Page 1 of 2 Rusal tests Hong Kong's waters
By John Helmer
MOSCOW - A quick walk from the Hong Kong Stock Exchange (HKEx) building on the
waterfront in Central will take you to the ferry for Macau, where, in less than
60 minutes, you can be at the roulette wheel of the Sands Macau; and within a
comparable interval you can gamble away a fortune.
This Thursday, inside a closed meeting-room of the exchange, a handful of
people will decide whether the HKEx intends to spin a wheel of its own and
offer an opportunity to a selected group of financial institutions. The HKEx
wager is much bigger; the odds less chancy.
This is something the HKEx has never done before - vote on whether to allow the
first application ever lodged by a Russian company to sell shares in the Hong
Kong market. The company, United Company Rusal, did not go ahead when
previously
considering bids to list in London in 2007, and in Hong Kong and Shanghai in
2008. Then, the underwriters and potential share-buyers were uncomfortable with
Rusal's risks.
Now, with a market valuation target of between US$20 billion and $30 billion,
and a 10% issue of shares to be offered, between $2 billion and $3 billion in
cash is at stake - all of it promised, according to sources close to Rusal, to
the banks and underwriters, accountants and lawfirms that have drafted the
Rusal share prospectus and the HKEx application, and which are participating in
the share sale.
But now, compared with 2007 and 2008, Rusal is in different shape, with
revenues dwindling as the aluminum price is down; huge asset writedowns and
bottom-line losses; the biggest debts of any company in Russia; its Russian
assets now held for security by Russia's state banks; and litigation pending in
the United Kingdom and Guinea to reclaim shares and assets on grounds of
contract violation, fraud, and tax evasion.
Most significantly, the international banks underwriting the share sale are
also owed very large sums of the $8 billion Rusal has been negotiating to repay
them for a year now. The latest deadline for Rusal to avoid default and
finalize terms expired last weekend, with a fresh extension of time to next
month.
HKEx is thus at the center of a grand conversion, potentially, of what until
now has been toxic Rusal debt, owed to more than 70 international banks, into
cash up front; and into new Rusal equity, for the purchase of which the
creditor banks may be lending sums equivalent to those already owed. This
massive exercise shifts value from the liability to the asset column, and
cleans balance sheets.
Paul Chow is the outgoing chief executive of the exchange; he will leave office
within eight weeks. Mark Dickens heads the listing division, which is directly
responsible for assessing Rusal's application. Following leaks from Rusal that
it intended to apply to the HKEx in September, Chow and Dickens have told Asia
Times Online that the confidentiality of the application process precluded them
from answering questions.
They would not comment on a liability warning issued by the London law firm
Dechert, representing Michael Cherney, who is in the UK High Court with a claim
against Rusal's controlling shareholder, Oleg Deripaska, for 13% of Rusal's
shares, or about $4 billion in compensation, based on contracts and a trust
Deripaska had signed in Cherney's favor in 2001.
Lawyers in London say that because UK High Court Justice Christopher Clarke has
ruled that Cherney's claim has "a reasonable prospect of success" - a ruling
recently endorsed by the UK Court of Appeal, with trial likely in the spring -
a substantial stake in the company must be reserved, and cannot be sold or
diluted, until the trial is concluded.
If Rusal is allowed to make its initial public offering, a Hong Kong securities
lawyer says, then this is likely to take the form of an issue of new shares,
which may dilute the value of existing stakes. He said he expects the banks
preparing the Rusal prospectus will disclose the Cherney claim, and the risk
that new share buyers will run that Deripaska and the company will have to pay
out on the High Court's order. According to one London securities lawyer, "The
Hong Kong Exchange is in no better position to violate the law on fraud than
the London Stock Exchange."
A spokesman for Chow and Dickens, Scot Sapp [1], told Asia Times Online that
the confidentiality provisions of the exchange charter and of the Securities
and Futures Ordinance - the Hong Kong statute regulating the market - impose "a
strict policy not to confirm or deny whether a company has applied to list on
the Stock Exchange, or the progress of any application".
However, if and when an application for a listing is approved, and before the
shares start to sell on the exchange, "all new applicants proposing to list by
way of a public offer need to post a web proof information pack (WPIP) on the
HKEx website (www.hkex.com.hk) after receiving the Listing Committee's approval
of their listing application. The WPIP is the first opportunity the public will
get to know about a potential public offer of a company."
For the time being, there is no approval, so there is no record for Rusal on
the exchange's data
link.
