Sistema Hals neck-deep in debt

Graham Stack for business new europe (www.businessneweurope.eu)

Sistema Hals tops the list of Russia’s most financially endangered real estate companies, in the wake of the financial storm that has swept over from Manhattan to Moscow.

“All real estate companies are having problems due to the financial crisis, but HALS are right out in front with $1.2bn debt, and only $30-$40m on its books. HALS in in trouble,” says UralSib real estate analyst Eldar Vagabob.

Confirming the developer’s difficulties, Sistema HALS announced Wednesday 17 that it would sell almost a quarter of its illiquid projects to raise up to $500m cash. Sistema Hals stock has fallen 66% since the beginning of the month.

“They’re in danger, but they won’t go bust,” argues Rencap’s Alexei Yazykov, pointing to the Sistema parent holding’s deep pockets.

Sistema Hals is a subsidiary of Sistema AFK, owner of Russia’s largest mobile phone operator MTS. “Sistema automatically covers for them, so they will find finance on a holding level if need be,” says Yazykov.

According to Vagabob, HALS has not only strong financial support, but powerful political patrons. Sistema holding owner, oligarch Vladimir Yevtushenkov, is a close friend of long-serving Moscow mayor Yury Luzhkov, and the concern was created in the 1990s on the back of Moscow’s fixed line operator and other municipal assets.

Critics says that precisely this powerful backing has created the moral hazard allowing HALS to run up mountainous debt without real cash flow.

In particular, Yevtushenkov’s appointment of his 26-year-old son Felix as president of the real estate division in 2006 raised eyebrows. Such apprehensions only increased at the end of May, 2008, when Yevtushenkov junior announced immediate plans to raise a further $600m debt, despite the credit crunch.

Six weeks later, his father removed him as CEO, replacing him with the experienced Sergei Schmakov. But the move now seems to have come too late.

Sistema HALS specializes in high-end commercial properties, including building the Moscow headquarters for German industrial giants Siemens and Daimler Benz, and launching projects for the Sochi Winter Olympics in 2014.

If HALS ran into real trouble, it would be highly embarrassing for Moscow city hall, and the inbred Moscow development sector, shortly before Mayor Luzhkov is due to depart office and would like to secure succession.

Storm clouds around the PIK

Storms clouds are also seen to be gathering around major residential developer PIK.

Fitch Ratings put PIK on negative rating watch on Friday, September 18.

Fitch estimates that half of PIK’s total gross debt matures before 31 December 2008 – placing it in a very tricky position.

Rencap’s Alexei Yazykov however disputed this.

“According to our information, PIK has total debts of $1.5bn, $900m of which is short-term. But with short term we mean within twelve months. They may have difficulties funding future projects, but they won’t go bust.”

Vagabob also argues that, compared to Sistema HALS, PIK has “stronger balance sheets and greater exposure to residential projects with pre-sales supporting cash flows.”

As recent as September 15, PIK was able to draw a $230m Sberbank loan to finish payment on a $350m project.

The loan also points to PIK’s good links to the largest Russian banks.

PIK does not have the same level of backing of Sistema HALS. But, as Yazykov and Vagabob point out, as Russia’s largest developer of mass residential housing, it has political significance nonetheless. Acceleration of mass housing construction is a key plank in President Dmitry Medvedev’s programme.

“Big state banks would be told to rescue it should anything happen,” says Yazykov.

But even if none of the large companies were to go bust, many projects will now be put on ice. Sergei Polonsky, chairman of non-listed Mirax, one of the main builders of Moscow’s prestigious City project, said Wednesday his company would not “start any new construction work nor take a single credit nor buy any new projects,” according to Vedomosti.

The real estate sector is particularly hard hit by the financial crisis, argue Fitch, because of the debt-intensive business model, with cash flow only coming late in the day.

Besides Sistema Hals and MIrax, Fitch include LSR Group and Open Investments on their negative outlook list.

However, Alfa Bank’s Elena Mills points out that individual business models vary hugely from company to company within the sector.  AFI Development, for instance, counts as a cash rich company.

According to Natalia Oreshina of commercial real estate agency Art Property, smaller speculative operations will suffer. “Every second company has been trying to invest in real estate without doing the calculations. There has been a lot of speculation.”

Now speculation is focused on who is going under first.