Russian rescue heralds uncertainty for Kvaerner

The future of 4,500 UK jobs in Kvaerner’s engineering and construction division remains uncertain, following this week’s announcement of a financial rescue package for the Anglo-Norwegian group.

The package was brokered by Kvaerner’s largest shareholder, Russian oil company Yukos, which is certain to take a lead role in the future direction of the group concentrated around two core activities – the E&C business and its oil and gas division.

The early signs are that Yukos, which holds a 22% stake in Kvaerner, does not want to remain involved in engineering and construction. Mikhail Khodorkovsky, the oil company’s chief executive, was quoted on Tuesday as saying the business should be sold.

Clouded future

Amid the relief that greeted the unprecedented rescue of a large western company by a Russian counterpart, this development inevitably put a cloud over the future of an operation that includes two of the best-established names in UK heavy engineering – John Brown and Davy Corporation. The two have a long history in the design and construction of big industrial plants in a range of sectors – and Kvaerner acquired both when it bought Trafalgar House in 1996.

In the UK, the division employs around 4,500 at four sites in London, Warrington, Solent and Stockton.

Paul Emberley, Kvaerner’s vice-president for group communications, said Khodorkovsky’s reported comment had come as news to the board members involved in negotiating the refinancing deal: ‘None of that has been said to us in any of the meetings over the last few days.’

However, he acknowledged that while Kvaerner’s financing arrangements over the next three years now look settled, it was not possible at this stage to say what its future ‘industrial direction’ would be. He also acknowledged that it would be largely dictated by Yukos.

In its announcement of the restructuring, Kvaerner said the Russian company had made clear that the ‘management and operations should be conducted in an appropriate manner and based on sound industrial thinking’.

It has already taken steps – at the direction of Yukos – to tighten its operations, including cutting its bill for financial advisers and establishing a working group to settle outstanding legal claims. Kjell Almskøg, the departing president and chief executive, will also forgo his entitlement to two years’ salary.

There are three main elements to the financial restructuring. The first is a £243m (NK3bn) rights issue, by a group of shareholders and lending banks. The second is the conversion of £350m of medium-term debt into long-term, non-interest paying convertible bonds. And the third is a three-year freeze on repayment of the group’s £700m of further debt until late 2004, with an interest charge of 1.25% over the interbank lending rate.

The debt restructurings take immediate effect, while the rights issue will require the approval of two thirds of the shareholders at an EGM before the end of this month.

This is not expected to prove a hurdle, although the second largest shareholder, rival Norwegian engineering group Aker Maritime, came out strongly against the plan this week. Aker had put forward its own rescue plan, which would have raised its stake in Kvaerner from 17% to 45% and written off the company’s debt, but this was rejected out of hand by the banks.

Cash injection

The agreement on the restructuring enabled the banks to put up £15m of short-term finance to assist Kvaerner through the liquidity crisis that had threatened to bankrupt it.

The company can also now draw funds held by overseas subsidiaries – which had been frozen to cover creditors in the event of bankruptcy – back into the central cash-clearing operation in London. ‘That is up and running again,’ said Emberley.

The scale of Kvaerner’s plight was revealed on Monday, when it reported figures for the third quarter. An operational loss of £47m was boosted by exceptional items to a total loss of £230m, taking the aggregate loss for the first nine months of the year to £330m. Last year’s turnover was £4.16bn.

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