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StockBeat: Vallourec Tests Europe's Fear of Big Bankruptcies

Stock MarketsSep 02, 2020 05:54AM ET
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By Geoffrey Smith -- Europe has tried to get through the pandemic without any of its big employers collapse into bankruptcy. It’s now facing a key test of that desire.

Vallourec (PA:VLLP) may not be a household name, but it is a big player in one of the sectors hit hardest by Covid-19. Its main business is producing pipes for the oil and gas sector, demand for which has crashed as Big Oil around the world has slashed its investment spending.

The fact that Vallourec’s two big side businesses – pipes for power stations and industrial facilities – are also severely challenged hasn’t helped. Indeed, the company has been in trouble for years, and is a good example of how the Covid-19 pandemic has accelerated trends that were already in motion.

Vallourec had warned at the end of July that there was “significant uncertainty” over its ability to continue business, after failing to persuade shareholders to inject 800 million euros into the struggling business, filling the hole made by a 660 million euro net loss in the first half.

As such, it started talks with its banks about a possible debt restructuring. By the start of this week, it was clear that that wouldn’t be enough. Vallourec said after the close on Monday that it will have to rope its bondholders into restructuring talks.

Vallourec’s chief problem is that 1.7 billion euros of a 1.9 billion bank facility matures in February. It has two bonds under U.S. law that mature in October 2022 and October 2023. The company doesn’t have enough cash on hand to meet the February payment and is unlikely to generate much from operations before that deadline.

It’s now asking the approval of bondholders for the appointment of a ‘mandataire ad hoc’, a negotiator with the power to effect an out-of-court settlement of the company’s debts to prevent it filing for bankruptcy.

President Emmanuel Macron famously promised at the start of the pandemic that no French company would need to declare bankruptcy because of the pandemic. He’s not alone in that – Germany has also relaxed its bankruptcy laws temporarily to the same end.

But Vallourec’s problems have been evident for years. Its shares have been in decline for a decade. It is a prime example of a company whose long-term issues have been magnified and accelerated by the pandemic, but not caused by it.

Investors can learn a lot from how Europe is going to emerge from the pandemic by how actively the French government gets involved in this process.

How far is Paris willing to go to save 19,000 jobs at the company, most of them in France (the North American and German workforces have already been drastically cut back). Will it lean on the banks to save a company that has “Zombie” written all over it? Will it inject equity itself, even though private investors have already refused (thus making any state aid a prima facie breach of EU competition rules)? Or has it shrunk to the point where it can be allowed to fail?

The shares, with a market value of 245 million euros, are already priced for bankruptcy and the breach of Macron’s promise. Any better outcome will be bought at a heavy price in terms of the European economy’s long-term future.

StockBeat: Vallourec Tests Europe's Fear of Big Bankruptcies

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