Polish Vodka Bonds Soar as Billionaires Vie for Rescue

Rival offers from Russian billionaires for rescuing Poland’s second-biggest vodka maker are spurring speculation Central European Distribution Corp. will avoid bankruptcy, sending bond yields to a 10-month low.

Roustam Tariko, CEDC’s biggest shareholder, and Mikhail Fridman’s Alfa Group announced competing proposals to save the company on March 5 as SPI Group, the owner of the Stolichnaya Vodka brand, said it hired Nomura Holding Inc. to “evaluate alternatives with respect to CEDC.” The spirits maker said on Feb. 25 that without a rescue plan it may file for bankruptcy as it’s unable to repay $258 million of notes due March 15.

Yields on 2016 Eurobonds of the maker of the Bols, Zubrowka and Zelyonaya Marka brands tumbled 1,009 basis points since Feb. 25 to 16.18 percent at 5:03 p.m. in Warsaw, the lowest rate since May, according to data compiled by Bloomberg. The yield on JPMorgan Chase & Co.’s Corporate Emerging Market High Yield index fell 11 basis points to 6.51 percent in the period.

“Bondholders have more and more options and falling yields reflect that,” Jakub Krawczyk, an analyst at Raiffeisen Centrobank AG in Vienna, said by phone on March 6. “This situation is a kind of end game as CEDC convertible bonds mature next week. Every scenario is possible.”

Offer Received

Warsaw-based CEDC said in a March 4 statement that it had received a restructuring proposal from Tariko’s Roust Trading that’s also supported “by certain bondholders.” CEDC said it’s evaluating the offer and expects to make a final decision “within the coming days.” Spokeswoman Anna Zaluska declined to comment further when contacted by e-mail yesterday.

The offer by Tariko, who owns 19.5 percent of CEDC, and a committee of bondholders includes a $172 million cash payment as well as issuance of new debt maturing in 2018 to holders both of dollar- and euro-denominated bonds maturing in 2016.

SPI, which owns both 2013 and 2016 notes of CEDC, has started “preliminary discussions with a few strong financial players in Russia who could be interested in considering the CEDC business together with us,” Val Mendeleev, chief executive officer of SPI, said in a statement on March 5.

Fridman’s Alfa Group and Mark Kaufman’s consortium A1, CEDC’s second-largest shareholder, proposed on the same day to invest as much as $225 million in the vodka maker’s restructuring in return for 85 percent equity in the reorganized company. Holders of the 2016 bonds would also be able to exchange the securities into new bonds maturing in 2018.

Deal Details

CEDC’s offer expires March 22. It would give holders of its 3 percent convertible bonds, due a week before that date, 8.86 new shares in exchange for each $1,000 principal amount of their notes, the company said.

Investors in 9.125 percent 2016 dollar bonds issued by CEDC Finance Corporation International Inc. will receive 16.52 new shares and $508.21 principal of the company’s 2020 debt.

On the 8.875 percent 2016 euro-denominated bonds, holders are being offered 22.18 new shares for each 1,000 euro principal amount and $682.37 principal of the 6.5 percent 2020 bonds, according to the filing. CEDC said it’s also considering a pre-packaged bankruptcy plan in Delaware, the filing shows.

CEDC’s shares have tumbled 70 percent in New York and 67 percent in Warsaw this year.

The price on CEDC’s convertible dollar notes due March 15 fell 3 percent to 16 cents on the dollar in Warsaw yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Persisting Uncertainty

Investors are “no longer sufficiently paid for the uncertainty,” Martin Svaerdborg, a bond analyst at Silkeborg, Denmark-based Jyske Bank A/S, said in a note on March 6.

He downgraded CEDC Eurobonds due 2016 to sell from buy citing “steep” price increases.

“The liquidity of the new notes that may be issued in connection with the restructuring cannot be guaranteed,” posing a risk of not being able to sell at a “reasonable price at a later point in time.” There’s also “continued uncertainty” about future operational performance, with development in Russia “still causing concern,” according to Svaerdborg.

The extra yield investors demand to hold Poland’s dollar bonds rather than U.S. Treasuries fell six basis points to 120 today, JPMorgan’s EMBI Global index showed.

The spread between Poland’s 10-year zloty bond and German bunds narrowed four basis points, or 0.04 percentage point, to 249, data compiled by Bloomberg show. The zloty strengthened 0.5 percent to 4.1289 to the euro, paring its 2013 decline to 1.2 percent, the fifth-biggest among more than 20 emerging-market currencies tracked by Bloomberg.

Debt Insurance

The cost of insuring Polish debt using credit-default swaps fell 1 basis point to 90. The contracts were 80 basis points below those from 15 emerging countries from Europe, the Middle East and Africa in the Markit iTraxx SovX CEEMEA index. That’s down from a gap of 110 basis points in October.

The swaps, which increase as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege on its debt agreements.

The Warsaw-based distiller has $1.2 billion of outstanding bonds, or 25 times more than its market capitalization on the New York exchange. It sold debt in 2008 and 2009 to help fund its expansion in Russia, the world’s largest spirits market.

CEDC has reported a combined net loss of $1.4 billion for 2010 and 2011 and plans to write down at least $400 million in 2012, data compiled by Bloomberg show.

“Bondholders may be betting that some kind of a compromise is possible and the risk of the company going bankrupt fades,” Krzysztof Kuper, an analyst at Ipopema Securities SA, said by phone from Warsaw yesterday. “Investors should still pay the most attention to proposals from CEDC and Tariko.”

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