would like to see the company turn a profit before any type of debt restructuring is carried out. Bank officials were unavailable for comment Friday.


The company, however, is trying to put a positive spin on the deal. Managers have said a convertible bond is virtually the only way to avoid bankruptcy. One director was recently quoted in a Russian paper as saying that the company may break even this year thanks to strong sales in October. Analysts, however, said that the director's statements are nothing but window dressing for the company's creditors and shareholders. According to analysts' reports, KamAZ posted a pretax loss of $50 million from January to June.


The one-to-one conversion ratio for the bonds means existing shareholders face a 100 percent dilution of their stakes. Kohlberg Kravis Roberts & Co., a New York-based buyout firm, will own 6 percent of company stock after the restructuring, according to KamAZ officials.


A KKR spokesman said the deal "is not against KKR's will," and that "a smaller stake in a healthy company is a good thing," Bloomberg reported.