Prokhorov Puts His Bets on Debt
Prokhorov, pictured during an interview in his office, says he wants to help the government restructure bad debts.
Billionaire Mikhail Prokhorov said the best place to invest during the crisis is in debt restructuring, a niche that has so far gone largely unfilled.
Prokhorov, Russia’s richest businessman, also said a government goal to halve inflation to about 6 percent was realistic, and he criticized the authorities for cutting investment in infrastructure.
Prokhorov, who spoke in a wide-ranging interview with The Moscow Times, voiced hopes of turning the New Jersey Nets into a profitable basketball team in three years and appealed to the government to allow heating generators to redirect their investment from constructing power stations to building grids.
“We want to help the state by participating in the restructuring of the bad debts of banks and companies,” Prokhorov said last week, sitting in his penthouse office on Tverskoi Bulvar.
“State-owned banks and big private commercial banks are dealing with their own problems, so there is no one to deal with the problems of other banks or the complex problems of the banks’ clients,” he said. “That is the job MFK plans to do.”
MFK Bank, which is controlled by Prokhorov’s Onexim Group, said Sept. 24 that it would help debt-saddled developer Mirax Group restructure its debt of $743 million. The bank, whose assets total 17 billion rubles ($565 million), said it had switched its business strategy from corporate banking to debt restructuring because of changes in the market.
Problem loans could soar to 40 percent of banks’ assets, Standard & Poor’s said late last month. But Russian officials said nonperforming loans would amount to 10 percent to 12 percent this year and have called for a scaling back of state support for the sector.
“The problem with bad debts is wider than the banking sector,” Prokhorov said, nibbling on chocolate and sipping black tea in his spacious office, which has a parquet floor and green marble-covered walls.
Onexim Group has estimated Russian companies’ debts to one another at 700 billion rubles.
“There are specialists on our team who went through the restructuring of Oneximbank, Inkombank and MOST-Bank in the 1990s. And our competitive advantages are in Russia, whose market for restructuring debts is limitless now,” he said. “But when we have harvested it, we could think about expanding this business abroad.”
Prokhorov, 44, is one of the few businessmen who has not been hurt by the drop in commodities prices and closure of foreign lending markets. The billionaire, who made his fortune in banking and metals, sold his 25 percent stake in Norilsk Nickel to United Company RusAl for about $7 billion in cash and 14 percent of RusAl in April 2008, just months before the crisis hit Russia. Onexim Group, whose interests range from insurance and media to nanotechnologies, currently has no debt.
Turning to state policy, Prokhorov said the government’s inflation goals were realistic but it needed to increase investment in infrastructure. Prime Minister Vladimir Putin told investors at a VTB forum last week that the government had set a target inflation rate of 5 percent to 7 percent by 2012.
“To get that, we need to make structural changes in the functioning of the economy, but I don’t mean diversification or innovation,” Prokhorov said. “You can build an innovative economy, but it will still be generating the same high inflation. However, if you create competition in the fields currently monopolized by a single state-run market player such as housing services or the distribution of food grown by farmers, the inflation level would drop, as the current monopolists raise prices regardless of market conditions.”
Inflation stood at 13.3 percent in 2008 and is expected to reach 11 percent to 12 percent this year.
“I am not calling for the privatization of all the currently monopolized industries. Some of them should remain state property. But competition should appear in these sectors as well. It could be done through the creation of at least several state-run companies in each sector, which will compete for the consumer,” Prokhorov said.
There are fields that should never be privatized, he added. “Nuclear power stations should not go to private business. The state should also keep a monopoly on gas exports,” he said.
The state also would do well to provide more analytical information to companies, Prokhorov said. “Business is interested in, say, the level of consumption at any moment, but the analysis performed by the Economic Development Ministry does not go deep enough,” he said.
Prokhorov said he would also like the government to collect more comprehensive data on cross-industries’ relationships, similar to what state planners did in the Soviet Union. “I would like to see, say, the connection between the supply of raw materials and the electricity sector, aluminum industry and machinery-building sector at a given moment,” he said. “What I am suggesting is an element of efficient management, not a return to the Soviet economy.”
Prokhorov, a graduate of the government’s Financial Academy, said he did not see a big contradiction between a planned and a market economy. “They are the ends of one stick,” he said.
Asked when Russia might recover from the crisis, Prokhorov said it depended on the country and local businesses and not on anyone else in the world. “It is an absolutely individual case, and it will depend on our market position, competitiveness and the qualification of the state’s and private companies’ management,” he said.
