Interfax reported that the AGM of Kazan Orgsintez shareholders on April 16 approved changes to the company's charter, and increased the number of stated shares by 35x, from 720 mn to 25 bn. This decision allows the BoD to approve the release of an additional share issue at any time, without approval from shareholders.
We regard the news as negative for Kazan Orgsintez minority shareholders, as the rise in the number of stated shares would raise the likelihood of an additional share issue by the company, which could dilute its minority shareholdings.
What is more, should the additionally issued shares be placed at a price lower than the company's current stock valuations, which is quite likely, this could produce a negative effect on the company's stock valuations. In 2005, Kazan Orgsintez had already planned to release RUB 5.255 bn in additionally issued shares, which would raise its capital by more than 3.5x. As planned, the shares were to be floated at their par value on a closed subscription basis. If the additional share issue goes ahead as planned, it would raise RUB 25 bn, or about 93% of the uplifted capital.
In our view, the likelihood that the additional share issue would go ahead is high, given that the company currently experiences a shortage of funds for its large-scale investment programs. In early May, Kazan Orgsintez asked the holders of its Eurobonds, maturing in 2011, for permission to postpone applying the covenant that puts a cap on its maximum debt for a year, until June 30, 2009. Under the current credit agreement, the company's debt/EBITDA ratio is limited to 4. However, the terms of the agreement were already breached at the end of 2007 after the company had seen its expenses grow on capital investments, building materials and equipment purchases and replacements. The company has therefore asked its investors to allow it to increase its debt/EBITDA ratio to 6 for a year, after which the original ratio is to be reinstated.
Given the high risks faced by the company, investors are advised to abstain from investments in Kazan Orgsintez shares (RTS: KZOS) in the near future.
0.553
1.6
