Sunday, May 12, 2013

Heavy metal in Liepaja - catching up with the story

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.