BUSINESS

Ed Bentley

The Russian government's plans to bail out beleaguered tycoon Oleg Deripaska and his debt-laden Rusal hit a snag last week after its IPO failed to gain approval from the Hong Kong Stock Exchange - at least for now.

A deadline of November 26 which had been set for the aluminium producer to restructure $7.4 billion of its debts whizzed by without any resolution and has now been pushed back to December 3, according to insiders.

Rusal is racing to get its affairs in order to push through the offering before the end of the year.

But the listing could be under threat after fears of a huge debt default by Dubai's government on Friday sent global stock markets into a downward spiral. A domino effect as creditors call in loans raises the spectre of other countries defaulting and a new, deeper financial crisis.

Leading investors in the Russian economy said it was now or never for Rusal.

"They should be in a hurry, because if they don't do it now, then I don't know when they'll do it," said MattiasWestman, CEO of Prosperity Capital Management. "As far as I understand, there are some triggers in various agreements that need to be fulfilled by having a listing this year."

Failing to launch the IPO this year could prove a blow to Finance Minister Alexei Kudrin, who had thrown the government's weight behind the offering. RIA Novosti reported him telling a financial forum that state-owned bank VEB would take a 3 per cent slice of the aluminium producer.

"I am convinced that it is a quality deal as it is an absolutely profitable market transaction," Kudrin said. "It's a long-term investment for a minimum of three years."

However, some analysts said Kudrin may have his doubts about the company's valuation of $16 billion to $21 billion, following his comment that the Russian stock market is overheated and prices might fall.

"This begs the question of why a state-controlled bank is buying into Rusal's IPO against the backdrop of an overvalued market," Citibank analysts wrote in a report.

The conclusion is that the government is again bailing out Deripaska, who in the last year has already received a $4.5 billion state loan, as well as a ticking-off from Prime Minister Vladimir Putin over unpaid wages as his highly-leveraged businesses suffered in the crisis.

"If you take both the loan of $4.5 billion and participation in the IPO, which will be about $500 million, of course it's a bail out," said Maxim Semenovykh, a metals and mining analyst at Alfa Bank Rusal's hopes of raising $2 billion through its IPO could also be under threat, after the six-month postponement of debt repayments by the Dubai World state-owned conglomerate delivered a blow to emerging markets and the oil price.

"The problems may emerge from the high volatility of stock markets - equity placement may become challenging in such circumstances for any company, not only Rusal," said Semenovykh.

Despite concerns about the valuation, among other worries, Rusal's IPO is likely to attract considerable interest, with investors eager to browse the prospectus if a date is confirmed.

"The debt issue is the major issue for investors to look at how much equity value they have," said Westman. "Other than the debt levels it is a good and sound business in itself."

Rusal's mountain of debt, a reported $16 billion, is the main question Hong Kong wants answered before it gives the green light to the offering - but the company is known for being cagey in giving out information.

"They are not disclosing much but they will somehow address the situation to those investors who are watching the marketing of the IPO," said Semenovykh.

If the listing is successful, the funds would be used to lower the firm's debts, but this would still leave $14 billion to which would eat into investors returns.

"The issue will be the cash flow to equity holders which will be quite low in the next four to seven years when the company is repaying its debt," said Semenovykh.

Other concerns remain for foreign investors, in particular the ownership of Deripaska and his upcoming court case in London with Michael Cherney. The Israeli-based businessman accused the oligarch of reneging on an agreement and is demanding $3 billion, which Deripaska branded "blackmail".

In addition to the 10 per cent IPO Deripaska, Russia's former richest man, is expected to exchange a 5.2 per cent stake in Rusal in return for wiping out $2 billion in debt with Mikhail Prokhorov's Onexim Group.

The deals would see Deripaska's holding sink below 50 per cent, from 56.8 per cent, though he is thought likely to retain control of the company.