Ukraine Markets Daily (November 16, 2015)

Market news

  • Ukraine and Russia make attempt to find a way out of the USD 3 bn debt standoff 
  • PrivatBank completes the restructuring of its 2016 debt 
  • Serinus’ sales down 45% y/y, EBITDA down 71% y/y in 9M2015
  • Cub Energy’s revenue down 32% y/y, EBITDA negative in 9M2015
  • IMC’s sales up 2% y/y, EBITDA up 3% y/y in 9M2015

Market comment

The UX Index was up by 0.5% in UAH terms on Friday, and down by 0.1% in the US dollar. The PFTS index was down by 0.9% in UAH terms. Six out of ten companies in the UX index were up in UAH terms, with the largest increase recorded for Kryukiv carriage (2.5%), DonbassEnergo (2.2%) and Ukrnafta (1.8%).

 

On the interbank exchange market, the USD/UAH was up by 0.6% to 23.14 (mid price) on Friday, according to Bloomberg. The official exchange rate reported by the NBU was UAH 23.06.

Ukraine 5-year CDS were unchanged on Friday.

 

Ukraine and Russia make attempt to find a way out of the USD 3 bn debt standoff

Ukraine cannot pay the USD 3 bn debt to Russia, as Russia did not join the restructuring schedule on the Ukrainian foreign debt, according to the country’s Finance Minister Natalie Jaresko. The restructuring terms offered by Ukraine are unacceptable for Russia, and unsuitable for negotiations, according to the Russian Finance Minister Anton Siluanov. “Ukraine has still offered to Russia the same conditions as for commercial lenders, and at these conditions, of course, no negotiations are affordable”, commented Siluanov. Russia would be ready to consider negotiating on the Ukrainian debt, if Kiev came with acceptable conditions, the Russian Minister added.

The Ukrainian Government is ready to find a solution together with the holders of the notes maturing in December 2015, according to the Ukrainian Finance Ministry. “The parameters of the securities, emitted today (November 13, 2015), include a contract clause, according to which Ukraine cannot make payment on such notes or offer to their holders more advantageous terms, compared with the terms granted to other holders of Ukraine’s Eurobonds, who participated in the final debt exchange. In the meantime, the government of Ukraine, in the limits of its contractual commitments, is ready to find a solution together with the holders of the notes due in December 2015”, reads the announcement. Currently Ukraine cannot make any payment on the debt, according to Mrs Jaresko, as “under the IMF program, we have clearly defined parameters about how much we may extend on anything from budget deficit to debt settlement”.

The Ukrainian government will introduce a moratorium on the debt to Russia, if the latter does not agree to restructuring, according to the Ukrainian Prime Minister Arseny Yatseniuk.

In the meantime, Russia may declare Ukraine in default, if Kyiv does not make payment on the USD 3 bn notes, according to the country’s Finance Minister Natalie Jaresko. However “it is premature to think about what we will undertake regarding the Russian (debt). It would be pure speculation from our side. However, we are ready for all possible developments”, the Minister said. Jaresko also stated her readiness to meet with the Russian counterpart to discuss the restructuring issue during the G-20 Summit. The Russian President Vladimir Putin plans to discuss the USD 3 bn debt issue with the IMF Managing Director Christine Lagarde during the Summit, according to the assistant to the Russian President.

Our view: 

The overall news stream is mildly positive, confirming that the Russian and the Ukrainian parties understand the need to renegotiate the USD 3 bn debt. Considering the legal limitations on any additional debt operations imposed by the terms of the new notes issued under the restructuring agreement with the majority of Ukraine’s note holders, we estimate that the Russian government will be more inclined to soften its stance on the debt. However, we think that Russia will continue pushing for a full repayment of the debt on maturity by December 20, 2015, playing on some aversion of the Ukrainian government to enter in any kind of default currently, and requiring extra concessions from Ukraine in exchange to a review of the Russian position.

