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GAZ Group gasps for breath

16 Apr '09
Oleg Kouzbit, Online News Managing Editor

Burdened with $1.24bn in debt and asking creditors for restructuring, GAZ Group is trying to stay afloat. Bond holders have been offered a repayment schedule and management claims the firm will break-even by July 1. To help revive falling sales a new economy-class GAZelle truck—the company’s perennial best-selling brand—will be launched. But the real news is that maker of the venerable Volga and its much-ballyhooed successor, the Volga Siber, announced it would be phasing out all passenger car production starting next year.

$1.24bn in debt

In late March Marchmont wrote about GAZ Group, part of Deripaska’s Basic Element, asking creditors for debt restructuring (click here, March 26, 2009).

The Nizhny Novgorod-based GAZ Group comprises auto maker GAZ in Nizhny Novgorod, 18 other automotive entities throughout Russia, vendors and service companies, and the U. K.’s LDV.

GAZ Group’s total debt was around $1.24bn. The firm is expected to repay $1bn this year.

Restructuring offered

As Marchmont reported, in February GAZ Group technically defaulted on its $150m bonds. Last week the company finally unveiled a debt restructuring plan to its creditors.

The plan calls for GAZ Group to buy back 4.5 million bonds at $29 par value in staged increments. If the arrangement is approved by investors, the firm has said it will buy 750,000 bonds on December 15, 2009; 500,000 bonds on March 15, 2010; one million on June 15; another 500,000 on September 15; and 1.25 million on December 12, 2010.

The offer is reportedly valid through December 31, 2010 and leaves it open the possibility for GAZ to complete its buy back offer earlier.

Break-even promised by July 1

Earlier this month GAZ Group president Sergei Zanozin tried to calm investors by announcing an across-the-board break-even deadline by July 1, 2009.

According to the company president, production costs will be slashed by 20% this year, labor costs by 50%, and by eliminating marginal production sites and inefficiencies the firm will save as much as $88m.

GAZ’ bus-making plant in Kurgan is already on notice—unless the factory can find firm buyers for at least 600 buses this year—it will be shut down.

Mr. Zanozin said that another subsidiary, the Golitsyno bus-making factory outside Moscow specializing in tourist and intercity buses, would cease production and become a service center.

A new GAZelle to the rescue

In the past week, GAZ announced that it was also planning a stripped down version of its best-selling GAZelle panel truck. Mr. Zanozin promoted the model as a “counter-crisis offer to the market.”

The new GAZelle model is a $6,000 version of a GAZelle light truck that normally sells for $10,500. It’s being pitched as an all-around small farm vehicle for rural Russia that could even be used to haul pigs and manure.

Although the company has the capacity to churn out 50-60,000 economy GAZelle’s a year, this year’s output will be 7,000.

Government’s $900m+ “nourishment plan”

Last month Marchmont also reported that Nizhny Novgorod regional officials had “leaked information” that GAZ “was fortunate to receive the federal government guarantees for bank loans worth $2.1bn.”

But it now seems that GAZ will get less than half of what Nizhny officials hoped for.

On April 13, Nizhny Novgorod Governor Valery Shantsev told media GAZ Group would get a “…minimum $662m in government contracts for its products this year...” and RF Prime Minister Vladimir Putin reportedly decreed that an additional $265m worth of government orders for GAZ products would be forthcoming.

Burying the baby…

The fate of GAZ Group’s $300m baby, the Volga Siber project, hailed in 2007 as Russia’s first new domestic sedan since the Volga, has also been decided—the car will be phased out next year.

GAZ’s decision to build a new Volga raised a lot of industry eyebrows because the car was based on a 1980’s vintage Chrysler Sebring. Undeterred, GAZ paid Chrysler $151m for its American Sebring plant and had it shipped lock, stock and barrel to Nizhny. Then it spent another small fortune re-designing it for Russian roads and building a fleet of several hundred for Russia’s elite to test drive.

Not only did the car fail to excite the rich and famous, it failed in the showroom—this year the company says it will make a maximum of just 7,000 Volga Sibers.

In a last ditch attempt to save the Siber, the ever-optimistic Governor Shantsev announced that the regional administration was eyeing cheap government loans for a local transportation company to purchase the Siber as taxis—an ignominious ending to a $20,000 “luxury” car that GAZ said would be snapped up by 45,000 eager Russians its first year alone and as many as 65,000 in 2010.

Sadly, the maker of the venerable Volga officially announced not only would the Siber become history, but starting next year, all GAZ passenger cars would be phased out.
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