#10 - JRL 7285
Moscow Times
August 12, 2003
State Fed Up With Bankrupt Firms
By Igor Semenenko
Staff Writer
Having lost patience with companies that use never-ending bankruptcy proceedings as a tax shelter, the government has said it will auction off assets of companies sitting under the umbrella of bankruptcy legislation.
None of the bankruptcy proceedings that dragged on for several years have been successful in getting the companies back on their feet, Tatyana Trefilova, the head of the Federal Bankruptcy Service, said in a telephone interview.
"We held a meeting earlier this year and decided to put such bankrupt companies up for sale," she said.
Bankruptcy proceedings -- an equivalent of Chapter 11 protection in the United States -- drag on for four to seven years, giving businesses a special legal status that allows them to avoid paying taxes in the meantime.
Many companies declare themselves bankrupt and unable to pay off their debts as a way of getting out of paying taxes. Tax arrears are accumulated, but bankrupt firms have the advantage of not having to pay the exorbitant late-payment fines. Also, a company with 100,000 rubles of debt in 1998 can pay that off in 2003, as the purchasing power of money has dramatically eroded the real cost of the original sum.
The Federal Bankruptcy Service is threatening to sell off firms as a disincentive to companies getting too comfortable with their bankrupt status.
Trefilova said her agency has already auctioned off seven firms in the Tambov region, two timber mills in the Vologda region and the Kuznetsk steel mill. In the case of the west Siberian steel mill, creditors were persuaded to reach an amicable settlement.
The Federal Bankruptcy Service promises to put other companies up for sale, too, if they do not promptly restructure and resume paying taxes.
Several bankruptcy cases have been thrown into the spotlight in recent weeks.
Last Thursday, the Orenburg-based NOSTA steel mill held a first auction to
sell off part of its assets for a total of 950 million rubles ($31.3
million) to repay part of its 7.7 billion ruble ($246 million) debt, including
155 million rubles owed to the government. The auction, however, was canceled
because only one prospective buyer placed a bid.
The Belovo zinc factory in Siberia's remote Kemerovo region faced being shut down last week after years of fruitless searching for a buyer for the dilapidated and loss-making plant, Reuters reported.
Belovo had been the country's third-largest zinc producer though it lagged far behind industry leaders Chelyabinsk Zinc Plant and Elektrotsink.
But it's another beleaguered firm that will test whether the bankruptcy has a bite as well as a bark.
The indebted Korshunovsky Ore Factory lies at the center of a power struggle
between Mechel, a holding company built around the nation's sixth-largest steel
mill, and Yevrazholding, which controls the fourth-,
fifth- and eighth-largest steel plants.
Korshunovsky is a $50 million business -- relatively small compared to Mechel, for example, which last year saw $2 billion in sales -- that extracts iron ore and sells the enriched ore to steelmakers.
Eager for Korshunovsky to start paying the1.8 billion rubles it owes in back taxes, the Federal Bankruptcy Service installed its own official as Korshunovsky's external manager last month and subsequently issued an ultimatum to Mechel, urging it to present a draft of an amicable agreement.
Mechel accuses the bankruptcy service of acting on behalf of its rival, paving the way for Korshunovsky to be bought up by Yevrazholding.
If Mechel fails to reach a debt settlement with the company's creditors, which include the government, this will demonstrate the "absence of any true intention to conclude the bankruptcy proceedings at Korshunovsky" by way of settling debts, the Federal Bankruptcy Service said in a statement posted on its web site last Wednesday.
Mechel officials have accused the Federal Bankruptcy Service of doing "a set-up job" in favor of Yevrazholding, which vehemently denies any involvement at Korshunovsky.
This tug-of-war between Mechel and Yevrazholding for control of the plant left Korshunovsky's prospects bleak, as no investor was willing to sink money into a firm whose ownership is murky.
Trefilova said this image to investors is exactly what the Federal Bankruptcy Service is trying to avoid.
"Investors refuse to put their money at stake if the company is teetering on the verge of bankruptcy, so we'd rather just sell it," Trefilova said.
Vasily Nikolayev, a metals analyst at Troika Dialog, said NOSTA is likely to follow in the footsteps of the Kuznetsk steel mill, which was sold off to Yevrazholding earlier this year at far below fair value after the asking price was lowered several times.
Initially, the Kuznetsk sale was projected to fetch 8.8 billion rubles, but its assets, which were sold in several rounds, fetched less than half that sum. The 3.36 billion rubles generated by the sale paid off a meager 35 percent of its total outstanding debt.
So in the end, Kuznetsk, a company with sales of almost $500 million, was acquired for just more than 20 percent of that amount.
But Oleg Chernysh, first deputy head of the Federal Bankruptcy Service, was nonetheless upbeat.
"We still received a significant amount of money from the Kuznetsk sales, even if we did have to lower the price," Chernysh said.
It is likely that NOSTA, too, will go on the block at a lower price than planned and a new company will take its place.
At NIKoil brokerage, analyst Slava Smolyaninov said he would not mourn the loss.
"NOSTA is probably the first suspect when you think of closing inefficient businesses in the steel industry," Smolyaninov said.
NOSTA is jointly managed by Alisher Usmanov, who also owns Gasmetall holding, and aluminum tycoon Oleg Deripaska. During bankruptcy, it is management, not ownership, that carries more weight, though it is possible these two own the company as well.
Gasmetall's relationship with NOSTA has been unclear in the past, but a source at the holding said it was "Usmanov's personal project."
NOSTA extended its bankruptcy status for another six months, and the government allowed it because it cannot afford to lay off large swaths of the company's staff, sources in Gasmetall said.
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