Latin Finance - June 2008 - 56

Parting shot Value Behind the Veil by Stuart Culverhouse and Francisco López Aufranc* Stuart Culverhouse Francisco López Aufranc Behind a convoluted judicial restructuring procedure, there is value in Argentina’s Sociedad Comercial del Plata. Defaulted debt looks attractive. S ociedad Comercial del Plata (SCP) is one of the last Argentine corporates looking to complete its debt restructuring. The Argentinabased company, which is mainly active in equity investment, has gone through not only one of the longest workouts, but also one of the most intricate. Despite this, it appears to be hiding a good value story. The company’s subsidiaries in the petrochemical industry include Compañía General de Combustibles and DAPSA. In the entertainment area, the company holds a stake in Parque de la Costa, Nuevo Tren de la Costa and the casino Trilenium. In 1999, SCP initiated a judicial debt restructuring proceeding (Concurso Preventivo). In 2004, SCP’s restructuring proposal was approved by the court of first instance, which was later confirmed by the commercial court of appeals. However, the proposal was rejected by some creditors who, along with the state attorney, appealed before the Argentine supreme court, whose decision is still pending. The creditors’ allege that restructuring proceedings were unlawful, due to the procedure followed to obtain the creditors’ approval that did not consider all bondholders votes. They also claim that the restructuring proposal was abusive. In order to support these arguments, the state attorney also pressed criminal charges against SCP, which were rejected by a federal court. However, the court’s decision was challenged in the federal court of appeals and SCP is awaiting judgment on this last matter. Undervalued Assets However, it should be noted that some of SCP’s investments appear to be undervalued while others are overvalued. Among undervalued assets is Compañía General de Combustibles (CGC), in which SCP holds a 19% stake and the remaining 81% is held by private equity fund Southern Cross. CGC is an oil and gas company with activities in exploration and production in LatAm, as well as natural gas transportation. Additionally, CGC has a 16% stake in Transportadora de Gas del Norte (TGN), one of the two largest gas transportation companies in Argentina, a 17.5% piece of GasAndes, which operates a gas pipeline across the Andes, and 10.9% of Transportadora de Gas del Mercosur (TGM), the first gas pipeline going from Argentina to Brazil. Moreover, another of SCP’s investments that appears to be undervalued is a 95% holding in Del Plata Propiedades. The company owns, among other assets, a 250 hectares land reserve in Tigre, 20 kilometers north of the City of Buenos Aires, and 2,800 hectares of forested land in the province of Corrientes. Finally, SCP also has 50% of Trilenium, a casino in Tigre which has an annualized Ebitda of $14 million and almost no debt. On another note, SCP’s investments that appear to have a book valuation higher than fair market are Parque de la Costa, where SCP owns 33%, and Tren de la Costa (TDC) in which it has 99%. The operation of these two companies is very poor, and TDC has serious problems with labor unions. In an overall assessment, the intrinsic value of SCP’s assets appears to be higher than reflected by the share price. Probably the safest way to seize the upside is by acquiring defaulted debt. SCP stock is exposed to a potential cramdown procedure and liquidation scenario – in the case of a negative supreme court ruling – where the downside is very high because equity would become almost worthless. On the contrary, if one acquires SCP’s defaulted debt, a favorable supreme court ruling would bring an upside slightly lower than the one obtained by the shares; however, a cramdown and liquidation scenario will still be very attractive, as creditors will receive a larger portion of SCP’s assets. The dollar series bonds are trading at $18-$20, and recovery value is estimated in the high $20s. To conclude, while legal risks remain, distressed debt investors may find SCP presents a very interesting opportunity. LF Crucial Appeal The outcome of the appeal is of utmost importance because, if overruled, it would definitively wipe out the accusation of fraud. The supreme court would therefore have to decide upon the issue of abuse, on which there is no previous case law. SCP points out that, so far, all rulings on objections have favored their side and, thus, the company is confident of winning a final favorable and clearing judgment. The restructuring proposal gives creditors the option to exchange claims for equity, receiving 60 shares per $100 of original claim. Assuming all creditors take this option – the debt alternative is very poor – they will jointly own more than 50% of SCP. Besides creditors, the other SCP participants would be the Soldati family (11.5%), the Werthein group (3.5%) and minority stockholders who acquired shares on the Buenos Aires stock exchange. Once the restructuring proposal has been completely implemented, SCP would become a listed company with almost no liabilities, $30 million in short term assets and $100 million in investments. * Stuart Culverhouse and Francisco López Aufranc are economist and senior analyst, respectively, at Exotix, specializing in broking illiquid bonds and loans, boutique investment banking and structuring EM financial instruments. 56 LATINFINANCE June 2008

Latin Finance - June 2008

Table of Contents for the Digital Edition of Latin Finance - June 2008