OREANDA-NEWS. On December 11, 2008 Sistema-Hals (LSE, MICEX, RTS: HALS), a major Russian real estate company, following a strategic review of all its operations, announced its revised business strategy and cost optimization programme for 2009, reported the press-centre of Sistema-Hals.

In light of the current global liquidity crisis, which has affected the Russian economy and the real estate sector in particular, Sistema-Hals is taking measures to overcome the current challenging market conditions and to reposition the Company for growth for the medium and long term as the economic situation improves in Russia and globally.

Updated Construction Strategy
Sistema-Hals’ project portfolio is divided into 2 categories:

category one - projects with financing either in place or expected to come, that can be carried out with co-investors and are either at or ready to move into construction stage;

category two - projects which offer long-term prospects and/or are at an early stage of development.

In 2009, Sistema-Hals will focus primarily on its category one projects with updated deadlines for their completion. These projects include:

Leningradsky Towers business centre (39 Leningradsky Prospekt, Moscow), in which Siemens has a contract to acquire one of two towers being constructed; completion deadline depends on the terms of financing arrangements to be negotiated;

Emerald Valley residential complex (111A Rublevskoye Shosse, Moscow), which is already fully financed with completion deadline in 3 quarter 2009;

Leto retail and entertainment centre (7 Pulkovskoye Shosse, St Petersburg) which has secured project financing from Eurohypo and is being carried out jointly with French retailer Apsys, completion deadline – 3rd quarter 2009;

Kamelia health spa complex (84 Kurortny Prospekt, Sochi), where Sistema-Hals is partnering with Saraya, a Saudi Arabian real estate company focused on hotels and tourism, completion deadline – 2nd quarter 2012;

Seven projects which form part of the Moscow City Telephone Network programme, financing for which is being provided by Bank Uralsib. These projects include 5 Vsevolzhsky Pereulok; 19 Daev Pereulok; 3 ul. Zorge; 5/1 Miliutinsky Pereulok; 34 ul. Nagatinskaya; 11 Rogozhsky Val; and 5 Stolyarny Pereulok, all in Moscow, completion deadline - 2010-2012;

The reconstruction of Detsky Mir (5 Teatralny Proyezd, Moscow); completion deadline – 4th quarter 2011.

Financing required for these projects to the end of 2009 will be approximately USD 290 million.

Capital requirements for the second category of projects, which offer long-term prospects but are at an early stage of development, amounts to approximately USD 30 million in 2008-2009 and will be restricted to internal agreements which do not require material financial expenditure.
 
Portfolio valuation
 
Sistema-Hals’ portfolio of projects and assets is independently valued twice a year by C&WS&R, an independent valuation agency, the most recent of which was taken as at 1 July 2008.  Due to the rapidly deteriorating market conditions especially since October 2008, Sistema-Hals believes that this is not an accurate reflection of the current value of the portfolio.

According to preliminary management assumptions and estimates, the primary projects in the Company’s portfolio might have devalued by 15-20% to date compared to the latest valuation by C&WS&R. The rest of the portfolio is likely to have been affected to a significantly larger extent. However, these internal estimates carry a significant amount of uncertainty due to the unprecedented depth of the financial crisis and due to the current absence of transaction activity in Russia. A revised valuation by C&WS&R will be undertaken in early 2009 as part of the regular valuation reports accompanying semi-annual and annual results releases.
 
Current Debt Position
 
In November 2008, Sistema-Hals agreed a new credit line of RUB 7 billion with VTB, one of Russia’s largest banks. This agreement will provide a further source of funds to refinance existing debt and finance selected projects.

In December 2008, the Group announced changes to the terms of its credit agreements with Bank VTB. Under the new terms, the five-year credit facilities for the amounts of USD 500 million and USD 200 million granted by Bank VTB in 2007 were converted into roubles at the rate of the Russian Central Bank as of December 2, 2008.

The effect of the conversion is a foreign exchange loss in the amount of USD 96.8 million. The Company believes converting the VTB facility to rouble denomination is prudent given the increasing percentage of rouble-denominated business. The loan have an interest rate of 15% per annum both for the USD 500 million credit (the previous rate was 8.5% per annum) and for the USD 200 million credit (the previous rate was LIBOR+5.43% per annum). The requirement for covenants (financial indicators) for FY2008 is cancelled and new covenants will be negotiated in FY2009.

As at 11 December 2008 Sistema-Hals’ debt amounted to USD 1.6 billion. Of this, approximately USD 20 million is due for repayment by the end of 2008, with a further USD 130 million due for the repayment by the end of 2009. The majority of the long-term debt (principally the loan from VTB) is not due until 2012.
 
Cost control measures
 
Sistema-Hals has commenced a cost cutting programme to cut its SG&A expenditure by approximately 50% to around USD 40 million in 2009. This program will incur approximately USD 3 million restructuring costs to be expensed in 2008.

As a consequence of the changes to the construction programme, Sistema-Hals will be optimising its operational structure and staffing costs, reducing headcounts across the Group by around 40%. In addition, Sistema-Hals is cutting its operating costs and rental payments by transferring all of its subsidiaries into one head office building (35/4 ul. B. Tatarskaya, Moscow), owned by the Company. 
 
Financing sources
 
The funds required to finance the adjusted construction programme, service the Company’s debt and cover SG&A expenditure are expected to come in 2009 principally from:

operating activities (expected to generate about USD 70 million in 2009);

completion and sale of a number of projects (expected to generate from USD 150 to USD 250 million in 2009);

credit facilities (up to USD 250 million expected to be raised in 2009); and co-investors on selected projects (about USD 150-200 million expected to be raised in 2009).

Sergey Shmakov, President of Sistema-Hals, commented:

“In this global liquidity crisis we are taking a series of measures aimed at minimising its impact on our business. The current market situation demands that we undertake a careful review of our investment programme and optimise corporate expenditure. At the same time, we believe that fundamentally the real estate sector in Russia is strong and that those companies which take a pragmatic approach to managing their construction programmes and preserving capital will overcome the current difficulties and will ultimately be well placed for further growth in medium and long term as economic situation improves in Russia and globally.”