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. Last Updated: 07/27/2016

Mirax Chief Uses Moskva-City to Gauge Crisis

MTPolonsky, pictured in 2004, says he is pleased to have reached a deal with Alfa to restructure $250 million in debt.

It will be clear that the Russian economy has recovered when construction on Moskva-City, the city’s new business district, is completed, Mirax Group president Sergei Polonsky said.

“It’s hard to say when all construction at Moskva-City will be completed — there are a lot of projects under way,” he told The Moscow Times in an interview. “But basically, the completion of Moskva-City will be the main sign that the economy has reached stability.”

The development of several projects within the Moskva-City business center was frozen last November as real estate prices plummeted. Since then, work has been halted on the 169,000-square-meter City Palace development, being built by Inteko and Snegiri, as well as the 500,000-square-meter Russia Tower, billed as Europe’s biggest tower and owned by Russian Land, exiled tycoon Shalva Chigirinsky’s developer.

Mirax has said it has a total 12 million square meters of development projects. It has put on hold those projects on which it hasn’t yet broken ground — or about 10 million square meters.

“I have a feeling that we’ve touched the bottom,” he said Tuesday. We haven’t witnessed a slump in prices in the recent 5 months … Demand is starting to grow. Specifically, we have seen more interest in apartments and offices in the past few months.”

Commercial real estate has slid over 50 percent over the past year, with the average square meter of office space costing $780 in September, according to Cushman & Wakefield Stiles & Riabokobylko.

Last fall, Polonsky was so confident that housing prices would rebound by at least 25 percent within 1 1/2 years, he promised he would eat his tie if they didn’t. Since the start of the crisis, new housing has declined in price by 16.8 percent, according to the Russian Association of Builders.

As real estate prices plummeted last fall, Polonsky became dismayed by the amount of negative coverage of the segment in the press. So much so, that he wrote an open letter to journalists, urging them to create a “positive picture” when writing on the topic, and not to exaggerate or make negative forecasts.

Unlike many of the Moskva-City developments, Polonsky said, Mirax was able retain control over its developments — Mirax Plaza and the Federation Tower. VTB and Sberbank, which financed most of the construction in Moskva-City, took control over many of the projects as developers became insolvent. VTB Group owns 58,600 square meters of the Federation Tower’s western building, where it plans to move its headquarters

Mirax passed one of its biggest hurdles last month when it reached a deal to restructure $250 million of its debt to Alfa Bank. “We’ve restructured our debt with Alfa Group. We had to contribute a certain number of square meters [in Moskva-City] to them,” Polonsky said. “The price was within the market, roughly $5,000 per square meter, and the deal is closed now. We don’t see any problems here.”

In addition to other loans to the developer, Alfa bought about $240 million of Mirax’s debt in July from Credit Suisse at a deep discount. Mirax’s total debt to Alfa amounted to about $330 million, but the bank wrote off about $80 million as part of the restructuring agreement.

In August, when debt talks with Alfa Group were at their most heated, Polonsky published a letter on his blog saying Mirax was on the verge of collapse and that there could be a change of ownership if no new owner was found.

In order to cover part of its debt to Alfa, Mirax Group issued 3.6 billion rubles in bonds in August. Many of the company’s debtors, however, refused to trade their previously issued debt for the new bonds.

Since it was able to come to an agreement with Alfa, Mirax paid off the newly issued bonds several days ago, Polonsky said. He said Mirax’s previous overall debt of $750 million was lower now, but would not disclose the exact figures. Estimates have put the group’s total level of debt at about $700 million.

“Last year our turnover was $1.5 billion, our debt/EBITDA ratio was just above one, which was the lowest on the Russian property development market,” he said.

“This is roughly half of our revenue, which is nothing for such a large company as ours.” he added. “However, in view of the reduction in volume experienced by all participating companies across the property development market since the end of 2008, we — along with all of our competitors — were obliged to enter debt-restructuring negotiations, despite having such a low debt-load indicator.”

Last month, MFK Bank, owned by billionaire Mikhail Prokhorov, said it would help Mirax restructure its debt by acting as an agent and adviser to the developer in upcoming debt talks.

Polonsky said MFK has been very helpful but rejected rumors that the bank may get a stake in Mirax in exchange. “We are working on debt rescheduling structure together with MFK Bank, and there haven’t been any other discussions so far,” he said. “It’s about consulting and nothing else.”

Things have improved from a year ago, when Polonsky was more ambiguous on the issue. Commenting on rumors that MFK may buy a stake in Mirax, he told Vedomosti at the time, “I don’t know which would be better to say, whether Prokhorov bought me or he didn’t.”

Polonsky shot down rumors circulating last month that Mirax was eliminating as much as 90 percent of its staff — or about 3,500 jobs.

“If a company lays off 90 percent of its staff, this basically means that they are closing up shop,” he said. “You can come to our office and have a look, people are working. We laid off roughly 35 percent to 40 percent of our staff.”

He added that Mirax optimized the “quality and quantity” of its staff and was not considering further layoffs.

Recalling last year’s financial crisis shock wave, Polonsky said he was one of the few businessmen who did not panic. “We made consecutive steps, and were the first to announce we were freezing a number of projects,” he said. “We always understood correctly what was happening in the world, and maybe this is why today we are one of the few companies that is not owned by a bank.”