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Ferrexpo: The Finance and Credit Headwind (September 19, 2015)

After seven months of intensive negotiations to avoid a bankruptcy of the Ukrainian Finance and Credit Bank (‘Bank F&C’), a related party of Ferrexpo ultimately controlled by Ferrexpo’s largest shareholder Kostyantin Zhevago, the National Bank of Ukraine (‘NBU’) finally declared the bank insolvent on September 17, 2015. As a result, USD 174 mn of cash (of total USD 280 mn) held by Ferrexpo at Bank F&C will be likely lost. Though this won’t likely impact company operations and liquidity in the short-term, it puts the company’s ability to repay USD 350 mn of syndicated loan in 2016 under question, and leads to the breach of covenants on Eurobonds and syndicated loan.

 Also according to recently adopted banking legislation on related parties in Ukraine, the NBU may potentially claim Mr. Zhevago’s assets which may result in a change of control in the company.

These factors together, in addition to the negative PR impact may result in a significant drop of the Eurobond price to 30-35 sending YTM closer to 50-60% until the terms of potential restructuring of syndicated facility and bank’s liquidation impact clarifies.

We see the impact on Ferrexpo most of all to consist in the loss of the cash deposited in the bank. Following the NBU announcement, Ferrexpo issued an update on Bank F&C. On a short-term horizon, we deem Ferrexpo’s business to be safe from any spillover effect from the bank’s bankruptcy. While Ferrexpo’s profitability should be weaker in 2H2015 as a result of lower average prices on its products, we believe that the company has sufficient liquidity reserves to successfully operate during this period, considering that Ferrexpo’s investment program is over and there will be no large capital expenditures.

The loss of the USD 180 mn deposit in Finance and Credit, though living Ferrexpo with sufficient resources to meet current payments, however negatively affected the debt outlook for 2016, given remaining business weaknesses ahead. As a result the USD 350 mn of Syndicated loan facility due in 2016 won’t be likely paid and will need to be restructured. In order to avoid a default by the next semi-annual testing of the net debt to EBITDA ratio, due to breaching of the 3.0x  required by the syndicated loan covenant, Ferrexpo probably would have to get syndicated loan borrowers to agree to a waiver, and postpone loan maturity. With an assumption of USD 230 mn in FCF annually, the debt could be repaid in 4 years.

 

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