Threat of default

Metinvest is asking creditors to restructure its debts

Metinvest is asking creditors to restructure its debts
Photo: Ivan Chernichkin

The Metinvest Mining and Steel Group proposed to postpone US $500 mn in payments for Eurobonds with a coupon of 10.25% and maturity in May 2015. Such intentions of the company were reported by the Irish Stock Exchange.

The issuer offered to give holders 20% of the amount owed to them in 2015 and exchange the rest for new bonds with a coupon of 10.5% and maturity in November 2017. The exchange will take place if it is accepted by 90% of the bond holders. Those that agree to such restructuring by October 31 will receive an additional one-time bonus of 1% of the nominal amount of the bonds they own.

Desperate measure

Metinvest did not reply to Capital’s request. Experts believe that due to the situation in the east of Ukraine, Metinvest would be unable to pay off its debts to investors without external support. Senior Analyst at the Art Capital Investment Group Oleksiy Andriychenko says the company has shown good results in the first half of the year; in particular the company’s net profits grew by 46% compared with the H1 2013 due to devaluation, but in Q3 Metinvest ran into certain financial problems in connection the hostilities in eastern Ukraine.

The expert says it is expected that the second half of the year may be a failure and the company’s EBITDA will fall by two times compared with the first half of the year. “In this situation, the company’s risks have significantly increased and the yield on bonds maturing next year has substantially increased, which is an indication of the lack of trust on the part of investors as to their full repayment,” says Andriychenko.

According to the estimates of Investment Analyst at the Eavex Capital Investment Company Ivan Dzvinka, in 2015 Metinvest has to make payments on obligations to the tune of approximately US $1.35 bn. He says that at the beginning of this year the company was able to repay Eurobonds with no trouble, but now even though full repayment is possible thanks to the internal resources of the company, it will not be optimal for operating activities, as it will severely exhaust the financial resources of Metinvest.

Analysts interviewed by Capital say Metinvest’s chances of negotiating restructuring with bondholders are quite high. As an argument they cite the findings of the Fitch Rating Agency, which put the individual rating of the company above the sovereign rating of Ukraine. It is worth expecting a storm of proposals for the restructuring of financial commitments of Ukrainian companies (or non-residents owning assets in Ukraine), the bonds of which will be repaid in 2014–2015. Among the likely initiators of restructuring Andriychenko names DTEK, MKhP and Avangard. The agricultural company Mriya has already submitted its proposal to restructure bonds maturing in 2016 (previously it missed a coupon payment), but was rejected by creditors.

Market environment

The situation on the global market is also not favorable for the financial stability of Ukraine’s mining and metallurgical complex. Some market players believe that the 40% drop in iron ore prices since the beginning of the year to US $80 per 1 t will have a negative impact on the mining division of Metinvest, which is a generator of its EBITDA index, seeing as this year the company increased exports of such raw materials. However, next year a further decline in prices of iron ore is not anticipated and even at the end of this year they could shoot up to US $100 per 1 t, said Andriychenko. This means the company will see higher profits.

“In general, the situation in the mining division of Metinvest will be neutral next year. On the one hand, its facilities and capacities for extraction of iron ore are located outside of the combat zone and a decline in prices on the market is not predicted. On the other hand, the further devaluation of the hryvnia will be happening on the background of inflation growth of the company’s expenses. For this reason, the positive effect from devaluation will be for naught”.

Experts note that in the steel segment the situation is more uncertain and in the event of aggravation of the conflict in the east of Ukraine, Metinvest’s two largest plants could be in danger, in particular Azovstal and the Mariupol Illyich Iron & Steel Works. At the same time, the climate on the steel market does not promise any positive changes next year either.

The Worldsteel Association downgraded its forecast of the growth of global demand for steel from 3% to 2%. Andriychenko says this year the steel prices dropped by 10%, and the decline will continue next year, while they are most likely to stabilize in 2016. The situation on the Russian market is not promising for the company, especially taking into account that this year its sales to Russia fell by one third, says Dzvinka. However, commenting on the financial performance of the group in January–June 2014 the other day, representatives of the company reported that they managed to redirect supplies to Europe, the Middle East and North Africa. Ukrainian metallurgists are also in trouble because China is increasing its exports of metal products.

These are not all the difficulties that Ukrainian metallurgical enterprises have faced this year. Today, companies are suffering from declining exports of products due to problems with delivery to ports by rail, said Deputy CEO at ArcelorMittal Kryviy Rih Volodymyr Tkachenko. He says despite the fact that the company makes advance payments for the services of Ukrzaliznytsya, it grants only 30–40% of applications and attributes the inability to fill them 100% to the lack of diesel fuel. Tkachenko says such a situation paralyzes the company’s export and leads to overstocking.

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