Nick Kochan in London -

The release of the full 2013 financial statement of Interpipe Group, the Ukrainian steel pipe maker owned by oligarch Victor Pinchuk, was delayed by a board dispute, as some board members apparently sought to prevent full disclosure. When the financials were finally signed off on by the auditors on June 30 and then leaked on July 29 (Interpipe has yet to publish them on its website), the reason for the reticence became clear: Interpipe, according to its auditors, is in severe difficulties.

Ernst & Young, Interpipe's auditors, calculate that, "the Group's current liabilities exceed its current assets by $649.1 million." That amount, the auditors warn, is a "material uncertainty that may cast significant doubt about the Group's ability to continue as a going concern." 

The delay in publishing the financials was closely watched by Philipp Thomas, a Luxembourg lawyer who acts for an Interpipe bondholder. "They did procrastinate in handling them over," he says of the audited results. "Initially, there were only eight pages of figures. Then some of the creditors insisted on seeing the whole story and not something deliberately edited. The full story is much more negative. Apparently, there was some internal row within Interpipe in that management didn't want these accounts to leak out." 

Indeed, an eight-page "consolidated statement" of Interpipe's financial position for the year to December 31, 2013 (dated June 17) was published by the company in the middle of July. Then two weeks later, a 55-page "consolidated financial statement" and "independent auditor report" (dated June 30) was leaked to a website.

Problems in Russia

The group's difficulties arise from Russia's withdrawal of a quota to the company for pipe imports last July, together with the raising of customs duties. This increase was not directed at Interpipe or Pinchuk so much as a punitive response to Ukraine’s decision to reject the Russia-led Customs Union in favour of signing a free trade and association deal with the EU. Ukranian pipe companies were landed with paying 19.7% customs levies.

Ivan Dzvinka, an analyst at Eavex Capital in Kyiv, says the group failed to anticipate the problems in Russia and diversify its operations. "It was only a matter of time for problems to arise with Russia. They have little chance of solving the diversification issue," Dzvinka says.

Interpipe in the report claims to be exploring new geographical markets for its pipe products, including pipes used for oil and gas, machinery, and construction. Analysts doubt that sales to the rest of the world, including the US, the Middle East and Asia, which amounted to 19% of Interpipe's sales last year, can offset growing losses in its main markets. Around a third of the company's total exports go to Russia and the curbs on imports by the Russian government are, according to Dzvinka, a "big problem."

The company accounts say that in 2013, the group generated approximately 27% of its revenues from Russian customers. “The dispute over Crimea and Eastern regions of Ukraine and the resulting deterioration in political relations between Ukraine and the Russian Federation may have a considerable negative impact on the trade conditions between the two states and, therefore, may affect the ability of the Group to maintain the historical level of sale revenues from Russian customers.”  Security issues are less of a concern for Interpipe and are not mentioned in the financial report. The company is based in Dniepropetrovsk, some way from the troubled Donbass region, and its assets are not said to be in physical danger.

Keeping schtum

The difficulty in getting the true picture of Interpipe's finances comes as no surprise to Dzvinka. "The company is highly non-transparent in terms of providing information and updates. They have not reported publicly their annual report for 2013. It is quite complicated to understand the situation. They used to keep silent when there were problems," he says.

Thomas puts it more forcefully. "They didn't want to face the entire truth. How long is it going to take them to go under?" he wonders. 

Dzvinka reckons that Pinchuk is in a position to step in and save the business. "Pinchuk is a rich guy and I guess if it is his intention to keep the group operating in the future as a going concern, he is able to do this," he says.

Bondholders are watching developments eagerly. Dzvinka fears that given the recent figures disclosed, there will need to be further restructurings of the outstanding debt. The accounts show financial liabilities as of December 31 totalling  $1.255bn. "I doubt that he [Pinchuk] is ready to repay or make regular repayments on his debt. This was the case in the past. He could definitely default once again on several of his loans, given the political and economic situation," Thomas says. "It is very difficult to see how Interpipe is going to be in a position to service those bonds. Time will tell." 

Negotiations are currently in progress with lenders to restructure borrowing facilities and debt, which the auditors say has been in default since October 2013. The group incurred a net loss of $73.5m in 2013 with current liabilities exceeding $649m.

But a legal dispute between Interpipe and the Ukrainian state energy firm Naftogaz over unpaid bills for gas is another cloud hanging over Interpipe. Under pressure from the International Monetary Fund to pursue outstanding debts, Naftogaz has stepped up its attempts to recover more than $70m for past deliveries. Interpipe has negotiated a reduction by bartering pipes the state company requires for its operations, but Interpipe executives have acknowledged to bondholders that the current cash obligation to Naftogaz still stands at about $40m. Thomas says that if this matter is not resolved, "the gas supplies could be disrupted and it would have to stop producing for a while. It is quite a mess."

In spite of the poor results, Interpipe's directors and managers are trying to remain optimistic, writing in the accounts: "Nevertheless, having assessed the situation, the directors and management believe that a mutually acceptable restructuring agreement with the lenders will be reached during 2014 and the Group will be able to continue its operations for the foreseeable future in the normal course of business. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements."

Longer term, Interpipe says it is counting on the devaluation of the hyrvnia, the new free trade and association deal between Ukraine and the EU, and the IMF's $17bn assistance programme to strengthen the company's financial position. The issue for bondholders and analysts, though, is whether Interpipe can last that long.