Green light for UC Rusal comes with a red-letter warning

When the Hong Kong stock exchange finally granted approval for Oleg Deripaska's plans for a $2.6bn initial public offering of his UC Rusal, the green light came with a red-lettered warning. The warning, on the third page of Rusal's 1,141 page share prospectus published last week, states in big red letters that the heavily indebted aluminium company - which is recovering from losses of $868m in the first half of 2009 - does not meet the profit test to qualify for listing on the Hong Kong Stock Exchange. Nevertheless it has been granted approval anyway because of the size of its proposed $26bn market capitalisation. It warns that prospective investors face risks that the "group may cease to continue as a going concern" should Rusal be forced to make accelerated payments on its mammoth $16.8bn in debt. The landmark offering, which is key for Mr Deripaska's bid to raise funds and pay down debts that threatened last year to swamp Rusal, has been dogged by delays as the Hong Kong Stock Exchange mulled the risks of the listing, and eventually decided to bar retail investors from participating because it was too risky. The prospectus notes three times that "investors could lose their entire investment in the company" if Rusal fails to comply with the terms of a debt restructuring agreement it reached with creditors last month and as a result falls into bankruptcy. The 31 pages of risk factors also state that a "sustained fall" of more than 20 per cent in the aluminium price "could adversely affect the company's ability to meet certain targets and financial covenants under its debt restructuring agreements" and warns that while most of the company's debt has been extended for repayment in 2013, the biggest chunk - $4.5bn owed to VEB, the Russian state-owned bank - falls due this October. Sberbank, another state-controlled bank, has issued a letter saying it would assume this debt and extend payment to 2013 should VEB fail to prolong the loan. But the Rusal prospectus notes there is no guarantee this will happen. One analyst, speaking on condition of anonymity, said the strong warnings issued in the prospectus were "extraordinary" and a sign that the Hong Kong Exchange may have faced pressure to accept the listing. The London Stock Exchange "would never allow a listing with that sort of warning on it. It just wouldn't happen", he said. Mr Deripaska had initially targeted London as the bourse of choice for the listing in a first attempt at an offering in 2007 which was pulled after the company decided to acquire a 25 per cent stake in Norilsk Nickel, the world's biggest nickel miner. He later targeted Hong Kong, claiming the Asian exchange made more sense because of the company's large role supplying aluminium to the continent, though critics say the company may not have passed stringent governance tests in London. Hong Kong has also agreed to waive its 25 per cent minimum free float requirement. The LSE would not have accepted a listing of only 10 per cent of the company's shares as Hong Kong has. Another big potential risk to the company's liquidity cited in the share prospectus is a lawsuit filed in London's High Court by a former associate of Mr Deripaska, Michael Cherney, claiming compensation for a disputed 13 per cent stake in Rusal. The UK's Supreme Court last month declined Mr Deripaska's final appeal against granting the case jurisdiction in the UK and the case is due to be heard on its merits this year. Even though the prospectus notes that the company is not party to the claim, which is vigorously denied by Mr Deripaska, it warns that a ruling in Mr Cherney's favour could have "adverse consequences" for Rusal's restructuring agreements, potentially triggering accelerated repayments should Mr Deripaska be forced to reduce his Rusal stake in order to pay off the claim.