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Vodka Billionaire Spooking Bondholders on Talks: Poland Credit

Vodka Billionaire Spooking Bondholders on Talks
An employee works among the oak barrels of sweet vodka at the Polmos Bialystok SA distillery, a subsidiary of Central European Distribution Corp. , in Bialystok, Poland. Photographer: Bartek Sadowski/Bloomberg

Central European Distribution Corp.’s borrowing costs are hitting a four-week high on concern revived takeover talks with Russian billionaire Roustam Tariko will result in less favorable terms for the Polish vodka maker.

The yield on CEDC’s 430 million euros ($557 million) of bonds due 2016 soared 241 basis points this week, after the company restated earnings on Oct. 6, to 22.57 percent yesterday, the highest since Sept. 13, according to data compiled by Bloomberg. That compares with an average yield of 4.86 percent on JPMorgan Chase & Co.’s emerging market consumer industry corporate bond gauge and 7.21 percent on the bank’s high yield index for developing nations’ company debt.

Negotiations resumed after CEDC, which has distilleries in Poland and Russia, revised down its financial statements for 2010 and 2011 and said in a Oct. 6 regulatory filing to the Warsaw stock exchange that it has exceeded “certain thresholds” in its strategic agreement with Tariko’s Moscow-based Russian Standard Corp. New talks risk a revision to the agreement the maker of the Zelyonaya Marka, Bols and Zubrowka vodka brands signed in July with Tariko to enable it to repay $310 million of convertible bonds due on March 15.

“The fact that CEDC is once again back at the negotiating table may be another source of uncertainty for investors,” Jakub Krawczyk, a Vienna-based analyst at Raiffeisen Centrobank AG, said in e-mail on Oct. 9. “Tariko now has the upper hand and will try to improve the terms of the deal for himself.”

Strategic Alliance

Anna Zaluska, a spokeswoman at CEDC, and Oleg Yegorov, a spokesman for Russian Standard, both declined to comment when contacted by e-mails yesterday.

CEDC signed a “strategic alliance” with Russian Standard, whose Roust Trading unit plans to purchase as much as $210 million of CEDC’s notes as well as new and existing shares in the vodka producer, CEDC said in July. The Mt. Laurel, New Jersey-based company said on Feb. 29 that it may default on its bonds after losing out on rule changes in the Russian vodka market, the biggest in the world for the clear tipple.

The restarted negotiations between CEDC and Tariko, Russia’s 65th-wealthiest man, according to Forbes, “could result in additional dilution for minorities in favor of Russian Standard,” Renaissance Capital analysts Ulyana Lenvalskaya and Natasza Zagvozdina, wrote in a note on Oct. 9.

Convertible Bonds

Tariko may seek to decrease the price at which Russian Standard exchanges its investments in CEDC’s convertible bonds into the company’s shares, Anton Farlenkov and Yulia Gerasimova, analysts at Goldman Sachs Group Inc., said in a note on Oct. 9.

The company has struggled to regain Russian licenses after the authorities last year approved laws to restrict advertising for liquor, banned alcohol sales in stores after 11 p.m., raised excise taxes from Jan. 1 and forced companies to reapply for permits in an attempt lower consumption.

CEDC revised down net income by $31.6 million in 2010 and $33.4 million in 2011 after an internal investigation regarding “retroactive rebates, trade marketing expenses and related accounting issues,” according to the regulatory filing. Its second-quarter net loss widened to $93.6 million from a $3.3 million loss a year earlier, the company said.

Business Development

“Its business outlook is weak and CEDC’s revised results don’t add any optimism,” Raiffeisen’s Krawczyk said. “In such an environment, even Tariko doesn’t guarantee success, especially as we don’t know how he will manage the company.”

CEDC notes have returned 3.5 percent this year, compared with 5.7 percent for Bank of America Merrill Lynch’s Euro Consumer Non-cyclical Index of bonds including distillers Diageo Plc and Pernod-Ricard SA, according to data compiled by Bloomberg. The yield on CEDC’s 2016 euro notes, which fell to 22.13 percent at 3:36 p.m. in Warsaw, hit this year’s high of 24.07 percent on Sept. 7, the data show.

“Having completed the restatement process, we can now fully focus on the further development of our business and continuing discussions toward moving forward with the alliance with the Russian Standard,” David Bailey, CEDC’s interim chief executive officer, said in a statement on Oct. 8.

The extra yield investors demand to hold Poland’s dollar bonds rather than U.S. Treasuries fell two basis points to 137 today, JPMorgan‘s EMBI Global index shows. The spread between Poland’s 10-year zloty bond and German bunds narrowed eight basis points to 304. The zloty strengthened 0.1 percent to 4.0889 against the euro, extending this year’s gains to 9.2 percent, the data show.

Default Swaps

Poland’s credit-default swaps rose two basis points, or 0.02 percentage point, to 97 today, according to data compiled by Bloomberg. The swaps cost 106 basis points less than the average for countries in eastern Europe, the Middle East and Africa that are included in the Markit iTraxx SovX CEEMEA Index, compared with an average difference of 78 basis points in the first half of this year. The default swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

Russian Standard “will take the opportunity to further increase” its stake in CEDC during the negotiations and “this may over time turn out to be positive for the credit case,” Martin Svaerdborg, an analyst at Jyske Bank A/S, wrote in a research note on Oct. 10. He maintained a buy recommendation for the company’s 2016 euro notes and dollar-denominated notes. “We point out, that it’s a very risky investment,” he wrote.

Negative Outlook

The agreement with Tariko may be amended to issuing more shares for the Russian investors or “effectively” give more control to him, Magdalena Komaracka, a Warsaw-based analyst at Ipopema Securities SA, wrote in a research note on Oct. 9. The agreement with Tariko is “very likely” to remain as CEDC doesn’t have “many other alternatives concerning refinancing of convertibles, which will mature in half a year,” she wrote.

Moody’s Investors Service downgraded CEDC’s rating by one level to Caa2, eight steps below investment grade, while keeping its negative outlook, according to an Oct. 5 statement.

The negative outlook reflects the “ongoing uncertainty” related to CEDC’s “future capital structure, including its refinancing plans,” and the “difficulties experienced in Russia,” Paolo Leschiutta, a senior credit officer at Moody’s, said in the statement. CEDC shares have tumbled 40 percent in Warsaw this year and 37 percent on the Nasdaq Stock Market.

“The key focus for investors remains the strategic partnership with Russian Standard, the company’s future strategy and detailed action plan for the improvement of operating performance,” Goldman Sachs’ Farlenkov and Gerasimova wrote in their research note this week.

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