Russian billionaire Roustam Tariko is sending yields on the bonds of Poland’s second-biggest vodka producer to a six-month low by offering to swap his holdings of the company’s bonds into equity.
Central European Distribution Corp.’s 430 million euros ($562 million) of notes due 2016 tumbled 3.78 percentage points in yield this month to 15.05 percent yesterday, the lowest level since Aug. 2, data compiled by Bloomberg show. The extra yield investors demand to hold CEDC’s 2016 dollar bonds over similar notes from Tariko’s Russian Standard Bank ZAO fell 53 basis points so far in February to 757, the lowest since Jan. 20.
Tariko, who controls banking and vodka assets through Russian Standard Corp., said in a Feb. 1 letter to CEDC that he wants to convert $103 million of debt into shares as well as buy new stock. CEDC, which had its credit-rating outlook cut to negative by Standard & Poor’s in December because of declining consumption in Poland and Russia, said it will consider Tariko’s proposal to boost his stake to 33 percent from 9.9 percent.
“Russian Standard, as a strong shareholder, gives them a chance to refinance debt and at the same time expand their products portfolio,” Krzysztof Kuper, a Warsaw-based analyst at Ipopema Securities SA, said on Feb. 3. “They need help.”
CEDC, whose headquarters is in Mt. Laurel, New Jersey, makes Zubrowka, Bols, Parliament and Zelyonaya Marka brands. The yield on the company’s 2016 notes fell from a record 25.73 percent on Nov. 25, Bloomberg data show.
The securities have recovered 46 percent of their value since Tariko, whose fortune is estimated at $1.9 billion by Forbes magazine, said in a Nov. 28 regulatory filing that he bought the CEDC stake as a “strategic investment.”
Russian Standard said last week it proposed to convert into shares a third of the $310 million bond maturing in 2013, and help refinance other debt. Tariko expects CEDC’s board to respond to his offer and start negotiations by Feb. 8.
CEDC will “certainly consider this proposal as well as other options the company is currently exploring, for the best benefit of our shareholders,” Chief Executive Officer William Carey wrote in an e-mailed response to Bloomberg News on Feb. 2.
CEDC shares gained 23 percent on Nasdaq this year to $5.40 after falling 81 percent in 2011, according to data compiled by Bloomberg. They rallied 15 percent in Warsaw this year, compared with an 11 percent rise by the broad WIG index, the data shows.
“The deal is better than standing still for CEDC, but dilution risk for minorities is significant,” Natasha Zagvozdina, analyst at Renaissance Capital in Moscow, wrote in a note to clients on Feb. 3. CEDC’s debt “presents a more interesting investment opportunity than CEDC’s equity, at the moment.” Renaissance recommends investors sell the company’s shares and has a target price of $3.70.
CEDC cut its earnings outlook for a second time in three months on Nov. 4 because of the “continued market environment of declining vodka consumption” and price competition, according to its filing.
Its share of the Russian vodka market, the world’s largest, fell to 11.6 percent in this first three quarters of 2011 from
12.4 percent a year earlier as the government introduced licensing for alcohol transportation and other measures to curb drinking, the company’s website shows.
CEDC sees its 2011 profit at between 25 cents and 45 cents per share compared with its August projection of $1.05 to $1.25.
“A weak fourth quarter still lies in store,” Alex Howson, equity analyst at Jefferies Group Inc. in London, wrote in a report on Feb. 2. CEDC’s forecast is “an unachievable target”
based “on continued volume pressure in the Russian market.”
Jefferies expects CEDC will say earnings reached $0.03 per share last year, when it reports results on Feb. 29.
The yield premium demanded by investors to hold 2016 CEDC bonds over similar maturity Polish government euro debt fell to a six-month low of 12.1 percentage points yesterday. The extra yield on CEDC’s 2016 notes over similar bonds from Paris-based Pernod-Ricard SA, Poland’s fourth-biggest vodka maker through its Wyborowa SA unit, fell to a three-month low on Feb. 3.
The cost to insure Polish state debt against non-payment for five years using credit-default swaps rose two basis points to 231 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices in the privately-negotiated market.
Polish credit-default swaps cost 59 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, compared with a 64 basis-point discount a year ago, according to CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The extra yield investors demand to hold Poland’s dollar bonds rather than U.S. Treasuries rose two basis points to 258 today, indexes compiled by JPMorgan show. The spread over Germany’s euro-denominated bonds widened eight basis points to 369, according to Bloomberg data. The zloty was little changed at 4.1735 against the euro yesterday.
Jyske Bank A/S is recommending investors buy CEDC bonds as Tariko’s proposal will reduce debt risk and will “most likely” be accepted, it said in a note to clients on Feb. 3.
“Looking at where CEDC convertible bonds are trading right now, it won’t be possible to refinance that debt in 2013,” Alex Hauge Andersen, credit research analyst at Jyske, said by phone from Silkeborg, Denmark, yesterday. “There are no other real alternatives for them.”