Shareholder dispute could drive Kyivstar into technical default

Ukraine’s largest provider of mobile communications is faced with the prospect of defaulting on a $175-million Eurobond issue due to an ongoing conflict between its two major shareholders.

The development could mark the second default on debt issued to Western investors by a leading Ukrainian company. Chemical giant Stirol found itself in a technical default on Eurobond obligations last year, but investors have thus far refrained from claiming their debt early, accepting a restructuring offer from the company.

Kyivstar, the first Ukrainian company to issue Eurobonds in 2002, became vulnerable to a technical default following rulings by Ukrainian courts in January and December that prevent it from providing financial information to auditors and shareholders.

The legal action was initiated by affiliates of Russia’s Alfa Group, which controls a 43.5 percent stake in Kyivstar, against Norway’s Telenor with its 56.5 percent of shares.

Telenor and Alfa have been locked in a war waged in courts and the media since 2005, when the two companies started quarrelling over the Ukrainian expansion plans of a major Russian mobile services provider, Vimpelcom, in which they both have significant stakes.

Ukrainian court rulings in December and January prohibited Kyivstar from being audited, thus breaking the terms of the company’s second Eurobond issue for $175 million conducted in 2005.

International rating agency Standard & Poor’s responded to the court rulings by warning that Kyivstar might suffer a ratings downgrade or default.

“We will suspend our ratings on Kyivstar if the company cannot provide adequate financial and operating information. This suspension will likely occur by the end of the remedy period,” reads a March 23 statement by Standard & Poor’s.

The international rating agency said that, for now, Kyivstar’s ratings and outlook remain unchanged.

Kyivstar has until April 30 to provide full audited results for fiscal year 2006 or bondholders will have the right to demand repayment of the bonds and interest.

However, Standard & Poor’s added, “We believe Kyivstar’s liquidity to be largely sufficient to fund back the debt, given on-balance-sheet cash and cash equivalents of $473 million at Sept. 30, 2006, and the company’s ongoing free cash flow generation and market performance.”

Another major international rating agency, Moody’s Investors Service, had as early as Jan. 25 this year upgraded the credit rating of Kyivstar’s joint stock on account of the Ukrainian company’s “robust operational and financial performance.”

But by March 21, Telenor’s board of directors decided to deconsolidate Kyivstar, canceling its status as a group subsidiary. The Norwegian telecom decided to present its interests in Kyivstar as an investment.

Telenor said Alfa Group “persistently boycotted Kyivstar’s shareholder and board meetings for the past two years. As a result, there has not been a valid quorum at either shareholder meetings or board meetings in Kyivstar for the whole of 2006.”

Telenor, which is majority owned by the Norwegian government, said that it will continue to contest the actions of Alfa Group in arbitration proceedings in New York. Alfa is controlled by one of Russia’s richest tycoons, Lviv-born Mikhail Fridman.

According to Oleksandr Yudin, the head of the corporate finance department at Kyiv-based investment firm Millennium Capital, Kyivstar’s attractiveness to investors will be damaged if its corporate rating is downgraded.

“Debt securities are usually bought by quite conservative investors. For any of them, the actions of a rating agency related to a refusal to support ratings may evidence that a borrower cannot fulfill a part of the obligations. This will inevitably lead to … the fall of the market price of the securities,” he said.

“It takes years to create a positive credit history and no time at all to spoil it,” he added.

Kyivstar leads Ukraine in the number of subscribers to mobile phone services.

In 2006, its subscriber base grew 54 percent to 21.5 million: 44 percent of the total Ukrainian mobile base and 31 percent of Telenor’s consolidated mobile subscriber base.

Telenor posted net revenues for Kyivstar of $1.7 billion in 2006, a 51 percent year-on-year increase and much higher than Telenor group’s 37 percent.