How Magomedov and TPG formed a debt to FESCO
Magomedov and partners acquired a controlling stake in the FESCO group from Sergey Generalov in December 2012, bypassing at the last moment another bidder – Neftetransservice. The amount of the transaction was not disclosed, but, according to Reuters, it could reach $ 1.4 billion. The Summa group (managing assets of Magomedov) reported that the purchase was financed from its own and borrowed funds – the company needed to attract loans for $ 800 million. Alexander Vinokurov, who at that time headed Summa, said that competitors “actively opposed this deal using any means available to them.” Then, Summa was unable to attract loans from Russian banks (Sberbank and VTB) and had to borrow from a syndicate of foreign banks (Goldman Sachs, Raiffeisen and ING), which provided part of the transaction funds – $ 400 million (which banks provided another $ 400 million, did not reported).
But initially, FESCO was acquired under the leveraged buyuot (LBO) scheme, when the company itself is the creditor of its future owners. Therefore, it was FESCO, who then lent the money to its new shareholders, as the formal borrower for this loan from foreign banks. In addition, in the spring of 2013 the group placed $ 800 million worth of Eurobonds, and exactly half of this amount went to repay the loan to Goldman Sachs, Raiffeisen and ING (the largest shareholders remained debtors to FESCO).
But the total debt of Maple Ridge, owned by Magomedov and TPG, to FESCO turned out to be twice as much – $ 905.86 million, of which the company was supposed to pay off $ 500 million in May 2018, and another $ 300 million on May 2, 2020, follows from the letter. Another $ 140 million is due to Sian Participation.
“The purchase of FESCO was carried out under the LBO scheme. There was nothing illegal about it. High EBITDA and high dividends were assumed, and through them the payment of the debt to the shareholders of the company. Unfortunately, several crises happened and this became impossible, ”a source familiar with the terms of the deal said to RBC. In a memorandum on the placement of Eurobonds in the spring of 2013, the company promised to reduce the net debt / EBITDA ratio from 4.25 to 2 over five years. But in 2017, the company was on the verge of default and agreed to refinance debt to foreign creditors, having received a credit line from VTB. The agreement with the Russian bank limited FESCO to dividend payments. “This is impossible within the framework of today’s loan obligations,” said FESCO chairman of the board of directors Leyla Mammadzadeh in an interview with RBC, answering a question about returning to paying dividends.
Then Mammedzadeh said that she decided to resign. “I have a letter where I wrote in black and white:“ Ziyavudin, I plan to leave, I am notifying you. I’ll hand over everything, calmly inform all stakeholders and leave immediately after the AGM (annual general meeting of shareholders. – RBC), ”she said. The annual meeting of FESCO shareholders should be held in the summer. The manager explained her decision by the fact that the businessman sees the future of FESCO differently. “I have always advocated a voluntary strategic partnership and company development with a strong player. I believe that we have already squeezed the water out of the stone and the next qualitative leap is impossible alone, ”Mammadzadeh said. Magomedov, however, opposed attracting partners.
Leyla Mammedzade – RBC: “The problem of Ziyavudin is not in the field of economics”
What is FESCO famous for?
FESCO is one of the largest transport and logistics groups in Russia. The group owns a port in Vladivostok, railway operators and a large fleet of containers and fitting platforms. The company’s revenue for 2019 is 57 billion rubles, EBITDA is 11.6 billion rubles. The capitalization of the parent company of the group on the Moscow Exchange on May 13 amounted to 18.9 billion rubles.
Ziyavudin Magomedov, who owns 32.5% of FESCO, was arrested in March 2018 on charges of organizing a criminal community, in 2019 Forbes estimated his fortune at $ 550 million.In 2020, he did not get on the list of 200 largest businessmen in Russia. American TPG Capital (owns 17.4% of FESCO) is an international investment company that has been operating for over 25 years and has invested in hundreds of portfolio companies around the world, including Russia. The company manages assets of approximately $ 88 billion.
VTB opened a credit line to FESCO in 2017 for up to $ 680 million and for a period of five years, becoming the company’s sole creditor (as of the end of 2019, the company’s debt amounted to about $ 600 million). The loan was secured by several assets of Summa and its partners, including 73.74% of the shares of FESCO, which are owned by Magomedov and TPG and the third largest shareholder – GHP Group Mark Garber (owns 23.8%).
“All shares of the company are pledged to VTB. If the company defaults, the bank, in accordance with loan agreements, can claim early repayment of the debt and, as a result, demand repayment of all the company’s debts, ”says one of the sources of RBC. But he is sure that management will treat shareholders with “due responsibility” and will not default. Shareholders ’debt to FESCO structures could be prolonged continuously if there weren’t the company’s obligations to VTB, adds another RBC interlocutor.
Such a company’s requirement for shareholders to repay debts is not common practice, said Alexander Zakharov, Paragon Advice Group partner, to RBC. “But taking into account the situation around FESCO (a big debt to VTB that needs to be serviced) and the overall market situation due to the coronavirus epidemic (it has already led to a decrease in traffic and, accordingly, financial indicators of the transport group. – RBC), this requirement looks like logical, ”he says. One of the possible reasons for this requirement is an attempt by FESCO management to defend itself against VTB claims in the future, the expert explains.
The representative of VTB refused to answer questions about how FESCO’s debt is serviced, whether the bank is aware of the obligations of the largest shareholders of the company and whether VTB intends to collect their shares if the company defaults. But at the end of March 2020, when the first restrictions were introduced in Russia due to the coronavirus epidemic, the first deputy chairman of VTB Yuri Solovyov said in an interview with RBC that until recently the company was in “good condition”. “Now we will assess the state of the company, because transportation, including container transportation, will be under pressure, we will see how this will affect the economic and financial metrics of the company,” he said then.
At the end of 2019, it turned out that there were two applicants for the purchase of FESCO – the Delo group, Sergey Shishkarev, which at the privatization auction for the sale of Transcontainer circumvented the structures of Vladimir Lisin and Roman Abramovich, as well as DP World from the United Arab Emirates. In a March interview with RBC, Soloviev said that under the terms of loans, VTB has the right to change of control: if the company is sold, the bank can present these debts for repayment. “But so far no one has contacted us, we are not working on any deals ourselves,” he emphasized.