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Vodka Bonds Toast Billionaire Taking CEDC Control: Poland Credit

Russian Billionaire Roustam Tariko
Russian billionaire Roustam Tariko, who owns Moscow-based banking and vodka group Russian Standard Corp., signed an agreement on Dec. 28 that gives him operational control over CEDC and ends a battle with the company’s board over direction and strategy. Photographer: Simon Dawson/Bloomberg

Russian billionaire Roustam Tariko’s deal to take control of Poland’s second-largest vodka maker sent the company’s bond yields tumbling this year, while Moody’s Investors Service warned of losses for some investors.

The yield on Central European Distribution Corp.’s 430 million euros ($561 million) of notes due December 2016 dropped 8.3 percentage points from the peak on Nov. 23 as the risk of default diminished, according to data compiled by Bloomberg. The yield declined 54 basis points to 24.20 percent today.

Tariko, who owns Moscow-based banking and vodka group Russian Standard Corp., signed an agreement on Dec. 28 that gives him operational control over CEDC and ends a battle with the company’s board over direction and strategy. The transaction provides the distiller with as much as $107 million in new capital, subject to the company restructuring its debt, a factor that prompted Moody’s to cut its rating two days ago because of concern about losses for existing bondholders.

“This is a game-changer for CEDC as it was on the brink of collapse,” Andrzej Knigawka, chief analyst at ING Securities SA in Warsaw, said by phone on Jan. 9. “For now, the risk of CEDC not being able to pay back debt has been minimalized.”

The yield on CEDC’s 2016 bonds compares with an average of 4.68 percent in JPMorgan Chase & Co.’s gauge for emerging-market consumer companies.

Funding Pot

Under the agreement, CEDC will receive access to as much as $65 million in funding. In turn, CEDC created an Operational Management Committee of its board of directors to be led by Tariko and appointed Grant Winterton, a former general manager of Red Bull Russia and senior manager at Coca-Cola Co., as chief executive officer of the company.

Tariko is the largest CEDC shareholder with a 20 percent stake, data compiled by Bloomberg show.

The transaction “is intended to stabilize CEDC’s business and to pave the way for CEDC to address its balance sheet issues in an orderly fashion,” the two companies said in a joint statement on Dec. 28.

While yields have plunged from their peak, they climbed 1 percentage point from this year’s low of 23.1 percent on Jan. 4. Moody’s cut CEDC’s rating by one level to Caa3, nine steps below investment grade, on Jan. 9 and placed all the company’s ratings on review for a further downgrade.

Battling Bondholders

The cut reflects the company’s “failure so far to secure adequate financing” to repay $310 million of convertible notes due March 2013 and concern that a previous strategic alliance agreement will expire on Jan. 21, Paolo Leschiutta, a senior credit officer at Moody’s, said in a statement.

Tariko “has won the power struggle” with CEDC’s former management, Martin Svaerdborg, an analyst at Silkeborg, Denmark-based Jyske Bank A/S, said in a research note on Jan. 2. But now he “initiates a new struggle” with debt holders, he wrote.

While that will mainly be between the holders of the 2013 bonds and Russian Standard, it “cannot be ruled out that the owners of the 2016 debt will also be hit,” Svaerdborg said.

“As a minimum,” Tariko will attempt to remove the change of control covenant on the 2016 bonds that requires CEDC to redeem the debt at a price of 101 cents on the euro should Russian Standard assume a controlling stake, he said. The bonds traded at a price of 63.75 today.

Nasdaq Listing

CEDC shares gained 2.5 percent in Warsaw today and are up 1.8 percent to $2.015 in New York trading. Nasdaq Stock Market said on Jan. 7 it will initiate procedures to delist the company for failing to hold its annual general meeting of shareholders by the end of 2012. The company said the same day it will appeal the ruling and hold a meeting “as soon as practicable.”

Nasdaq stayed the delisting and scheduled a hearing for March 21, CEDC said in a filing yesterday.

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries was unchanged at 104 basis points at 7 p.m. in Warsaw, indexes compiled by JPMorgan show. The spread between Poland’s 10-year zloty bond and German bunds widened nine basis points, or 0.09 percentage point, to 244, according to data compiled by Bloomberg.

The zloty weakened 0.6 percent to 4.1095 against the euro, following a 9.4 percent advance last year, the biggest gain among more than 100 currencies tracked by Bloomberg.

Polish credit-default swaps increased two basis points to 77, data compiled by Bloomberg show. The contracts cost 77 basis points less than the average for countries in emerging Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, versus a 70-point discount at the end of 2011.

Prevailing Risks

The deal with Tariko, Russia’s 65th-wealthiest man, according to Forbes, will allow the maker of the Zelyonaya Marka, Bols and Zubrowka vodka brands to refocus on operations in Russia, where it “faces fierce competition amid an uncertain business environment,” Knigawka at ING said.

Anna Zaluska, a Warsaw-based spokeswoman for CEDC, and Oleg Yegorov, a spokesman for Russian Standard, both declined to comment when contacted by e-mail on Jan. 9.

“Effectively, the operational control of the company is now with Mr. Tariko,” Tanvi Arora, a Singapore-based credit analyst at Lucror Analytics Pte Ltd., wrote in a note to clients on Jan. 7. “Although CEDC managed to avoid a default for now, considering its track record, execution risks prevail.”

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