Monday, December 21, 2009

The Impending USC Rusal's Time Bomb, SFC Should Wash Its Hands Clean

Readers of this blog will know how much I frown on the proposal to list Rusal on HKSE. Well, they rejected the first proposal, then Rusal went to appoint two prominent HK figures onto its board. After repeated attempts, the world's largest aluminum maker Rusal was allowed to put forward its Hong Kong flotation plan under the prerequisite that the deal should not have a public offering tranche.

To ensure that retail investors would not put themselves at risk to heavily indebted Rusal in the secondary market, the SFC also boosted the board lot size which may result in an entry price of as much as HK$1 million per lot.


Bloomberg: Rusal has said it plans to sell a 10 percent stake to help repay $17 billion of borrowings. The share offering will be led by Zurich-based Credit Suisse Group AG and BNP Paribas SA of Paris, with banks from BOC International Holdings Ltd. to VTB Group also helping to manage the sale.

The exchange’s listing committee withheld approval for Rusal’s IPO application at a meeting on Nov. 26 and asked the company for more information, including details on its debt restructuring. Earlier this month, Rusal signed an accord with creditors in Russia’s largest corporate debt restructuring.

A subsequent review by the exchange, on Dec. 7, again failed to approve Rusal’s bid. The bourse asked the company to explain how it would repay a $4.5 billion loan from Russian state-owned lender Vnesheconombank.

The loan will be refinanced by OAO Sberbank, the Financial Times reported last week, citing unidentified people.

Sberbank, VTB

Rusal was rushing to secure approval in Hong Kong before the end of the year to avoid redrafting its 1,000-page IPO prospectus, which would delay the share sale until April, the FT also said, citing an unidentified Hong Kong exchange official.

The company’s borrowings almost doubled last year after Rusal bought 25 percent of Moscow-based OAO GMK Norlisk Nickel, Russia’s biggest mining company, for $7 billion in cash and a 14 percent Rusal stake. Commodity prices subsequently collapsed, with aluminum tumbling 36 percent in 2008 on the London Metal Exchange.

Rusal had a net loss of $6 billion last year, Vedomosti newspaper reported in October. The company was forced to take the $4.5 billion loan from Vnesheconombank in October 2008, the biggest state-led bailout of any Russian company.

Russia’s two biggest banks, OAO Sberbank and VTB, both state-controlled, will buy shares in the IPO alongside state-run VEB, RIA Novosti reported this month, citing Russian President Medvedev's chief economic aide.

The stakes Sberbank and VTB will buy won’t be significant enough to require approval from the lenders’ supervisory boards, Arkady Dvorkovich told reporters in Moscow, according to RIA.

Rusal is also in talks with potential investors including China Investment Corp., the nation’s sovereign wealth fund, and Singapore’s Temasek Holdings Pte, the Hong Kong Economic Journal said in October.


What a very silly ruling by SFC. Either you allow the listing or you don't. You cannot be seen to be protecting the small investors by suddenly making this one company with a huge board lot. By doing so, SFC has over--stepped its jurisdiction. Its role is to regulate, ensure all required market information are properly disclosed and disseminated. If you think a company is not fit to be listed, then don't approve. If you approve, then let the market players decided to buy or sell the stock. You do not go around trying to steer certain investors away by changing board lots - its like saying that Rusal gets the OK to list but hint, hint, its very dangerous.

It is not the SFC role to say this is a good or bad company. Its like our Securities Commission - can you imagine if the SC were to come out and say Company A is looking to be going into PN17 in 6 months time - well, you can't say that. SC can only put a company into PN17 when it has failed certain financial conditions.

If Rusal is deemed fit to list, then there should not be any contraints UNTIL they have breached the "regulatory conditions". You don't pre-empt these things. Its very very bad. I wonder who the fuck is inside the SFC committee - you must be able to distinguish your roles and your capacities clearly, regulate and enforce, you are not a research house. You cannot "flag" a company as "suspicious" even before its listing, and yet still allow it to be listed!

As long as there are proper disclosures, and there are a lot in an IPO, why should Hong Kong retail investors and even individuals who could participate in the institutional tranche be discriminated against? The world's largest aluminum maker is seeking US$2 billion (HK$15.6 billion) from a dual listing in the SAR and Paris. Whether to conduct a retail public offering should be a matter of choice for all listing applicants.

The SFC's unprecedented move is "bizarre" as "the general public can buy the shares in the secondary market, so excluding them from the primary offering does nothing to protect them. The SFC should stick to the principles of a disclosure-based market. Market watchers are worried that the regulator's action could set a bad precedent, hurting Hong Kong's image as an international financial center.

SFC concerns over Rusal is factually correct as I think Rusal is a dubious company, but its not their jurisdiction. They can only approve or reject the listing. Since "pressure" has mounted for them to approve Rusal's IPO, they should just leave it at that. Buyers beware!

p/s photo: Goto Makino

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