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The Rupp Report: OC Oerlikon Still Under Pressure

Jürg Rupp, Executive Editor

Since the start of the financial crisis, OC Oerlikon was fighting problems. On Dec. 8, 2009, the group announced: "As part of its commitment to strengthen the balance sheet and regaining a sustainable financing base, Oerlikon Group submitted a comprehensive financial restructuring proposal to its syndicate banks on November 25, 2009. The proposal, designed to ensure long-term financing for the company, ... includes a substantial reduction in current equity capital followed by a capital increase."

Financial Problems
However, there is still no quiet moment for OC Oerlikon: Within a few weeks, major shareholder Viktor Vekselberg and the now 28 creditors must come to an agreement; otherwise, the group will end up in probate court. At stake are about 16,000 jobs. For weeks, new details referring to the financial problems have surfaced. Now, Vekselberg and the banks argue about Oerlikon shares. Experts are not sure if the Russian investor can keep control over the enterprise. The result will be seen within the next weeks.

A Fight To Survive
On Feb. 26, 2010, the Oerlikon Group released a message that "negotiations with its lending banks on the restructuring of the Group's finances are progressing. Oerlikon believes that it will be able to reach an agreement with its lending banks by the end of March 2010."

"Good progress has been made on a comprehensive restructuring solution which will provide a firm foundation for Oerlikon going forward," stated Vladimir Kuznetsov, chairman of Oerlikon Group's Board of Directors. "We are preparing for the prompt implementation of key measures, including a capital increase during the second quarter."

Officially, this is a substantial capital cut, but in reality, it's an equity dilution. Vekselberg still holds a 44-percent stake in Oerlikon, but the equity dilution is also a threat to him because of Oerlikon's 1.8 billion-Swiss franc debt with the banks, which have been asked to convert a part of it into shares. But the banks are still struggling against this plan of Group Director Hans Ziegler -- they want cash. But even they say that a solution must be found. The end of the Oerlikon Group is not the solution for them and only brings little money.

But the handwriting on the wall is not good: Without negotiations in detail, it is clear that the banks are entitled to 20 to 30 percent of all shares at a 300 million-Swiss franc debt swap. The financial restructuring is not an easy task for Vekselberg if he wants to keep control. To keep control over the enterprise, the limit is around one-third. However, one-third is not enough for Vekselberg to keep control. For this, he must buy subscription rights from other existing shareholders, too. Vekselberg also agreed to buy those shares that no one wants to buy in the recent capital increase. However, it gets more and more expensive for Viktor Vekselberg. He already paid around 1 billion Swiss francs since the takeover.

The banks and Vekselberg have argued for months about who is to make which sacrifices in Oerlikon's refinancing. The conflict has escalated now because a group of Anglo-American banks, led by the Citibank, are fighting against having to write off their debt. They insist that Oerlikon must pay the total debt of 2.5 billion Swiss francs. It seems that European banks are more ready to write off their money and to convert debt into equity capital. On the other hand, Vekselberg is ready to pay some 300 million to 400 million Swiss francs for the capital increase to save the Oerlikon Group.

The negotiations have become more difficult than ever: In one year, the number of creditors has increased from 21 to 28. Obviously, the banks are speculating on insolvency if their claims are not met. In this case, some financial institutions are on the safe side because their liens on outstanding accounts are covered. In June 2008, Oerlikon had to pledge securities to the most important banks by depositing a substantial number of shares of subsidiary companies. If the parties do not come to an agreement, Oerlikon will not be able to pay back 600 million Swiss francs, due at the end of March. If a refinancing is not successful, insolvency or even bankruptcy is possible.

March 16, 2010