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XXI Century negotiating sales with bargain-hunting real-estate investors; Kiev assets most attractive - sources
Ukrainian real estate company XXI Century now has just four months to raise the cash it needs to cover a put option on its USD 175m Eurobond in May. The developer has been talking to several interested parties but bargain-hunting property buyers and equity investors are waiting for a better deal as XXI Century’s put option approaches.
“It’s all about price and how flexible the company will be,” said a source close to the situation. Potential buyers are delaying negotiations, hoping that the company will acquiesce when pressed for cash, agreed two other sources close to the situation. 

Real estate advisory firms DTZ, Jones Lang La Salle and Colliers International have all held talks with potential buyers interested in XXI Century assets, said the source. 

ING has been hired to approach equity investors, as reported, and Baker & McKenzie will provide legal advice on any potential deals, said a banking source and a fourth source close to the situation. 

XXI Century will likely try restructure its debts, including its USD 175m Eurobond, but has not awarded a financial advisory mandate yet, said a company insider and the banking source. ING, Renaissance Capital and UBS are among banks that pitched for the mandate but the company is unlikely to approach bondholders before it reaches sale agreements, one of those sources commented. 

XXI Century declined to comment. 

The Ukrainian developer, which is listed on the London Stock Exchange, has been struggling to sell assets since last year. Property valuations in Kiev – the Ukrainian capital and XXI Century’s main market – have dropped 10%-50% over the last 12 months, said two of the sources close to the situation. 

As investors grow more risk-averse, they have also started demanding a higher capitalisation rate on assets, according to Arkadiy Vershebenyuk, director of capital markets at Colliers International in Kiev. The average capitalisation rate for Kiev properties stood at 9% before the global credit crisis but now investors expect at least a 15%-25% capitalisation rate, he said. 

The capitalisation rate is a measure of an asset’s annual net income as a proportion of its capital cost or current market value. XXI Century has said in several trading updates over the last year that it wants to raise cash from asset sales, and has admitted it may struggle to keep up with its financial obligations. The company’s USD 175m 10% notes rarely trade but are indicated at 10-20, according to a London-based trader. The paper matures in 2010 but incorporates a put option exercisable in May this year. 

The developer tried to sell its logistics business in summer 2008, but the deal fell through when UK-based company Parkridge withdrewrom the bidding, said one of the sources close to the situation. The deal could have been worth around USD 200m, the source added. 

Parkridge could not be reached for comment. 

But since December, investors have started to cautiously re-approach property agents in Ukraine about XXI Century assets, said Natalia Stelmakh, head of investment at DTZ in Kiev. Investors are mainly interested in income-generating projects based in Kiev, or land plots with a permission to build, she said. 

XXI Century has only two finished projects, the Aurora and Kvadrat shopping malls in Kiev, Stelmakh continued. Two residential projects in the Ukrainian capital are close to completion, while other office and hotel schemes are either at the approval stage or were recently started, she added. 

According to German Panikar, head of capital markets at Jones Lang La Salle in Kiev, XXI Century has over 50 projects in its pipeline in several sectors, but the Aurora shopping mall is the most significant among potential candidates for sale. 

Aurora’s value decreased from around USD 120m last year to just over USD 80m now, both Stelmakh and Panikar agreed. Other XXI Century projects in Kiev up for sale could be worth anything between USD 30m-USD 60m, Stelmakh added. 

Foreign buyers may be discouraged by the fact that majority of XXI Century’s projects are leasehold as opposed to freehold. Banks are sometimes reluctant to provide financing for such projects, noted one of the sources close to the situation. 

Panikar countered that this should not be an issue for investors, considering these projects have long-term leases of 20-25 years. 

According to Stelmakh, foreign developers that have entered the Ukrainian market in recent years are actively considering buying assets now that prices have fallen and buyers have the upper hand in negotiations. Auchan, Praktiker, Leroy Merlyn and IKEA might all be interested, she said. 

Jones Lang La Salle’s Panikar said there is interest among wealthy Ukrainian businessmen in properties being sold at a discount. Any sales could be completed within three or four months, according to Panikar, though Vershebenyuk at Colliers International described this time frame as optimistic. 

The company will need a new equity investor if it is to meet its debt obligations in time, as asset sales are not reliable, agreed two sources close to the situation. 

“A likely scenario is that the company will find a strategic investor and then negotiate a debt restructuring,” one of those source said, adding that a US-based private equity fund is a likely suitor. 

The company insider said that while talks with potential equity investors are underway, XXI Century’s main shareholder is not currently discussing a sale of a controlling stake or the entire business. Ukrainian businessman Lev Partzkhaladze owns 53% of the business. 

“It is obviously a tough question to be certain about in these circumstances, but it’s unlikely he will [sell a controlling stake],” the insider said. 

Yulianna Vilkos 

Financial Times 

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