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. Last Updated: 07/27/2016

Consortium Takes Over Debt-Riddled RosEuroDevelopment

A consortium of Gazprombank, Goldman Sachs and Citibank has taken control of RosEuroDevelopment, a major commercial real estate developer, because of the company's debt.

One of the developer's competitors told Vedomosti that a controlling stake had gone to the new owners, which was confirmed by RosEuroDevelopment board member Ilya Brodsky, chief executive Nikolai Artemenko, and a representative from one of the company's shareholders.

A year ago, when most developers were facing difficulties because of the financial crisis, RosEuroDevelopment shareholders handed over roughly half of the company to the banks in exchange for a debt-restructuring deal.

As a result, the consortium received a 50 percent plus one share in RosEuroDevelopment, while its previous shareholders saw their stakes roughly halved. Lightwater, which represents individual investors including RosEuroGroup managers, had its stake cut to 30 percent. Moor Capital now has about 10 percent, while a joint venture between Morgan Stanley and French developer Altarea also has about 10 percent.

Altarea said in its 2008 financial reporting that it left RosEuroDevelopment as a shareholder because of the "worsening macroeconomic situation in Russia," without elaborating. Brodsky said he knew nothing about the company leaving. A shareholder in RosEuroDevelopment, however, confirmed the information, saying the stake went to Morgan Stanley.

Either way, those percentages are not final, Brodsky said. The deal has not yet been closed and shareholders are discussing a possible buyback of some of their shares by the end of 2009, he said.

He declined to specify the developer's debt to the banks or the lenders' relative shares in the consortium, but he said the company was working normally.

Early last year, RosEuroDevelopment announced that Gazprombank and Goldman Sachs were raising a mezzanine loan — used in real estate financing to raise funds backed by a stake in the borrower — of $165 million. The company has not disclosed its debt to Citibank.

Spokespeople for Morgan Stanley and Goldman Sachs declined comment. A spokesman for Gazprombank was not immediately able to respond to questions, and Citibank could not be reached for comment.

RosEuroDevelopment specializes in building shopping centers and warehouses. According to the company's web site, its portfolio includes 1.3 million square meters of shopping space, 1 million square meters in logistics parks, 500,000 square meters of housing and 100,000 square meters of offices. All of its projects where construction had not started were frozen late last year.

Among the projects that the company finished were the Planeta shopping mall (140,000 square meters) in Krasnoyarsk, the Krekshino storage facility in the Moscow region and the RosEuroPlaza office center (27,600 square meters) in Novosibirsk.

This is hardly the first time that an indebted developer has had to pay off banks with projects, shares or stakes in companies, said Mikhail Gets, managing director of Praedium Oncor International.

Banks are now trying to decide whether to manage the property they've taken on or sell it.

For example, VTB received 1,200 hectares on Rublyovo-Uspenskoye Shosse from Senator Sergei Pugachyov's OPK to settle a $2.4 billion debt. The bank has also taken controlling stakes in developers Sistema-Hals and Don-Stroi Invest, as well as 75 percent of the Dynamo sports group.

Sberbank has also taken its share of property in exchange for debt, including 60,000 square meters of the Gorod Stolits project in Moskva-City, and 15,000 square meters in Gorod Yakht from Capital Group, as well as 370,00 square meters of property from Alpi.

There's no point in selling it all immediately, since the market is recovering, Gets said. Even if it's a few years down the road, demand for commercial real estate will recover, and the banks will be able to earn dividends on these assets, he said.