Putin's Airline Rescue Creates Debt Trap for Strongest Companies

  • Forced takeover of Transaero by Aeroflot is bad precedent: ING
  • Model could see distressed companies absorbed by state giants

As Russia’s economic crisis threatens more companies with bankruptcy, bond investors may end up paying the price if Vladimir Putin’s rescue of a loss-making airline becomes a model for state-engineered bailouts.

ING Groep NV said national carrier Aeroflot PJSC’s “value-destructive” takeover of Transaero Airlines opens the door to other state-backed deals that would load up the country’s biggest companies with debt. At least 12 Russian borrowers have bonds trading at distressed levels, compared with nine in Brazil, according to data compiled by Bloomberg.

“Any company that’s in a tough situation because of the economic slowdown may become a takeover target,” Egor Fedorov, an analyst at ING in Moscow said Thursday, pointing to oil, transport and banking industries as possible merger candidates. "This deal creates a negative precedent as other financially strong state companies may be forced to buy financially troubled ones, undermining their financial position.”

Aeroflot will absorb its closest competitor after Transaero became a casualty of Russia’s recession which curtailed travel while the ruble’s 45 percent decline in the past year bloated the cost of leasing jets. Spiraling costs on about $7 billion of Russian corporate bonds maturing by the end of the year could force similar deals.

“The consolidation of industries and takeover of weak players by the strong ones is an essential attribute of the crisis,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail. Losev owns bonds of energy giant Gazprom PJSC and Russia’s second-biggest lender VTB Group. “An increase in the debt load due to the takeover of bankrupt companies produces a naturally negative reaction.”

Since the deal was announced Sept. 1, the yield on the airline’s ruble notes due March 2016 notes has jumped more than 2 percentage points and was at 12 percent by 5:57 p.m. in Moscow on Friday. Risk premiums surged to a five-month high after junk-rated Aeroflot was cut one level to B+ by Fitch Ratings on Sept. 7. The firm cited the “expected negative impact” of acquiring Transaero and kept the ratings under review for further downgrade.

‘Not Pretty’

“Right now this deal doesn’t look too pretty for Aeroflot’s finances,” Andres Vallejo, who helps manage the equivalent of $2.6 billion at Kapital Asset Management in Moscow, including Aeroflot bonds, said by phone on Wednesday. Long term, the debt burden is manageable said Vallejo, who isn’t selling his Aeroflot bonds. “I don’t think this raises the risk for Aeroflot bond holders.”

An Aeroflot spokesman declined to comment on how the acquisition will affect the company’s balance sheet Thursday.

The deal will push leverage, or debt as a ratio of earnings before interest, taxes, depreciation and amortization, to 6.1 times from 5 times, according to VTB Capital analyst Elena Sakhnova. That compares with an average ratio of less than one time for companies listed on the Micex Index, according to Bloomberg data. Transaero has about 42 billion rubles ($616 million) of foreign currency leases on jets, and a total debt load of 107 billion rubles as of December 2014, according to VTB estimates.

“What’s important here is that this deal wouldn’t have occurred on the same terms if Aeroflot had been a private company,” said Fedorov at ING.

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