OOO Trading House Euroset, part of the Euroset group, planned to place three-year bonds worth 3 billion rubles at the end of May. According to Eldar Razroev, president of the management company Euroset, the money is needed to purchase goods. The securities prospectus opened with a warning: the purchase of bonds "is associated with increased risk due to the fact that the amount of the issuer's obligations under the bonds exceeds the net asset value of the issuer and the net asset value of the persons providing the guarantee."
The Euroset group includes about 20 companies. Its owners were Timur Artemyev and Yevgeny Chichvarkin (92.5%) and FC Uralsib (7.5%). Revenue for 2005 under IFRS, according to preliminary data, grew 2.5 times to 57.6 billion rubles, net profit increased 7 times to 1.79 billion rubles, EBITDA grew 3.5 times to 3 billion rubles. In 2004, OOO Trading House Euroset had already issued bonds worth 1 billion rubles.
Assets of the Borrower and Guarantors
Trading House Euroset is engaged in retail sales and owns 100% of the capital of regional Euroset companies, but its net assets by the end of 2004 amounted to 8.6 million rubles, and according to the results of the first nine months of 2005 — 41 million rubles, the prospectus said. Alexander Kudrin, senior analyst at Troika Dialog, explained that the Federal Financial Markets Service (FFMS) requires a warning phrase if the net asset value of the borrower is less than the loan amount. To avoid this phrase, borrowers usually attract guarantors, added Alexei Demkin, an analyst at Trust Bank.
Euroset's guarantors were OOO Iled M, OOO Euroset Opt, and OOO Exhibition of Mobile Communications, but their combined net assets as of September 2005 amounted to only 1.2 billion rubles. According to Demkin, the group includes dozens of companies with small assets. Igor Frolovsky, head of the securities issuance department at Bank of Moscow, noted: "To make the net asset value equal to the loan amount, we would have to gather too many guarantors."
Analysts' Assessments
A representative of a large Russian bank called the warning about the loan's riskiness "purely formal": investors, he said, understand that they are lending to an entire group whose total assets may be significantly higher than those of the borrower and guarantors. Eldar Razroev estimated the current net assets of the entire group at approximately 4.6 billion rubles and explained that key assets are distributed among foreign companies subordinate to the Dutch Euroset Holding N.V.
Such situations, according to the banker, are common in the retail sector: amounts exceeding the net asset value were borrowed by Pyaterochka-Finance (3 billion rubles), Dikaya Orkhideya (1 billion rubles), Otechestvennye Lekarstva-Finance (1.3 billion rubles), and Magnit-Finance (2 billion rubles). Kudrin pointed out that a trading company cannot have large net assets because the business is based on turnover and loans. Tamara Kasyanova, general director of 2K Audit — Business Consultations (Euroset's auditor), said: "Euroset rents most of its retail space, and goods are constantly in circulation, so a small net asset value is normal."
Demkin noted that the warning would alarm investors in a debut loan, but this does not apply to Euroset. Razroev was confident that when retailers place loans, the key factor for investors is the company's turnover. At the same time, some investors, such as pension funds, are prohibited from buying risky securities, and those who decide to invest, according to Demkin, will demand additional yield. "Risk must be rewarded," the analyst concluded.
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