To
those of you who have been following the Latvian media, the saga of the rolled steel products company Liepajas
metalurgs (LM)has been in the
headlines. It has been building up to a crunch that may have come on May 3,
when the company’s creditors’ club, which includes a state-owned bank, the
state-owned electrical utility, the state treasury, state-owned Citadele
Bank, the Latvian subsidiary of SEB
Bank, an Italian bank and a British steel trader, offered to buy out the
company’s existing shareholders (for LVL 1 apiece or around six US dollar in
total), replace its management and put LM in some kind of protection from
creditors until it can be recapitalized and put on the path to profitability
again. But more on that later…
That
LM was teetering on the edge is clear from a confidential audit report by Ernst
& Young that also says that if the
company is allowed to fail, it could have a knock-on effect of taking 1.2 to
1.5 percentage points off the Latvian GDP. Depending, or rather, regardless of
whose data you use (the auditors say LVL 305 million, other
sources,
perhaps adding in related companies, have a higher figure), LM is one of
Latvia’s largest companies by sales. In addition, 98% of sales are exports.
With
a slumping market for rebar and falling prices, it was the combined export
markets of Europe and the world that killed LM’s profit margins and had it
selling rebar products to a major market – Algeria – probably below cost, according
to the extraordinary audit report.
As
for the company’s official auditor, BDO Invest Riga , the Ernst &
Young report is unsparing – the auditors,
by also making a valuation of LM’s assets were in conflict of interest and methodologically
unsound – something which clouds the real risk associated with the assets pledged
against the company’s loans and, ultimately, to protect the government’s risk
with its loan guarantee.
Without
going into detail, the officially “restricted access” document as stamped on
each of its pages, is a litany of instance of corporate mis-governance, bad
judgment and nontransparent dealings and transactions which, thereby, cannot be
scrutinized. No one says the “f” word (fraud, what did you think?) other than saying
that there was no evidence of fraud, given the no-one had any real evidence of
anything in the obscure dealings of LM and some of its related companies. The
situation was not helped with the apparently hapless and more likely feckless but
royally-paid (some LVL 14 800 per month) management board/shareholders unable
to deal with the deteriorating world market situation.
As
it became obvious that LM had about a month left, if not less, before
insolvency proceedings are filed against it by creditor UniCredit (the Italian-owned bank), owed its regular
payment on the government guaranteed loan on April 30. As things turned out,
the government was forced to pay just over LVL 6 million in principal on the
loan when LM indicated that it could not pay. LM did cough up the interest on
the loan, without which things would have turned seriously south.
It
seemed, too, that the electrical utility Latvenergo , initially blamed for the
problems LM was facing because of the utility’s more than slightly deranged
double charges for “green” electricity in line with government policy, would
only be one of several creditors rushing to file insolvency papers against LM
in court. Worse still, Latvenergo could
have simply shut off electricity to the
company’s brand new furnaces, something that you can’t turn on again without
serious technical problems (like hacking tons of solidified slag out of the
cold cauldrons, though not being an engineer, I could be wrong on that).
None
of that has happened. Instead, the letter send by the creditor club’ s advisor,
Prudentia Advisers (advisors?- spellcheck seems happy with both versions)
Politically,
this is a situation where Prime Minister Valdis Dombrovskis coalition
government
can do no right. Through Finance Minister Daniels Pavļuts it has indicated that LM’s problems must be solved by its
feuding private owners and by more private investment, no politician will be
forgiven for turning Liepaja into an impoverished ghost town by letting LM go
under (2,800 jobs lost immediately,
thousands
more indirectly). By giving the scale of financial assistance that LM needs to
avoid insolvency and to recover, Latvia risks trouble with the European Union, if
it uses taxpayer money to bailout and recapitalize the company.
So
far two of the shareholders, Sergejs Zaharjins and Ilja Segals have agreed to
sell their shares in LM. With production stopped and both management and the
two aforementioned shareholder clueless as to what to do next, Zaharjins and
Segals may be getting the best deal they can hope for.
The
third shareholder, Kirovs Lipmans, who is also president of the Latvian Hockey
Federation, heard about the offer while attending the World Hockey Championship
in Helsinki. Despite blaming the other two shareholders, from whom he is
estranged, for the pitiful state of LM, Lipmans rejected the offer and said the
scheme put together by Prudentia would be a disaster for LM (as if the company
was not already ruined). Lipmans may be bitter that he, who played no part in
mismanaging the company, is being offered the same terms as the other
shareholders. However, he has repeatedly said that he could get the company
back on its feet, given a chance, and the offer by the creditors does include
such a chance. Lipmans has said he has found potential investors for LM, but so
far has not disclosed who they are nor even described them in general terms.
As
things stand, it looks like the only serious player in the moves to avoid an
end-game for LM is the British steel trader Stemcor, a company that knows the steel
and steel products markets and would be taking over one of its suppliers.
However, for the scheme to work, the puck, so to speak, is on Lipmans’ half of
the ice, since he could swallow his pride, sell his shares and buy back into LM
with his own money and/or that of his unnamed investors and then run the
company in partnership with Stemcor.
Whether this scenario plays out remains to be seen.
