Central European Dist: Mark Kaufman discloses letter to the board in amended 13D filing; offers to build a credible alternative to the current unhealthy negotiations between CEDC and RTL.
Before giving more thought to Kaufman's letter I would firstly say that:
1. Kaufman contributed largely to this CEDC management capitulation through his letters that added a lot to the already existing pressure.
2. It's been 3 weeks now that the deal went through. Why did Kaufman wait this long to send his letter?
3. The only weapon I have is my vote. I wil not be giving my vote to a stockholder that doesn't have majority of shares. That's common sense and it's definitive!
4. Sending angry letters to management and cc'ing Kaufman I don't see how this could become productive.
Does the revised agreement present a definitive solution, including funding the repayment of the 2013 Convertible Notes, i.e., does RTL still give a firm commitment on clear conditions to provide additional funding in the manner that it did under the original securities purchase agreement? No.
Does the revised agreement set forth the terms under which RTL is prepared to restructure its own share of the 2013 Convertible Notes, as it used to be in the previous agreements through the issuance of the Exchange Shares? No.
Can we at least be confident that CEDC will not go bankrupt in few months – or weeks – thanks to the revised agreement? No.
Are we sure that it was impossible (and is still impossible) to find an alternate investor, ready to invest USD 100 to 115 million, or even more, in exchange for more reasonable rights and privileges than RTL has negotiated in the revised proposal? No.
I believe there are serious candidates. But they are indeed driven away by the current situation.
All “No” and not one “Yes”: so what’s the revised proposal all about? In short, it potentially delivers to Mr. Tariko more and more control over CEDC, including majority control of the board, for less and less financial commitment! It increases his leverage with respect to negotiations over the restructuring of the capital of CEDC. And it obtains for RTL additional guarantees and security interests to protect the investment that he has already made.
In short, thanks to the Term Sheet, RTL is more likely to get what it wants or get all its investment back; and we, the remaining stockholders, are more likely to lose all our investment. “What you want, or your money back”. Not a bad deal for RTL. But a lousy deal for us long-suffering stockholders.
Why do I believe the deal is not balanced anymore?
1) RTL’s funding commitment is illusory
The terms of the revised deal no longer deliver a clear and definitive path to resolving CEDC’s immediate liquidity crisis. As well put by Moody’s in its Rating Cut to Caa3 dated 9 January 2013: “CEDC[‘s] announcement on the 28 of December that it had agreed with Russian Standard a revised transaction … has increased the risk of potential loss for existing bondholders. The downgrade also reflects CEDC’s failure so far to secure adequate financing to repay the convertible notes and Moody’s understanding that the old strategic alliance agreement between Russian Standard and CEDC … will now expire on the 21 of January”.
But it is even better put by our own Special Committee in its Open Letter to Shareholders and Bondholders, dated December 12, 2012 (the “Open Letter”): “RTL’s Proposals are Incomplete and Illusory” and “contrary to the interest of CEDC and its stakeholders and should be ignored”.
Why then did our Special Committee on December 28, 2012 capitulate and accept essentially the same proposals?
2) The Term Sheet is a clever shell game in which RTL gets something largely for nothing
How does this shell game work?
· USD 50 million of the USD 70 million of 3% Senior Notes due 2016, originally purchased by RTL on May 4, 2012 are converted into a new credit facility in the form of a term loan (“New Credit Facility Debt”), which funds may now be used for working capital and general corporate purposes and advanced to the operating subsidiaries.
· But in exchange, CEDC’s operating subsidiaries must now guarantee the CEDC’s obligations under the New Credit Facility Debt as primary obligors. In turn, as security for their obligations under their guarantees, and for CEDC’s obligations under the New Credit Facility, the subsidiaries have pledged and granted RTL security interests in all their property and assets. In addition, RTL has agreed to provide a USD 15 million revolving credit facility that will be similarly guaranteed by CEDC’s subsidiaries, which will pledge and grant similar security interests in their assets. None of these guarantees and security interests existed when the New Debt was originally purchased.
· However, by pledging and granting security interests in their own property and assets to secure the New Credit Facility Debt, CEDC’s subsidiaries will likely no longer be able to provide the security necessary for local banks to finance their working capital with cash funds and guarantees for excise tax and import duties. In such case, the funds available under the new term loan of USD 50 million (which, of course, is not a new funding commitment, merely a loan on better secured terms for RTL as lender than the original notes), and the USD 15 million revolving credit facility to be extended on similar terms, will be used just to replace the financing of working capital currently provided by local banks. Rather than being available to secure borrowing capacity, the subsidiaries’ assets (albeit purportedly limited by what is permitted under the 2016 Indentures, as well as prohibitions on fraudulent transfers, fraudulent conveyance and voidable preferences) are now pledged to secure the repayment of most of RTL’s existing (and previously unsecured) New Debt. Why does the Special Committee accept these terms -- particularly when on December 12, 2012 it told us that “contrary to the insinuations in Mr. Tariko’s letters and filings, CEDC’s working capital and guarantee situation has improved”? Do the subsidiaries really need this New Debt Credit Facility – or does RTL just want to re-trade the terms of the New Debt to benefit from additional collateral it had not managed to negotiate in April or July.
