Hidroelectrica’s return to insolvency shatters stock exchange ambitions

Newsroom 12/03/2014 | 15:42

With Hidroelectrica, the state-owned hydropower producer, sent back into insolvency at the end of February, unnerving lenders with EUR 400 million in receivables, any listing prospects depend on the company’s ability to exit insolvency in good shape, say experts.

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The Bucharest Court of Appeal decided on February 25 to annual the official conclusion of the judicial reorganization of Hidroelectrica that was approved in June 2013. Judges sent the case back to the syndic judge for a retrial, following appeals by the company’s creditors, including the energy traders known as the “wise guys.” These were companies that secured long-term supply contracts at low prices, which were disadvantageous to the power producer.

Remus Borza, who represents insolvency manager Euro Insol, was reinstated as judicial administrator of the company, while Gabriel Dumitrascu, general manager of the privatization division and administrator of state stakes in the energy sector, was appointed special administrator.

“Restructuring measures have been taken and I think that Borza has done a good job. From my point of view, the contracts left unclarified with the ‘wise guys’ in the energy sector brought about this return to insolvency (…) It is clear that things have slipped out of control once again. I think the activity of this company needs to be more stringently monitored,” Constantin Coman, country manager at Coface Romania, the credit insurer, told BR.

Insolvency outcome crucial for listing

Dumitrascu said the power producer would be “swiftly removed” from insolvency and that its portfolio would be restructured. He added that the company would be prepared for listing but did not provide a timeline for this target.

The government had pledged to list a 15 percent stake in the company on the Bucharest Stock Exchange this June, as part of the EUR 4 billion stand-by agreement with the IMF and the European Commission, the executive arm of the EU. At present, the government controls an 80 percent stake in Hidroelectrica, while the Property Fund, the EUR 3.3 billion closed-end fund managed by Franklin Templeton, holds the rest.

The state is expected to raise as much as EUR 330 million from the sale of its stake in the producer, which currently covers around one third of Romania’s electricity consumption.

“A reasonable time has to pass after the company exits insolvency before we talk about a potential listing. Until it becomes clear what will happen there and how long it will remain in insolvency, and even more importantly in what condition it will exit insolvency, we cannot yet consider a potential listing,” Dumitru Beze, chairman of the Association of Capital Market Investors (AIPC), told BR. The producer exited its first period of insolvency after one year.

Remus Vulpescu, the former special administrator of Hidroelectrica, who also sat on its supervisory board, commented that the firm may end up paying at least EUR 300 million in penalties to the energy traders, in an extreme scenario under which the traders would have their cheap energy supply contracts reinstated.

Beze said the company would be interesting to potential investors only if it came with no massive debts or penalties.

During his tenure as judicial administrator, Borza denounced a handful of bilateral contracts with the “wise guys”, including Swiss Alpiq and Romanian Energy Holding. He said these contracts had deprived the state company of around EUR 1.2 billion over six years. Borza stated that last year the producer registered a record profit of EUR 200 million and EUR 665 million in turnover.

According to Ludwik Sobolewski, CEO of the Bucharest Stock Exchange (BVB), there is “little probability” of an IPO this year.

A consortium comprising Raiffeisen Capital & Investment and Morgan Stanley was selected in late January to manage the initial public offering (IPO) in Hidroelectrica.

Banks face provisioning conundrum

Vulpescu said last week in a broadcast appearance at gandul.info that banks have receivables worth EUR 400 million in the power producer and that lenders can provision them, under new IFRS rules rolled out in 2013.

“In 2012, banks did not make provisions or were not fully provisioned and they had not deducted the receivables they had in Hidroelectrica from the taxable profit,” said Vulpescu. This legal provision saw the profit tax collected from banks drop by EUR 1 billion last year.

Beze said the central bank’s move was “totally incoherent”, and “with no legal grounds was trying to avoid blowing up the banking system” as these sums were not provisioned. In 2012, the central bank issued a derogation that saved banks from provisioning their receivables in Hidroelectrica, according to independent news portal cursdeguvernare.ro

Borza told Mediafax newswire on February 28 that the appeal for annulment would be used to get the company out of insolvency, but only after judges issued a motivation for their decision.

“We will appeal for annulment at the Court of Appeal; it is the option that can be used by creditors. They were not cited by the Court of Appeal on the Tuesday meeting (e.n. February 25). Hidroelectrica’s real creditors are 12 banks, which, however, were not cited. The court said their citation was not necessary,” said Borza.

Challengers of Hidroelectrica’s closed insolvency

Alpiq Romenergie
Alpiq Romindustries
Energy Holding
EFT AG
EFT Romania
Andritz Hydro
2nd District Local Budget Department

Source: Property Fund

12 – the number of Hidroelectrica’s bank creditors

Energy experts reckon the insolvency threatens Hidroelectrica’s capacity to attract financing for new investments. The biggest planned project is the EUR 1.2 billion hydro pumping storage plant at Tarnita Lapustesti. So far, the authorities have unsuccessfully attempted to attract international investors that have enough financial clout to build it.

Constantin Nita, the former delegate minister for energy, said last month that a spin-off, especially of the inefficient investments, would “be great”.

“Imagine that Hidroelectrica, over the years, has made investments of several hundred million euros that did not generate any income, meaning we have buried some money and it will stay there,” said Nita.

Coman of Coface Romania says that an insolvent company has limited financing options. It could seek help from banks, which are not that receptive, or from suppliers that trust it. Finding an investor might also work but the manager says there have been few situations in which insolvent firms have been able to attract fresh investments.

Ovidiu Posirca

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