The big step is the next one, and that's what happens this week. The minimum
quorum for the Listing Committee to meet is five, but this time there will be
at least eight seats occupied behind the closed door. Because of the
international ramifications of Rusal's move, there has never before been such
public scrutiny of who will occupy those seats.
According to Chow's spokesman, "All listing applications have to be approved by
the Listing Committee in a hearing meeting convened for that purpose; and
Listing Committee meetings on listing applications are not public hearings. The
meetings are conducted by a committee comprising members from different sectors
including at least eight individuals who the Listing Nominating Committee (LNC)
considers will represent the interests of investors. Other members include
individuals who the LNC considers will be a suitable balance of representatives
of listed issuers and market practitioners, including lawyers, accountants,
corporate finance advisers and securities brokers."
Chow and Dickens decline to give the names of those due to convene on November
19. The HKEx website gives a list of 28 committee members in all. There is no
indication as to which members will be present at Thursday's consideration of
Rusal's possible listing.
Seven of them are of special interest as they work for institutions with a
possible interest in Rusal's debts, company value and marketable share price.
John Moore, a deputy chairman of the Listing Committee, is a lawyer who used to
be with Goldman Sachs, and who is now with the London-based firm, Herbert
Smith. Herbert Smith acted for Rusal in a recent fee-record High Court case in
London, where Rusal was accused of fraud and corruption in the takeover of an
aluminum smelter in Tajikistan.
Jack Chow is a senior executive with the global accountancy, KPMG. That firm, a
Rusal source reveals, has prepared the audited financial details in the share
prospectus in Hong Kong. Terence Keyes, another Listing Committee member, is
with Morgan Stanley, one of the financial backers of Rusal in the past. Anthony
Leung, a committee member, works for Ernst & Young, another of Rusal's
auditors. Joseph Longo is with Deutsche Bank, one of Rusal's financial advisors
in previous listing attempts and a major creditor. Daniel Ng is with Fortis
Investments and BNP Paribas - BNP is the lead underwriter, with Credit Suisse,
of the HKEx bid, and one of the banks that is most vulnerable to Rusal it if
defaults on its debts.
Alexander Schrantz is with Goldman Sachs, which has been advisor to Rusal and
has assisted in preparing the HKEx listing, until it reportedly withdrew from
the underwriting a few days ago, as reported by the Financial Times, which said
the US bank declined to comment.
According to the HKEx, there is an explicit bar which "preclude[s] a member
with a material conflict of interest from participating in the deliberation of
the issue or counting as part of the quorum present at the meeting". Section 16
of the committee's operational code looks clear and tough: "a member who is in
any way, whether directly or indirectly, materially interested in a matter to
be discussed at a meeting must declare any such material interest to the
Secretary prior to the meeting or to those present at the meeting and, whenever
appropriate and practicable, return all relevant papers to the Secretary as
soon as he becomes aware of the conflict. If the member attends the meeting at
which the matter is to be considered he must leave the meeting immediately when
such matter comes up for discussion."
Each of the seven with a possible corporate involvement in the business of
Rusal was telephoned at his Hong Kong office and then sent an e-mail to follow
up. Each was asked to say if "you are planning to attend the scheduled meeting
of the Listing Committee next week? Do you intend to recuse yourself from
consideration of the listing application of US Rusal on the ground of the
potential for conflict of interest, which arises as a result of the business
relationship between your company and Rusal?"
Deputy chairman Moore (Herbert Smith) did not answer, along with three others -
Chow (KPMG), Ng (BNP) and Schrantz (Goldman Sachs). But here is how Leung
(Ernst & Young), Longo (Deutsche Bank), and Keyes (Morgan Stanley) replied,
each with the same wording:
Dear Mr Helmer
Thank you for your email. As a member of the Listing Committee, I am subject to
statutory obligations to preserve confidentiality under Section 378 of the
Securities and Futures Ordinance of the Laws of Hong Kong. I am, therefore,
unable to provide answers to the questions you raised in your email. Kind
regards ...
The three responses are identically worded. So
they were asked to explain how it happened that they chose exactly the same
reply; and whether this had been decided in advance with Chow, Dickens or
others in the HKEx. They did not reply.
Chow and Dickens told Asia Times Online through their spokesman that "the need
to maintain confidentiality, for reasons related to natural justice or due to
statutory secrecy provisions applying, means that it is often difficult or
inappropriate for the Committee to comment on individual cases".
If the Listing Committee votes approval, new issuers like Rusal will be
"required to submit their prospectuses for posting on the HKEx website
(www.hkexnews.hk) before listing."
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