 

PrivatBank completes the restructuring of its 2016 debt 

On November 13, 2015, Ukraine’s largest commercial bank PrivatBank completed the restructuring of its USD 200 mn subordinated debt and extended the maturity dates to February 2021, after having received the overwhelming support of its creditors and the seal of approval from the High Court of England and Wales, according to a press statement of the bank. The successful restructuring of the public debt will further bolster the bank’s regulatory capital by about UAH 5 bn (USD 220 mn), while adding UAH 10 bn to its liquidity, thanks to the extension of the maturity of the notes to 2018, according to an additional statement of the bank. The restructuring, which has been conducted with full overview and approval of the National Bank of Ukraine, will result in an increase of the capital adequacy ratio of the Bank to above 11%, and result in an increase of the liquidity position of the Bank, reads the report. The maturity extension on the debt will contribute to further strengthening of the bank’s capitalization, according to Commerzbank, who was the organizer of the deal.

In the meantime, the Head of Ukraine’s National Bank Valeria Gontareva reminded that Privatbank is a significant systemic bank and the largest savings bank of Ukraine. The bank serves a considerable number of pensioners, large, small, and medium businesses, salary plans, successfully develops the payment systems, being a leading innovative bank, Gontareva emphasized. Currently Privatbank complies with all required regulatory guidelines, including the liquidity ratio, according to the NBU Head.

“’Privat’ is a bank which plays the role of the main savings bank of the country. It is important as a significant clearing center, but much more strategically important as a saving one. ‘Privat’ with the amount of deposits, that it has, undoubtedly should be preserved as a bank. That is, in my opinion, it cannot go about its liquidation. Privatbank is ‘too big to fail’, therefore it should be handled very carefully and cautiously. And, by the way, I do not consider it an Apple of Discord. I consider Privatbank to be a highly technological system. NBU and the shareholders of ‘Privat’ have a plan, which is currently actualized. If the shareholders stick to this plan, the bank will remain private”, the head of the Presidential Administration Boris Lozhkin said in an interview.

Our view: 

Different representatives of the Ukrainian State have issued some POSITIVE statements about the bank lately, which on top of the successful restructuring of the bank notes maturing in 2016 should contribute to dispel the negative rumors disseminated around the bank. The public statements seem to indicate some compromise between the bank’s shareholders and the government as to the strategic role and position of the banking group in the Ukrainian economic environment. Nevertheless, we think that the risk of direct interference of the country’s banking and financial regulators into the management of the bank remains high until the bank finally settles its debt to the National Bank on refinancing credits and finally fixed the issue of related parties to the bank.

 

Serinus’ sales down 45% y/y, EBITDA down 71% y/y in 9M2015

Last Friday Serinus [SEN PW], an international oil&gas exploration and production company with assets in Tunisia, Romania and Ukraine, published its financial results for 3Q2015 and 9M2015. The company’s gross revenue was down by 45% y/y to USD 68 mn (net to Serinus: USD 54 mn) in 9M2015 and down by 56% y/y to USD 20 mn in 3Q2015 as a result of lower natural gas prices (-36% y/y in 3Q2015) and lower production (-28% y/y in 3Q2015). 

Serinus reported netbacks of USD 12.89/boe in Ukraine and USD 25.97/boe in Tunisia in 9M2015, down 62% y/y and 55% y/y, accordingly. Ukrainian netbacks in 3Q2015 were slightly higher at USD 15.65/boe due to lower effective royalties as a result of a one-time tax credit (arising from adjustments from prior periods). The company’s EBITDA fell by 71% y/y to USD 19 mn in 9M2015 as a result of higher royalties in Ukraine and lower commodity prices. Serinus reported a net loss of USD 33 mn for 9M2015, which also included a USD 44 mn impairment charge against its Tunisian properties (reevaluated due to lower prices of oil and gas).   

The company’s operating cash flow was down by 74% y/y to USD 14 mn in 9M2015; however net cash flow was down by 83% y/y to USD 11 mn as a result of WC movements. Serinus reported a net cash inflow from financing activity of USD 12.5 mn in 9M2015 due to higher borrowing related to the Tunisia and Romania projects. The company’s capital expenditures were down by 52% y/y to USD 24.6 mn as a result of lower drilling and exploration activity. Serinus reported a cash balance of USD 10.4 mn as of end-September 2015.

