Russian vehicle distributor Rolf has said it may not be able to continue trading unless a new transaction agreement with Mitsubishi Corporation gets the go ahead at the end of October. In one of three separate but mutually dependent transactions, Rolf, which is Mitsubishi Motor’s largest distributor, will sell 40% of its distribution business to the group for a minimum $72m. Mitsubishi Corporation and Mitsubishi Motor Corporation (MMC) will also retain an option to buy a further 20% of the business. Mitsubishi Corporation has a 14% direct shareholding in MMC though they remain separate business entities.
In a letter to noteholders, Rolf’s Chairman of the Management Board, Nick Hawkins, said the transaction, which was begun in November 2007, “will be mutually beneficial and will give Mitsubishi direct access to one of the largest new car markets in the world” but that without it the board “cannot exclude the possibility that some or all of Rolf’s group companies may not be able to continue trading as going concerns.”
Furthermore, noteholders were warned that even if the refinancing agreement and sale of the distribution share did go ahead, “there remain significant risks to the business in the medium term, which could continue to be adversely affected by declining cars sales caused by worsening economic conditions in Russia.”
Rolf has stated that greatly discounted prices in the country have led to significant losses within the distribution business. On top of this Mitsubishi  Motor’s export figures for August published this week showed an 83% drop “due mainly to slow sales in Russia”.
Russian car sales fell 51% in the first eight months of the year.
In April this year Rolf and Mitsubishi Corporation entered into a share purchase agreement designed in part to reduce Rolf’s exposure to the operating and financial risks associated with the Mitsubishi distribution business and provide Rolf Import, the division of Rolf that specifically handles distribution for the carmaker, with a source of additional funding. The transaction provides Rolf with elements of new equity, debt and cash funding that will allow it to complete refinancing and extend the maturity of its debt to 2011.
Rolf is currently refinancing $520m in bilateral loan facility borrowings and fighting back against an operating loss of $80.5m in the Q1 of 2009 compared with an operating profit of 56.9m for the same period in 2008.
The benefits of the new transaction include Rolf’s debt obligations being reduced by a minimum of $160m shared between bank and bond debt. The agreement is also hoped to strengthen Rolf’s relationship with Mitsubishi Corporation and MMC, with the prospect that Mitsubishi Motors Corporation will agree to extend the exclusive distribution arrangement with Rolf Import for the distribution of its cars in Russia, which is expected to end in March 2014.