Ukraine Markets Daily (December 23, 2014)

Market news

  • The EIB and WB will provide EUR 600 mn and USD 378 mn in loans to Ukraine 
  • Russian restrictions on grain exports push wheat futures up 
  • Ferrexpo’s iron ore production up 3% in 11M2014
  • Mriya asks creditors to sign a standstill agreement

Market comment

The UX Index was up by 0.9% in UAH terms on Monday, and up by 0.4% in the USD terms. At the same time, the PFTS index was up by 0.5% in UAH terms. Nine out of ten companies in the UX index were up in the UAH terms, with the largest increase in prices observed for Ukrnafta (4.3%), Enakievo MP (2.3%) and Alchevsk MP (2.0%).

 

On the interbank exchange market, the USD/UAH spot rate was up by 0.5% with the closing price of 16.25 (mid price), according to Minfin.com.ua, while the average exchange rate reported by the NBU was 15.85.

Ukraine 5-year credit default swaps were up by 6.8% on Monday.

 

The EIB and WB will provide EUR 600 mn and USD 378 mn in loans to Ukraine

The European Investment Bank (EIB) will provide two loans to Ukraine under the Bank’s 2014-2016 EUR 3 bn lending plan to Ukraine. EUR 200 mn will be directed to finance early recovery of small-scale damaged infrastructure at conflict ravaged parts of Eastern Ukraine, and EUR 400 mn will be forwarded to support projects promoted by SMEs and midcaps. The latter loan is intended to address the scarcity of long-term funding in the private sector in Ukraine which has been aggravated by the current political and economic unrest.

At the same time the World Bank approved USD 378 mn loan for the Second Power Transmission Project in Ukraine. The project aimed to improve the reliability of the power transmission system and support the implementation of the Wholesale Electricity Market. With this new project, the Bank is stepping up its support for energy sector reforms in Ukraine.

The project is part of the World Bank Group’s overall assistance to Ukraine announced in March 2014. World Bank has pledged up to USD 3.5 bn of new lending for Ukraine, of which over USD 2.5 bn has already been provided.

Since the start of EIB operations in Ukraine in 2007 its lending commitment in the country has reached a total of EUR 3.1 bn. Earlier this year the EIB signed loans to finance the upgrade of gas transmission infrastructure along the Urengoy-Pomary-Uzhgorod pipeline (EUR 150 mn), the improvement of the storage and food-processing infrastructure of the MHP Group (EUR 85 mn) and LLC Firma Astarta (EUR 50 mn), and the extension of the Beskyd Railway Tunnel (EUR 55 mn).

Our view:

The news is positive for the Ukrainian economy. Continued Ukrainian co-operation with EIB and the World Bank indicates investors’ confidence in further economic development of the country. We also lay great hopes to the donors’ conference, which the government intends to hold in February-2015 and which should help attract more investors to the country.

 

Russian restrictions on grain exports push wheat futures up

According to a press-release of the National Association of exporters of agricultural products (NAESP) in Russia, the largest Russian grain exporters ceased purchases of grain until the situation in the local market stabilizes.  Following the collapse of the ruble in Russia the rise in grain prices has accelerated: over the past week the ruble was devalued by 7-8%, while grain prices rose by 5.7%. Wheat prices went up by 50% in ruble terms starting from the beginning of the season, despite one of the largest harvests of grain collected in the country in recent years. 

As was reported by NAESP, there were some indications that the Federal Service for Veterinary and Phytosanitary Surveillance (FSVPS) unofficially imposed some restrictions on grain exports, namely, selective issuing of phytosanitary certificates only for grain that is sent to Turkey, Egypt, Armenia and India. In addition, the Russian Railways have limited shipments of grain for export for an indefinite period, referring to the "failure to discharge and receive grain wagons" and problems with delay of trains, according to RBC (a news agency in Russia). Moreover, according to the recent statement of the Russian PM Dmitriy Medvedev, the Russian government will introduce temporary administrative measures to limit the export of grain, including export duties and restrictions of the maximum weight load of vehicles transporting grain to export.

According to the Russian Deputy Prime Minister Arkady Dvorkovich, Russia could export 28 mn tonnes of grain without damaging domestic needs, of which 21 million tonnes had already been exported since the start of the 2014/2015 marketing year.

