The Crisis Is Affecting All Of Us

• (an interview with Dana Lulache, General Manager of Fondul Proprietatea)

Bursa: How is Fondul Proprietatea affected by the international economic crisis? Do you anticipate a decrease in profit for 2008, or even losses?

Dana Lulache: Considering the globalization and international economic relations, any economic entity is going to be affected by a crisis of this magnitude. The crisis is affecting FP both directly and indirectly, but not all effects are negative. We believe that potential fund managers will become more interested, because their business is affected in their home country and a contract to manage assets for an investment fund as large as FP can only be a welcome opportunity for a fund manager to achieve their budget targets. As for the direct influences on the listing of FP, supposing that the Ministry of Economy and Finance puts up for sale, within the secondary public offering, some 10% of FP, then we speak of a minimum of 400 million EUR that needs to be attracted from institutional and individual investors.

Obviously, this would be the largest public offering organized in Romania so far, at some distance after the one that will have taken the first place by that time, i.e. Transgaz. Nonetheless, to attach such an amount of money from the local and international capital markets will be quite a challenge for any broker assigned to handle the listing. The companies in FP"s portfolio are directly affected by the economic and financial crisis because demand is decreasing, the cost of financing is increasing and it"s becoming increasingly difficult to find financing (through the capital market or through loans). This situation will directly affect profits, development plans and market value. For listed companies, the effect is even more visible, considering that, although a fundamental analysis would show that some companies are underestimated on the market, the demand vs. supply game has brought some prices per share to historical lows.

We expect to reach our operating profit targets stated in the revenue and expenditure budget. The net profit estimated for 2008 is 414 million RON, up by nearly one third from the previous year. However, given the impossibility to estimate possible adjustments for the depreciation of fixed financial assets (FP"s holdings), it is possible that these adjustments (i.e. depreciation provisions) may bear a negative influence on the profit estimate for 2008.

Bursa: Some of the companies in which FP holds shares are listed on the Bucharest Stock Exchange and their quotations have lost as much as over 60% in some cases. How does this depreciation reflect on FP? Is it possible that you disburse smaller dividends less year? Will you still make provisions for the listed companies?

Dana Lulache: Our portfolio does include holdings in some listed companies, of which the most important for us are Petrom, Transelectrica, ALRO and Transgaz. I wouldn"t want to pass a general verdict, but some of the price collapses on BVB were triggered by the international financial crisis, the exit of certain investors from the capital market - which generated great pressure on the prices - and also by low liquidity. Obviously, the price per share is an important indicator for determining the value of a company, but it is influenced in time by the liquidity of the respective shares, the demand/supply ratio and other factors. The fundamental assessment elements tend to matter less in nowadays.

PF has hired to appraisers - PwC Management Consulting and Darian Rom Suisse - which apprase all of FP"s holdings. The appraisal is underway and we hope that it will be finished by the end of the year for all our holdings. For the market value evaluation, several aspects are taken into account: at least two appraisal methods, the size of the holding, discounts for the minority holdings or the lack of liquidity and so on.

The method of market comparisons is just one of the appraisal methods we are using among the ones linked to the price of shares. If the market value of the holdings (analyzed separately) is lower that the price that we logged for them in our accounting boos, then we make a provision through the profit and loss account, which is called an adjustment for asset depreciation). It is therefore possible that the evaluation of possible adjustments for depreciation at the end of December may have a significant impact on the annual result.

The financial reports for 2007 released by FP include the accounting values that incorporate our most important holdings (i.e. Petrom), so anyone can make a direct comparison by benchmarking against the current market value of shares in the FP portfolio.

Bursa: FP could be attractive to major foreign and Romanian investors in the context of the financial crisis. Do you have any information in this respect? Can we corroborate the interest of such investors with the concentration of holdings (the decrease in the number of private shareholders and the increase in their respective holdings), which has been visible for a few months?

Dana Lulache: FP is attractive both to Romanian and foreign investors. Indeed, we can say that evidence in this respect comes from the changes in the structure of FP shareholders, but even more eloquent evidence comes from the number and quality of those interested in becoming FP manager. We are talking about some of the largest global investors. Also to confirm the interest triggered by this project, we can refer to the increasingly numerous analysis reports made by specialized institutions for institutional investors - sophisticated investors, that is.

Bursa: What is the relationship between FP and the National Energy Company? Was the FP management been asked for input during the drafting of the ordinance establishing the Company, considering that some of the entities in which FP is a shareholder will be merged into the Company? Would the interests of FP shareholders be in any way damaged by the planned way of establishing the National Energy Company?

Dana Lulache: FP was not consulted during the drafting of the ordinance establishing the National Energy Company. In fact, for the time being, the ordinance only regulates the transfer of shares from one packet of the State to another: from the Ministry of Economy and Finance to AVAS and, later on, to Electrica. We cannot speak of a direct impact on the Fund. As for the indirect effects, it is premature to speak about that, because we have very little information about the changes that are going to take place and the specific way of making the changes.

Bursa: Has FP sued the Ministry of Economy and Finance for the Nuclearelectrica issue? What will FP do solve the litigation with the State over the money resulting from the privatization of BCR?

Dana Lulache:: Article 1.8 of the Appendix to Law no. 247/2005 regulates the obligation of the Ministry of Economy and Finance to transfer 20% in Nuclearelectrica SA to Fondul Proprietatea. Nuclearelectrica increased share capital on two different occasions between December 2005 and November 2007. As a result, FP"s holding was diluted to approximately 9%. Our opinion is that these capital increases did not consider the rights bestowed upon the Fund by Law 31/1990. Emergency Ordinance no. 69/2008 clarified the matter of FP"s holding in Nuclearelectrica. According to Article 1, FP"s holding in Nuclearelectrica is to be updated according to the increase or decrease in the share capital of Nuclearelectrica between 1 February 2006 and 13 November 2007, except for the capital increase performed based on Law 297/2006 on the transfer of 315 tons of heavy water from Nuclearelectrica to the State Reserve. The heavy water was necessary to start Reactor 2 of the Cernavoda plant. The implementation of this act will bring FP"s holding to 17.64% in Nuclearelectrica. The outstanding 3% up to the regulated 20% is an open issue. Obviously, our intention is to take all legal action to recover the 3%. The General Meeting of Shareholders in Nuclearelectrica has been scheduled for 13 November 2008 and will convene to approve the implementation of Emergency Ordinance 69/2008. The lawsuit against the Ministry of Economy and Finance to recover the receivable held by FP on the State as a result of the privatization of the BCR was filed with the Court of Bucharest on 1 October 2008. The first session will be on 20 November 2008.