The rescue plan for local petrochemical producer Oltchim Ramnicu-Valcea will this week be on the European Commission (EC) table. The solutions stipulated in this document could be termed state aid, which is why the plan needs EC approval. The document stipulates a conversion of the debt to the Romania state and an investment plan for which the company is looking for financial support from the major local banks and a state warranty.
But how has a company which in 2004 posted a net profit of EUR 20.6 million come to need a rescue plan?
The decline of Oltchim started in 2005, when the company reported a drop in net profit of 65 percent y-o-y. The poor results didn't stop here. In 2007, Oltchim reported EUR 28.8 million in losses, which last year almost doubled.
Company officials say that last year's poor result was partially because the company was functioning at half capacity.
“During Q4 of last year, the prices of our products dropped by 30-50 percent. But the main reason for last year's losses was the financial expenses incurred by the company, caused by the unfavorable exchange rate and cost of loan interest,” Constantin Roibu, Oltchim's general manager, told Business Review. But a question still remains: how did a company that exports 75 percent of its production not hedge the risk?
Shareholder not happy with proposal
“Oltchim's investment program for this year is estimated at EUR 620 million. From this sum, some EUR 135 million represents debt to the Authority for the Recovery of State Assets (AVAS) – which controls a 53 percent share package – a debt which the authority plans to convert to shares by increasing the share capital,” Roibu told BR.
The Oltchim management's intention brought a vehement reaction from the main minority shareholder, the German company Petro Carbo Chem (PCC SE).
“We are afraid that this solution could be illegal state aid. If the EC thinks so too, what will Oltchim do then? Moreover, only minority shareholders will put up money for these debts, or the state will just get more shares in the company. This is not a real rescue plan for Oltchim,” Wojciech Zaremba, business development director at PCC SE, told BR. According to him, for PCC SE, the debt conversion will mean paying out several million euros in order to keep its share package in the company. “PCC SE has the money because it sold its rail business to Deutsche Bahn. We are ready to invest in Oltchim, but we don't want to see the results on paper only,” said Zaremba.
Daring investment plans
The Oltchim management has announced a bold EUR 485 million investment plan. “Oltchim's number one priority is to integrate the petrochemical part of Arpechim into our operations, as we are dependent on it – it is our main source of raw materials. Our target is to integrate this petrochemical division by April this year,” said the Oltchim GM.
According to him, the company is currently in negotiations with several big banks on the local market over a loan. Silviu Pandrea, Oltchim legal representative, said that the company “is considering the possibility of asking for state a guarantee for the loan.” Oltchim previously asked for a state warranty for a loan which it was unable to pay back, thus increasing its debt to AVAS.
The Oltchim management believes that without help from the state, it faces an uncertain future. “If we manage to integrate the Arpechim petrochemicals firm into our operations, we will have direct and unlimited access to raw materials resources, which will enable us to function at maximum capacity. We know that there is demand for Oltchim products in the region, which will produce the necessary cash to repay the loans,” said Roibu.
According to company information, Arpechim would need EUR 100 million in investment for modernization. “There are ongoing negotiations for the takeover but no figure has been made public,” added the GM.
According to Oltchim, after the merger with Arpechim, the total turnover is expected to reach EUR 646 million and the net profit to stand at EUR 5 million, while by 2013 – the year in which the company estimates it would restart paying back its loans – it is expected to generate a turnover of EUR 975 million and a EUR 81 million net profit.
The PCC SE official said that even some of the investments made up until now are not yet producing results. “They don't have any real business solutions, only an administrative one: to get help, to get state warranties,” said Zaremba.
The predicted results of this rescue plan may look good on paper, but the reality isn't so rosy – even the Oltchim official admit that “because of its low share capital, Oltchim has been put in the E risk category, which means a high interest rate for loans.”
Oltchim's rescue plan relies very much on state support, but what if the EC says “no”? What back-up plan does Oltchim have?
By Dana Ciuraru