Fesco Eurobonds Slide on Missed $27 Million Payment Decision

  • S&P cuts rating, cites concern about debt servicing ability
  • Fesco signaling restructuring may be tough: Raiffeisenbank

Far Eastern Shipping Co.’s Eurobonds tumbled to a record low after the Russian transportation company said it won’t pay $27 million in interest due today.

The $421 million of notes due May 2018 sank 3.3 percent to 34.83 cents on the dollar Wednesday. They have handed investors a loss of 37 percent this year, the worst performance among Russian corporate Eurobonds, data compiled by Bloomberg as of May 3 showed. Fesco decided not to pay interest due Wednesday on 2018 and 2020 Eurobonds as it reviews the group’s capital structure amid an economic slowdown and ruble weakness, according to a statement on the company’s website.

KPMG expressed doubts last week as auditor about Fesco’s ability to continue as a “going concern” because of debt problems, while the shipping firm posted deepening losses and signaled it may not make the payment. A group of Eurobond holders are forming an alliance to declare the company in default if it decided not to pay, three people familiar with the plan said on Friday.

“Fesco’s behavior signals that the debt-restructuring process will be tough," said Denis Poryvay, an analyst at AO Raiffeisenbank in Moscow. “Perhaps, it will use the coupon as a bonus later to those bondholders who agree to cooperate on restructuring."

Fesco said today it expects to start a dialogue with interested creditors as soon as legal “constraints” and progress on a strategic review will allow. It hired Houlihan Lokey as a financial adviser and Cleary Gottlieb Steen & Hamilton LLP as a legal adviser. Investors interested in talks should contact Houlihan Lokey, Fesco said. It declined to comment when contacted by Bloomberg on Wednesday.

The transport company’s loss widened to $167 million last year from $123 million in 2014, with current liabilities topping current assets by $93 million. The company made a 401 million-ruble ($6.1 million) interest payment to holders of its ruble debt a week ago, a day before announcing it might not pay the Eurobond coupon.

S&P Downgrade

S&P Global Ratings on Wednesday cut Fesco’s credit rating to CC from B- with a negative outlook, saying that the firm is "highly vulnerable" to debt nonpayment. Falling transportation volumes and the ruble’s slump have pressured earnings relative to the company’s largely dollar-denominated debt, according to S&P.

“While the company has not provided any details on the conditions of the possible debt restructuring, including the scale or what next steps would be, we are concerned about its overall current liquidity and its ability to service its debt according to the original conditions,” S&P analysts wrote.

The company faces about $52 million of debt service charges through the end of June and about $120 million in the following six months, whereas about half of Fesco’s earnings aren’t linked to the dollar, according to S&P. Fitch Ratings cut Fesco’s debt rating to CC, an indicator of a very high level of credit risk, on April 20.

The group of investors, including some U.S. and European funds, has more than the 25 percent of the securities outstanding needed to force a default in the event today’s payment is missed, the people close to the creditors said on Friday on condition of anonymity to discuss confidential negotiations. The terms of Fesco’s Eurobonds give the creditors recourse to assets -- including 70 percent of its shares -- in the event of a default, according to the prospectus. Disputes are to be litigated under English law in London, the document shows.

“The collateral on Eurobonds doesn’t guarantee investors’ protection, otherwise, the Eurobonds wouldn’t be trading at such low levels,” said  Raiffeisenbank’s Poryvay.

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