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What does Roust Corp's bankruptcy filing mean? - Analysis

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Last Friday, Roust Corp, the Moscow-based producer of Russian Standard vodka, filed for bankruptcy in New York City.

Roust Corp controls a number of vodka brands, including Zubrowka Bison Grass

Roust Corp controls a number of vodka brands, including Zubrowka Bison Grass

The move follows declining vodka demand in Roust's major Eastern European markets, especially Russia, where measures to curb alcoholism and a rise in illegal alcohol sales have hit producers hard. 

But the bankruptcy filing is far from the end for Roust, according to analysts at Debtwire Research. The spirits producer has "very limited operations" in the US outside of its New York state executive operations, Debtwire said, and though it owns six manufacturing facilities in Poland and Russia, where it employs 3,500 people, these operations will not be affected by the US action.

"There doesn't seem to be a direct correlation between what they are doing [in the US] and a substantial change operationally on global scale," Debtwire legal analyst Joshua Friedman told just-drinks. "Usually you do these [bankruptcy filings] and it's business as usual."

Instead, the bankruptcy is an attempt for the company to reorganise its global debt commitments and will, according to Roust, free up money to allow it to pay off impending excise duty in Russia.

Roust says the filing - set to be heard by a judge in New York today - will reduce the company's debt by almost half, or about US$500m, by offering bondholders a debt-for-equity swap. The company calls this an "outstanding result", and the plan has already been accepted by the creditors that will be affected by the plan, namely bondholders of its $488m in senior secured notes and its senior convertible $279m PIK (payment-in-kind) notes. (Other creditors are not affected by the reorganisation and as they will receive 100% of the money they are owed, they were not allowed to vote on whether to accept the plan.)

Furthermore, if the bankruptcy plan is passed today by Judge Robert Drain at the US Bankruptcy Court for the Southern District of New York, then billionaire owner Roustam Tariko will hold on to control off the company with a 57.04% share of its equity. 

To retain that majority stake, however, Tariko has had to offer up the assets and intellectual property of Russian Standard vodka as a kind of collateral. By doing so, he is adding value to Roust Corp. This, in turn, has allowed for the bankruptcy to be fast-tracked through the courts.

A quick resolution

According to Friedman, it is the speed of the bankruptcy filing that is the most unusual aspect of the Roust case. 

"It is very fast for a Chapter 11 case, even one that is 'pre-packaged'," the analyst said. "However, the lawyer for the company running the case is well-known for his pre-packaged bankruptcy experience."

Friedman also said that it is possible that creditors supporting the restructuring own "cross-holdings". This means that they own both the senior secured notes and the senior convertible PIK notes, and, as a result, it would be easier for the company to gain support for the reorganisation.

It may help, too, that Roust is part of what Friedman refers to as "an inter-connected web of companies" owned by Tariko, whose operations range from banking to beverages, and whose connections, including Russian Standard Vodka and Russian Standard Bank, helped form the basis of the current restructuring.

A "healthier" Roust

Assuming that Judge Drain gives the restructuring plan the go-ahead today, what kind of Roust will emerge from the other side?

According to Friedman, it will be largely unchanged, though its balance sheet will be reduced and its asset base will be different due to the infusion of the Russian Standard Vodka assets. 

Indeed, the analyst says that in one respect you will "have a healthier Roust" as it will have more assets and less debt. However, Friedman adds: "Its ownership will be different, in that secured and convertible note holders will also own stakes in Roust going forward."

There is, however, one possible obstruction to Roust's wish for a speedy conclusion to proceedings.  The United States Trustee Program, a government agency that oversees the administration of bankruptcy cases, has lodged a complaint against Roust's Chapter 11 filing partly because of how quickly the vodka maker wants things wrapped up. Roust announced at the start of December its intention to file, but the time between the filing last Friday and today's hearing is just seven days - fast even for these so-called "pre-packaged" bankruptcy cases.

Trustee William Harrington said in the complaint on Wednesday that Roust's relief request "would be unprecedented and an affront to the integrity of the bankruptcy process".

Harrington also pointed out that Roust has done this before. More than three ago, Roust's previous incarnation as Central European Distribution Corporation (CEDC) declared bankruptcy in Delaware just before it was bought by Tariko and combined with his Russian Standard assets. CEDC owned a number of Polish vodkas such as Zubrowka Bison Grass that are now controlled by Roust.

However, Friedman said the Trustee's complaint is a typical objection, and one that is designed to safeguard the bankruptcy process in cases where when no other objections are filed.

"When creditors are all on board, this is one way the court has of giving the case the real consideration that it might not have otherwise have got," Friedman said.

Trouble ahead?

If all goes well today - and there is no reason to assume that it won't - Roust will be back to business as usual. It will still, however, continue to face challenges in its core markets. Grant Winterton, the company's global CEO has cited headwinds such as Russia's economic crisis in Russia, the depreciation of currencies across Eastern Europe, illegal alcohol sales and industry competition.

It will take more than a simple court hearing to clear those problems up.


Sectors: Spirits

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