Prokhorov differed with the state over several measures that it is taking to tackle the crisis, saying demand, not supply, should be stimulated. “This is very easy to do. You can build infrastructure: roads and homes,” he said. “But look at the budget for next year. Financing for the sectors whose development could bolster demand has been cut drastically.”
Prokhorov is ranked by Forbes magazine as Russia’s richest man with a fortune of $9.5 billion. But Prokhorov said he could not say exactly how much he is worth. “It’s not my job to count that, and I’m not very much interested in doing so,” he said. “There are always a lot of people who will do that for you.”
Onexim Group CEO Dmitry Razumov said in July that the fund’s assets were worth $12 billion to $15 billion.
Prokhorov is known for his dislike of computers and cell phones, and plates of watermelon slices sat on his mahogany desk instead of a computer.
“The computer brings a lot of unnecessary information,” Prokhorov said. “I am a principal. I order the exact information I need, and I get it. I have a team who works on that for me.”
Prokhorov Says Nets Will Make Profit in 2011-12
Billionaire Mikhail Prokhorov said he was counting on his newly acquired New Jersey Nets basketball team to become profitable as soon as it moves to Brooklyn for the 2011-12 season.
Prokhorov, who has agreed to invest $200 million into the construction of a sports arena for the team in Brooklyn, also said he believed that the $4.9 billion stadium and a nearby development project would soon overcome a legal challenge.
“We have carried out our due diligence. We understand the current state of the team, and we understand how it will be transformed into a successful and profitable undertaking when it moves to Brooklyn,” Prokhorov said in an interview.
“We understand the legal situation around the arena, our lawyers have attentively looked through all the documents. Under the agreements, we are protected from delays at the arena and expect that the management team will be able to deal with this,” he said.
The team’s move from New Jersey to Brooklyn has been delayed repeatedly because of a legal challenge from Brooklyn residents led by the community coalition Develop Don’t Destroy Brooklyn. A New York court will hold a hearing on eminent domain issues linked to the project next Wednesday.
“We don’t see any problems there,” Prokhorov said. “I think we will win in all the courts.”
Prokhorov’s investment vehicle, Onexim Group, signed an agreement with Forest City Ratner Companies, headed by Bruce Ratner, on Sept. 23 to invest $200 million into the construction of a $800 million arena in Brooklyn. In exchange, Prokhorov received an 80 percent stake in the Nets, 45 percent of the arena and the right to buy up to 20 percent of Atlantic Yards Development, a company that will oversee construction on a 9-hectare real estate development around the arena. The development is to include a rail yard, warehouses and several high-rises containing residential and office space, and the first high-rise is expected to be completed 69 months after the ground is broken, which, barring legal hurdles, is to take place this year.
Prokhorov said that while Onexim Group has sufficient funds, it might raise the financing required from Western banks. The New York Times reported Sept. 25 that the agreement also envisioned future Nets losses, up to $60 million, that are expected to accumulate before the move to Brooklyn. Prokhorov also will be responsible for 80 percent of the team’s $207 million debt, the newspaper said, citing an unidentified executive involved in the transaction.
Prokhorov declined to provide details about the deal.
“We borrow the money and essentially give the loan to someone else,” Prokhorov said. “For that, we get the team and a share in the real estate project. To use simple language: the group doesn’t spend any of its own money.
“We are in the process of negotiating with Western banks,” Prokhorov added, declining to identify the banks or disclose the interest rate of the loans. “We will attract the full sum of the needed investment.”
The deal is contingent on Ratner obtaining financing for the arena and control of all the land required for it by Dec. 31, The New York Times said.
Prokhorov, who has to secure the approval of 23 of the 30 team owners in the National Basketball Association to finalize the transaction, said he could not confirm the details of the deal. “Our contract is confidential. I can only say that we are fully protected in this venture,” he said.
Forest City Ratner Companies spokesman Joe DePlasco also declined to comment on the terms of the agreement.
Prokhorov said negotiations to buy the Nets had not taken long because he had seen a great opportunity in the team. “My associates first met with Bruce Ratner’s team and realized that the venture was interesting,” Prokhorov said. “Then Ratner came to Moscow, and we discussed the venture.”
The negotiations were also discussed at the highest levels of government in both the United States and Russia. “As I understand it, President [Dmitry Medvedev] even told Barack Obama about it,” Kremlin spokeswoman Natalya Timakova told reporters last week.
