Company sets out external funding strategy and declares financial situation to be significantly better than that implied under RAS (1,253 words)

Published: 10/11/2001

IAPO has announced that it plans to issue further ruble commercial paper (CP) with a maturity of between three and 12 months onto the markets, aimed at both domestic and foreign investors as part of a programme to provide the plant with financing for ongoing activities. The programme will start on 15th October and will involve the issue of paper each month. The first issue will be between Rb 120-130m ($4.5m), with the intention that the amount of CP will not exceed Rb700m ($24m). The company already has experience of issuing paper, making its first issue in April 2001 for Rb625m ($21.5m) and the most recent for Rb 30m ($1m) in August 2001, as part of a programme that has raised Rb1140m ($39.3m) for the company. Rb695m of the paper has been redeemed by the company with the balance of Rb445m due to be redeemed between 23rd October 2001 and 15th April 2002. The primary market for its paper to date has been among its banks, of which there are 15, but IAPO is keen to develop secondary market interest and has been briefing investors on the attractiveness of its papers. Sergey Tsivilev from IAPO reported that programme to issue short maturity paper reflected the company's problems in attracting long term financing. Funding is available from the state savings bank, Sberbank, in addition to the $200m already advanced, but Tsivilev said that the terms were not very attractive at 15% plus, making CP an appealing alternative. The company does, however, have plans for longer term funding and is planning to issue both Eurobonds and a Global Depositary Receipt (GDR). Tsivilev commented that, while potential investors may put off by the company's losses under Russian Accounting Standards (RAS), the methodology does not necessarily reflect the IAPO's actual financial situation. He said that, while under RAS the company showed losses of Rb266.6m ($9.2m), less than the loss in 1999 of Rb631.7m, the RAS figures were distorted by the impact of advanced payments in hard currency made to the company in 1997 for aircraft due to be delivered in 2002-2004. These payments were re-calculated under RAS rules to reflect the devaluation of the ruble, accumulating theoretical losses of Rb3.9 billion, despite the fact that the company had generated an operating profit of Rb880m ($30.4m) in 1999 and Rb1.1 billion ($38m) in 2000. Tsivilev said that the company has asked Ministry of Finance to allow it to report currency issues separately to reflect IAPO's real financial situation. He added that a positive response would mean the company would not show these losses in 2001. But the change in accounting treatment is reported has not been well received by the tax authorities. They argue that any changes in accounting treatment means that IAPO owes both payments and penalties as, having reporting losses since 1998, the company has paid no tax, although they are believed to have conceded a ten-year repayment plan for the back taxes. IAPO has proposed a shorter repayment period of four years, provided that the penalties are reduced. According to Tsivilev the IAPO programme for external financing has four stages. These are as follows: 1st stage 2001-1st half of 2002 IAPO issues promissory notes/CP targeted at foreign investors. First issue of Eurobonds with preparation for second issue. Overall objective for the period: to demonstrate that IAPO is both transparent and financially sound. 2nd stage - 2nd half of 2002 Issuance of medium-term bonds. Continued provision of commercial paper with ongoing marketing to investors. Overall objective: improving terms and reducing costs of attracting funding from domestic market. 3rd stage - 2003 Planned audit under GAAP accounting Acquires credit rating Listing on one of Russian exchanges 4th stage - 2004 The company issues Eurobonds and gets ready to issue either an American Depositary Receipt (ADR) or GDR. Ongoing business According to Alexei Fedorov, President of IAPO, the company currently has an order book of $3 billion, with the expectation that by 2004 it will have grown by a further $1.5 billion on a worst case scenario, with a best case scenario of $3.2 billion. He also said that the company was adopting the strategy of diversifying its production away from its historic dependence on building Sukhoi military aircraft towards civilian projects, with the production and upgrade of the Su-30 accounting for between 80-85% of the plant's current revenues. The civilian projects include the Be-200 amphibian that recently received its intermediate certification with its first customer, the Ministry of Emergency Situations. They also include the development, in conjunction with Ilyushin and Indian producer HAL, of the Il-214 transport aircraft, in addition to potential work on the Airbus through EADS, recently brokered by the Russian Aerospace Agency (RAKA). The company also continues to work with Russian Avionics on the repair and upgrade of Mil helicopters including Mi-8, Mi-24, Mi-17 and Mi-35. EADS EADS and IAPO have conducted a number of meetings on possible cooperation over the production of the A-319 and the A-320 and potentially other aircraft within the Airbus family, under the framework of the memorandum signed between EADS and RAKA. EADS has already visited IAPO to assess the plant's production capabilities and capacity although Fedorov said that the discussions were in the earlier stages. He confirmed that if an agreement is signed, it would involve "substantial investment" by the plant to meet Airbus' standards. This suggests that the public statements made by the company on its funding strategy is largely directed at convincing EADS and Airbus of the plant's solvency and suitability as long term partner. However, Fedorov added that both EADS and Airbus appreciated that IAPO's management spoke the " the same language" Il-214 Working with Ilyushin, Rosoboronexport and HAL, Fedorov said that the transport aircraft programme continues to be supported by the Indian and Russian governments, with each side owning 50%, in return for investment in the same proportion. The programme will have two production lines in India and Russia and will be managed by a JV company, with a prototype scheduled for 2005-2006 and serial production following soon after, in 2007. Currently, the aircraft has an order from the Indian Ministry of Defence of 50 aircraft with the option of a further 100. Modernisation Fedorov said that the Ministry of Defence had already held an unofficial tender for the modernisation of the Su-27 and IAPO believed that it would secure the contract, as it offered the most cost effective modernisation of the Su-30KM. The potential contract would come on top of an agreement already signed for upgrades of around 30 Su-27s between 2001 and 2003. Fedorov added that the company was receiving considerable foreign interest in the Su-30KM package. Holding companies Further evidence that many of Russia's aerospace companies are far from happy with the plan to create two major aerospace holdings was revealed in Fedorov's reluctance to discuss the establishing of the holding companies and its involvement with Sukhoi, in particular. When pressed to confirm that IAPO was happy to be in the same holding as Sukhoi, he couched his simple "yes" with the caveat, "if the terms are right". The current shareholder structure of IAPO is as follows: · Brunswick UBC Warburg Nominees for foreign shareholders (24.6%) · AVPK Sukhoi (14.7%) · FTK, an investment company (20%) · AKB Forpost, a bank (20%) · Aerospace Equipment, an IAPO partner (11%) · Other entities (9.7%)

Article ID: 2816