Restructuring key to TNK-BP future

  • 22 Oct 2004
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In February 2003 British oil company BP agreed a $6.75bn acquisition of the oil assets of Alfa Group and Access/Renova. Seven months later, in September, TNK-BP was formed to hold the three firms' Russian oil assets. In his first big interview since being appointed CFO of TNK-BP just over a year ago, Kent Potter talks to Kathryn Wells about the company's ambitious plans for restructuring.

As chief financial officer at TNK-BP, Kent Potter is focused on overseeing the restructuring of the three groups that make up the firm ? BP, Alfa and Access/Renova ? a challenging job that involves streamlining more than 600 legal entities into one holding company. The restructuring plans will also have an impact on the company's outstanding debt, as well as its options when looking to fund in the future.

Here, Potter explains the strategy behind the restructuring, and looks at other areas the company is working on such as the decision to become Sarbanes-Oxley compliant.

How would you describe the restructuring process that the company is undertaking?
Our corporate restructuring project is an ambitious effort to simplify our legal structure and improve the transparency of TNK-BP.  However, before we can begin we need to consult with many interested parties, including our bondholders, whose consent is required before we can undertake our restructuring.  To this end we sent out a consent solicitation statement in September that outlines the restructuring.

If I were a bondholder, I would be very pleased with the position. The guarantor, TNK International, remains the same, while the direct borrower will now be the combination of TNK, Sidanco and Onako [oil companies], rather that TNK alone. All three major international credit rating agencies considered this to be either credit neutral or better.

Why does the company need to restructure?
At the moment, TNK-BP is an amalgamation of its many past heritages. When BP and the Alfa-Access Renova Group combined their assets, this led to the formation of a group of more than 600 legal entities. That, coupled with an inefficient tax structure, is incompatible with a long term, efficient and transparent management structure.

In the restructuring, we are trying to consolidate most of our Russian assets into a single legal entity. However, some of those where we are in partnership with others, for example Rusia Petroleum, won't be consolidated, at least initially.

The new entity is referred to as NRH ? New Russia Holding ? and will be registered here in Russia. It will be owned by the offshore holding company that currently owns most of the Russian assets directly.

Through a series of mergers and accessions, NRH will consolidate the three major Russian holding companies of the group [TNK, Sidanco and Onako], and ultimately most of the subsidiaries belonging to those three. We are targeting the creation of NRH before the end of the year.  In due course, our minority shareholders will be given an opportunity to own shares in just one company ? NRH.

What other challenges do you face?
The main challenge is to improve both our internal and external financial reporting. This means that we need to teach our accountants to be financial accountants, not just tax accountants. Our financial statements are very creditable right now, but it takes four months to produce them. We need to accelerate that process significantly. Improving internal controls, risk evaluation and mitigation activities, and tax compliance, are also very important.

Our shareholders have instructed us to be Sarbanes-Oxley compliant, even though we are not SEC registered, but they see this as a strategic need.  Clearly, if we are serious about improving our transparency, this makes sense.

What are your financing plans?
For the most part we have been paying back debt since the company was set up. Our financial framework is based on maintaining flexibility, and our net debt to equity ratio is targeted at 25%-35%. We will fluctuate within this band, depending on oil prices, and thus our revenues, and taking into account our need for capital to fund our growth plans.

This strategy gives a balance between cost-effective borrowing and being able to borrow when you need to. We have the financials of double-A rated company, but it will be hard to penetrate the sovereign ceiling.

To stay within the range, we will need to borrow. We have a dividend policy of distributing 40% of net income. Generally, we are comfortable with floating rate instruments but our average debt tenor is only 2.6 years. This creates a lot of refinancing work, and we will be seeking to extend that tenor over the next year.

When the right time comes, we will look at the Eurobond markets. We are convinced that conditions will continue to improve for Russian credits.

Our syndicated loan was drawn down to $600m at the end of September. In the fourth quarter, we anticipate borrowing a further $200m-$400m depending on our cashflow to support our capex programmes.

We would like to get to international liquidity standards and for this reason we will look at setting up EuroCP and EuroMTN programmes. We generate cash fairly evenly over time, yet our tax and dividend payments are irregular. I would like to have the facility in place in order to manage cash better.

BP will not guarantee TNK-BP's deals, nor will Alfa, Access/Renova.

How do you select banks for your loans or bonds?
We select banks strictly on the basis of the value they provide, taking into account the associated costs. We do not believe in paying for relationships and the fees that that can incur. Every deal must stand on its own. 

  • 22 Oct 2004

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