Prokhorov said it took about two months to hammer out the details of the deal. “I know the NBA and basketball in general quite well,” he said. “So when the opportunity came up, we quite quickly realized that it was an attractive one.”
Prokhorov said he planned to fly to the United States to meet the Nets management and NBA officials before the end of the year.
When asked which position on a basketball team he would prefer to play, the 6-foot-7 Prokhorov said he would prefer not to go out onto the court. “I would be either the head coach or the general manager,” he joked.
Billionaire Eyes Heating Reform
The government should set long-term prices for heat producers and use money earmarked for new power stations to modernize the country’s inefficient grid system, which would help keep costs down for consumers, billionaire Mikhail Prokhorov said.
As industrial production plummeted over the past year, electricity and heat producers have lobbied the government for leniency with their state-mandated investment programs, which were approved during the sector’s privatization.
But Prokhorov, who controls 25 power stations in the European part of the country, told The Moscow Times that urgent changes in the state’s approach toward the sector were needed.
“The reform of the electricity sector has been held. Now the time has come for changes to the centralized heating system,” Prokhorov said. “The changes are urgent.
“The government should allow the so-called territorial generating companies, or TGKs, to redirect investment planned for the construction of new power stations to build new heat grids and new boiler houses,” he said.
Most of the country’s heat grids are outdated and technologically exhausted, meaning up to 50 percent of heat can be lost between the generator and the consumer.
If generators are allowed to redirect their investments, consumers will pay significantly lower rates and power stations will become far more efficient, Prokhorov said.
“Building a new power station leads to higher tariffs for heat since the investments to build it have to be returned,” he said. “If a new grid is built and the capacity of the working power station is used more efficiently, tariffs will grow insignificantly because much less heat will be lost on the way to the consumer.”
Prokhorov offered his TGK-4 as an example.
“I have 5,000 kilometers of grids, which have been in use for 30 years on average,” he said. “So I have to build at least 290 kilometers of new grids per year. But with the tariffs set by the state I could only afford to replace 120 kilometers last year and will only replace 80 kilometers of the grid in 2009.”
The situation could be changed, for example, if some of the funds intended to build a 240-megawatt power station in Lipetsk, which is part of TGK-4, were redirected to replace grids.
“If that were done, prices for heat would only rise 13 percent next year, instead of 89 percent,” he said, referring to the local market. “The utilization of the power station will skyrocket to 70 percent from the current 40 percent.”
TGK-4 has sent the suggestions to the Energy Ministry, Prokhorov said, and he presented this approach to President Dmitry Medvedev at a Sept. 30 meeting of a state commission on the modernization and technological development of the economy.
Under the electricity sector privatizations from 2004 to 2008, state-run monopoly Unified Energy System sold off its assets to domestic and foreign investors, who took on obligations to modernize the country’s dilapidated electricity and heating industry by building new power stations.
A market for the electricity sector has been created and prices for half of the power generated in Russia have been liberalized. Heating rates, however, are still set annually by regional energy commissions controlled by the local administrations.
“When the tariff for the heat is changed every year and is mainly dependant on the will of the region’s governor, you can’t plan any long-term energy-efficient measures,” Prokhorov said. “Long-term heat tariff planning is badly needed for the sector.”
Separately, Prokhorov said TGK-4, based in the Tula region, was holding negotiations with a number of foreign investors to attract additional financing and acquire new technology.
“TGK-4 is working with a few potential partners, some of which want to buy a share in the company, while another wants to create a joint venture with us,” Prokhorov said. He declined to identify the companies.
Onexim Group, Prokhorov’s holding company, was involved in one of last year’s biggest corporate governance disputes after it backed out of a deal to buy out minority shareholders in TGK-4.
In May 2008, Onexim bought a 50.4 percent stake for 2.7 kopeks per share, which required the company to make a buyout offer to the minorities at that price.
But the firm’s shares plummeted last fall to as low as 1 kopek, and 40 percent of the firm’s minority shareholders decided to exercise the buyout right, requiring Onexim to pay a total of 21 billion rubles.
Onexim said in October that it did not have to buy the shares because TGK-4 had recently been placed on a list of natural monopolies, which meant that Cyprus-registered Onexim would have to get permission from the state before it could increase its stake.
Onexim has since issued dozens of lawsuits asking the court to call the initial deal invalid. Some of the lawsuits are still pending.