· Further, Section 8.15 of the Securities Purchase Agreement, which will survive the termination of that agreement on January 21, 2013, provides that the giving of a false or inaccurate representation at the Initial Closing constitutes an Event of Default under the New Debt (and therefore under the New Credit Facility Debt) allowing RTL to accelerate the New Debt. But because the Accounting Issue exceeded the limits set forth in the Securities Purchase Agreement, the representations regarding CEDC’s financial statements were inaccurate when given at the Initial Closing. Accordingly, an Event of Default already exists under the New Debt (USD 50 million of which is now better secured against the operating property and assets of the group). So the Term Sheet grants RTL significant additional creditor protections with respect not only to a debt investment that RTL has already made but one that RTL already knows is in default.
· It is true that, for the moment, that under the Term Sheet, RTL has agreed to forbear from exercising any remedies under the New Debt that arise out of circumstances existing prior to December 28, 2012. But that forbearance terminates automatically, among other events, on the maturity of the 2013 Convertible Notes, that is, on March 15, 2013.
· So what? Well, RTL’s new capital commitment under the Term Sheet is conditioned on a restructuring of CEDC’s capital that is acceptable and agreed by RTL, in its sole discretion. That is, it is no commitment at all. Absent new capital, CEDC will likely default on the 2013 Convertible Notes due March 15, 2013. That will trigger a cross-default under CEDC’s 9.125% Senior Secured Notes due 2016 and 8.875% Senior Secured Notes due 2016 (collectively, the “2016 Notes”). To put it mildly, this gives Roustam Tariko significant negotiating leverage.
· But on March 15, 2013, absent an acceptable restructuring of the capital (and the conversion of the New Credit Facility Debt (but not the entire New Debt) to capital that is junior to the 2016 Notes (but not necessarily common stock), and on automatic termination of the forbearance agreement, an Event of Default will immediately exist under the New Debt, allowing RTL to accelerate it, call the subsidiary guarantees and proceed to enforce the security interests over the subsidiaries’ property and assets.
· Further, since much of this enforcement would be through the Russian courts against assets located in Russia (where Roustam Tariko is a well-established figure and where the legal process may still give rise to unpredictable results), RTL would have a good chance of taking over some or all of the Russian assets on a distressed basis.
· In short, RTL has a much better chance of getting its money back under the New Debt, as modified by the Term Sheet, than before. For certain, the New Debt could have been accelerated under the Section 8.15 of the Securities Purchase Agreement on the basis of the inaccurate representation regarding CEDC’s financial statements given at the Initial Closing, but the Notes – governed by New York law – were not guaranteed by CEDC’s subsidiaries and had no security interests over the subsidiaries assets.
· But don’t take my word for it. Isn’t this whole shell game of the questionable New Credit Facility Debt just a (slightly) subtler version of the proposal that our Special Committee announced in its Open Letter was “contrary to the interest of CEDC and should be ignored”. In then rejecting securing the existing unsecured Net Debt against “collateral owned by CEDC’s operating subsidiaries”, our tough talking Special Committee properly summarized the subterfuge: “In other words, RTL has demanded that . . . subordinated loans in an amount of $50 million be elevated to senior status, to the potential prejudice of other CEDC stakeholders – and this is to be done notwithstanding the fact that his [sic] investment already has been made.” Well said.
· It should be recalled that on termination of the Securities Purchase Agreement on January 21, 2013, RTL also has the right to put the 5,714,286 Initial Shares that it subscribed for on May 4, 2012 back to CEDC in exchange for repayment of the USD 30 million subscription price.
claims that Tariko effectively secured most of the company's assets as new collateral while CEDC received nothing in exchange.
fears that Tariko will likely get control of the valuable Russian assets at distressed prices when moving the company into bankruptcy as his power in Russian courts is unprecetended.
Kaufman thinks Tariko is currently ripping off the assets from CEDC in exchange for nothing and as most of the bankruptcy proceedings will be held in Russian courts he has a good chance to take these assets even against senior bondsholders .
That's exactly what I pointed out when the latest deal was made public at the end of December.
Obviously, you took A LOT and I mean A LOT of time, thought and effort in your post. Unfortunately, I have ADD and stopped reading half way. If you want to publish a book, it may be worth a read. But for many half wits like me, we have a very, very short attention span. GLTA!~