The prices of March 2015 wheat futures on the Chicago Board of Trade has grown more than 28% since the September low of USD 4.88 per bushel, partly on concerns about Russian supply. On Monday, they rose by almost 2% during the intraday trading, before climbing down to USD 6.23 per bushel.

Our view:

The news is POSITIVE for the Ukrainian grain producers and exporters, namely Kernel [KER PW], Astarta [AST PW], IMC [IMC PW] and Ukrlandfarming. We believe that grain prices might go up even further once export duties are introduced in Russia, as the country’s share in global wheat and barley exports was approx. 11% in 2013/2014 marketing season, according to USDA.

 

Ferrexpo’s iron ore production up 3% in 11M2014

According to the press-release of Ferrexpo [FXPO LI], a leading Ukrainian producer and exporter of iron ore pellets, the company’s total pellet production for 11M2014 increased by 3% y/y to 10.2 mn tonnes. However, Ferrexpo notes that in December 2014, total pellet production is expected to fall below plan by approximately 140 ths tonnes as a result of reduced power availability during the peak demand hours of the day due to lower domestic coal production and low stocks at coal- fired power stations. 

Ferrexpo also stated that should the situation with power outages remain unchanged, it expects the capacity of its processing facilities to remain at around current levels in 1Q2015, after which it is expected to improve in 2Q2015 when peak power demand reduces following the winter months. Moreover, the company stated that in the event of continued power constraints in 1Q2015, Ferrexpo will increase output of 65% Fe premium pellets and prioritize delivery under long term contracts.

The company also noted that due to the Ukrainian currency depreciation Ferrexpo’s C1 cash cost of production averaged USD 44 per tonne in November (compared to an average cash cost of USD 59.8 in 2013) Ferrexpo stated that its liquidity in Ukraine is currently being held stable to ensure operations are shielded as much as possible from further disruptions and are now sufficient to fund approximately two months of operating and capital expenditures at current exchange rates.

Our view:

The news is moderately POSITIVE for Ferrexpo. A decrease in the production costs will allow the company to stay profitable amidst the period of low iron ore prices (China 62% Fe price is currently quoted at USD 69.2), while converting to a higher-grade premium pellets  (65% Fe content) could increase the realized sale price. However, we expect that due to power outages and decreased global demand the company’s production in 2014 will fall 7-8% short of 12 mn tonnes.

Ferrexpo currently trades at 2015 EV/EBITDA multiple of 2.2x and 2015 P/E multiple of 4.3x vs. global EV/EBITDA multiples of 4.6x and P/E multiples of 9.3x according to data compiled by Bloomberg.

 

Mriya asks creditors to sign a standstill agreement

According to the statement on the company’s website, Mriya encouraged lenders to show a consolidated position in their desire to save the company. As was stated by the company, most lenders have not approved the “road map” plan for Mriya, and do not act in coordination.  Mriya noted that certain creditors continue taking measures to return their share of debt, in particular, Erste Group demanded for the company’s majority shareholder, HF Assets Management, to be recognized as bankrupt.

Meanwhile, according to the company, without leased equipment and emergency funding Mriya will not be able to continue operations, which could soon lead to its bankruptcy. Given the situation, owners and management of the company have proposed to transfer their rights of ownership of the Cyprus-based holding company to a “special purpose vehicle”, which will be owned by the majority of lenders (banks and bondholders), or their authorized representatives (credit committees). 

Moreover, Mriya's owners have stated that they are ready to call an extraordinary general meeting of the Cyprus-based holding company and replace its representatives on the board with representatives of creditors. In response, Mriya calls on lenders to show a consolidated position and sign a standstill agreement to end negotiations on restructuring before January 31, 2015.

Our view:

The latest statement by the company seems like the first concrete proposal from the owners. The fact that the owners are ready to transfer control to the creditors is definitely a positive sign. However, we believe that the conflict between the company’s owners and creditors still continues, as last week creditors of Mriya said they presented the Ukrainian agricultural group with their own restructuring plan, which included appointing a chief restructuring officer. Thus, it may be the case that the terms of restructuring proposed by Mriya’s owners are not beneficial to creditors, which makes it more difficult to reach a consensus.

 

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. 

This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report is confidential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.

Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has verified the contents of this document and, accordingly, no research analyst, Empire State Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.