Russia's Brunswick Rail spills off the tracks as CEO is sacked over malpractice allegations

By bne IntelliNews October 27, 2015

Jason Corcoran in Moscow -

Russian freight leasing company Brunswick Rail has spun off the tracks after senior management were suspended pending completion of an internal enquiry over allegations they gave some customers "preferential prices" that broke the company's "high standards of corporate governance" and that the company breached loan covenants when its railcars were used in Crimea.

CEO Alex Genin's position at the head of the company was "terminated", the company told bne IntelliNews in a response to enquiries, due to "internal policy breaches" that "contravened the company corporate governance standards." The company is conducting an internal inquiry to determine the extent of the alleged wrongdoing.

Another 10 employees have been suspended in total as Brunswick investigates whether "attractive terms" were awarded to certain clients, according to company insiders. The money involved is significant but won't "have a material impact on the financials", according to one source close to the Moscow-based company.

Genin, a Harvard graduate who had been in the role just over two years, has been replaced at the helm by American Paul Ostling. Swedish co-founder Martin Andersson also took over as chairman of the board following the initiation of a review of management practices and operations.

A statement provided by Brunswick to bne IntelliNews said the company is taking  any breaches of internal policies "extremely seriously".

"In the light of our commitment to good corporate governance and transparency and in the interest of conducting the review and implementing any changes in the most effective way possible, we felt it was the right thing to do to immediately terminate the General Director and suspend certain other senior employees pending the results of the review, and to disclose this to the market in a timely manner,"  the company said. "We note that a number of those employees have since left the company."

Rail freight operators' profitability in Russia has come under enormous pressure as the decline in cargo volumes becomes more acute on the back of contracting domestic demand and as the current railcar surplus drives down freight rates. Rivals GlobalTrans, Freight One and TransContainer are in better shape because they have less foreign currency exposure and have much longer contracts.

Julia Pribytkova, senior analyst at Moody’s in Moscow, told bne IntelliNews that the company is in "high risk of default" on its $600mn Eurobond maturing in November 2017. "They still have money and can generate cashflow for another 18 months according to our estimates, but they have to go for restructuring now urgently," Pribytkova said. "November 2017 is the big problem because it's doubtful they will be able to refinance the bond and then everything will get bleak and gloomy."

Pribytkova believes that a weakening market and constrained access to funding for private rail freight operators will squeeze out smaller and less resilient operators and leasing companies,

Brunswick, whose original founders were investment bankers, has about 90% of its debt denominated in foreign currencies. The price of its Eurobond has tumbled from a yearly high of 68 cents on the dollar on May 14 to 44.7 cents by October 25, according to Bloomberg.

It is unclear whether a waiver granted by international lenders in September due to the breach of the financial covenant will be extended beyond 30 October, which would trigger a prepayment of 4bn rubles.

Crimea catalyst

In addition, Brunswick Rail admitted on October 12 that a small number of its railcars that are collateral under the loan agreement were used in Crimea by its customers, causing the company to breach certain warranties. This fact may also trigger a prepayment event at the option of the lenders. It is believed that the issue of the Crimean cars may be connected to Genin's ouster.

On its website, the firm sets out its sanctions policy "not because we are required to but because it is the right thing to do for our group and for our investors".

If Brunswick fails to extend the waivers, it will need to prepay the loan out of its approximately $80mn cash balance to avoid a cross-default under its $600mn Eurobond maturing in 2017.

As part of seeking a longer term solution to the covenant breach, management is in discussions with its syndicate banks on how restructure their credit exposure to Brunswick. The syndicate is comprised of Citigroup Inc., ING, Raiffeisen Bank International and UniCredit.

Downward track

The company was hit by a net loss of $3.1mn for the six months ending June 30, 2015, compared with profit of $12mn for the same period last year. Brunswick's share of US dollar contracts has declined from 52% during 2014 to 34% by June this year, which means it has become a primarily ruble-revenue generating business with about 90% of its debt in foreign currency.

The business is expected to deteriorate further as more and more of those US-dollar based contracts expire and railcars are remarketed at less favourable terms and at rouble-based tariff. The majority ofBrunswick's 25,700 railcars are gondolas and mineral hoppers with boxcars, platforms and tank cars making up the remainder. They are leased to Russian industrial groups and railcar operators mainly under multi-year operating contracts.

Management warned in the earnings that continuation of the weak and unstable business environment "has severely impacted the group's profitability and creates material uncertainties over its future viability".

Shareholders include Japan's Sumitomo Corporation, Australian infrastructure Macquarie, the International Financial Corp, the European Bank for Reconstruction and Development, VTB and the chairman Andersson. Not one of the groups has a controlling interest.

Analysts expect shareholder support to be limited given that international institutions like the IFC and the EBRD have frozen new investments in Russia due to the Kremlin's interference in the Ukraine conflict.

"The company operates in a very challenging environment," Pribytkova said. "The continuing surplus of railcars on the market and persistently weak pricing is exacerbated by the macroeconomic deterioration characterised by a decline in transportation volumes."

CORRECTION: The original version of this article claimed that Mr Genin had been dismissed following graft allegations. On further investigation, we understand that Mr Genin has not been accused by the company of graft. However, we have been informed there appears to have been financial improprieties that contravene the company's corporate governance codes that are currently under investigation by the company. We have amended our report and we apologise unreservedly to Mr Genin for this error. 

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