Our view:

The news is moderately NEGATIVE for the company. Although Serinus recorded higher netbacks in Ukraine in 3Q2015, this was mostly related to one-off tax adjustments, while realized natural gas prices continued to decline (USD 6.68/Mcf in 3Q2015) and cash generation was weak. While production in 3Q2015 was up slightly q/q (+2%), this was due to the start-up of the Sabria field in Tunisia, while production in Ukraine suffered from underinvestment. We expect the company’s results to be weak as well in 4Q2015, but improve substantially with the expected royalty rate decrease in Ukraine starting from 2016.

 

Cub Energy’s revenue down 32% y/y, EBITDA negative in 9M2015

Last Friday Cub Energy [KUB CN], a Ukrainian oil&gas exploration and production company, published its financial results for 3Q2015 and 9M2015. The company’s revenue was down by 32% y/y to USD 3.3 mn in 9M2015 and by 55% y/y to USD 0.6 mn in 3Q2015, while pro-rata revenue (including KUB’s 30% WI in Eastern Ukraine assets) was down by 45% y/y to USD 17 mn in 9M2015 and by 60% y/y to USD 5 mn in 3Q2015.  The company reported netbacks of USD 9.24/boe for its own fields in Western Ukraine and pro-rata netbacks of USD 14.88/boe in 3Q2015. KUB’s EBITDA was negative at USD 0.8 mn (including the income from equity investment) in 9M2015 compared to a positive EBITDA of USD 4.9 mn in 9M2014. The company reported a net loss of USD 2 mn for 9M2015.

KUB’s net operating cash flow was negative at USD 0.4 mn in 9M2015 compared to a positive cash flow of USD 5.5 mn in 9M2015. The company’s capital expenditures amounted to just USD 0.1 mn in 9M2015 compared to USD 6.2 mn in 9M2014. KUB reported a cash balance of USD 1.5 mn as of end-September 2015.

The company reported that it had successfully upgraded the separation and dehydration process at the RK facility in Western Ukraine.

Our view:

The news is moderately NEGATIVE for the company. Declining commodity prices and high royalty rates continued to pressure on KUB’s profitability in 2015, which resulted in underinvestment in the development of its own fields in Western Ukraine and the subsequent decline in production rates. We expect KUB’s results to be weaker in 4Q2015 as production rates will continue to decline, but improve substantially in 2016 with the expected royalty rate decrease.

We maintain our target price of USD 0.024 (CAD 0.032) for the company’s shares.

 

IMC’s sales up 2% y/y, EBITDA up 3% y/y in 9M2015

Last Friday Industrial Milk Company [IMC PW], one of the largest Ukrainian agricultural holdings, published its financial results for 9M2015. The company’s revenue was up marginally by 2% y/y to USD 100 mn in 9M2015. IMC’s gross profit was up by 11% to USD 68 mn in 9M2015, while the company’s EBITDA amounted to USD 60 mn (+3% y/y), which included USD 37 mn of gain from changes in fair value of agricultural produce and biological assets. IMC reported a net income of USD 20 mn in 9M2015, which included USD 22 mn of non-cash FX loss (adjusted net income: USD 42 mn).

The company’s net cash flow from operating activity increased by 51% y/y to USD 17 mn in 9M2015, mostly due to lower working capital needs. IMC’s capital expenditures amounted to USD 2.5 mn in 9M2015 compared to USD 25.8 mn in 9M2014. The company reported a cash outflow from financing activities of USD 15 mn as a result of the company’s strategy to reduce debt level. IMC’s total debt amounted to USD 109 mn as of end-September 2015, which implied a net debt to EBITDA ratio of 1.8x. The company’s cash balance amounted to USD 3 mn as of end-September 2015. 

Our view:

The news is POSITIVE for the company. Despite falling agricultural commodity prices, IMC managed to slightly improve its top-line figures and profitability as a result of significantly higher selling volumes of corn (+24% y/y to 475 ths tonnes) and sunflower (+75% y/y to 48 ths tonnes), while operating costs were lower in USD terms due to the effect of the UAH devaluation. However, we note the relatively low cash balance observed as of end-September, which indicates that the company might seek additional sources of funding.

 

Disclaimer

Although the information in this report has been obtained from sources which Empire State Capital Partners believes to be reliable and was collected in good faith, we do not represent or warrant its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and affiliates, either expressly or implied, and such information may be incomplete or condensed. Nor has the information and/or data been independently verified, and so is provided without further caveat regarding its reliability, suitability for commerce or specific purpose. 

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