Ukraine Markets Daily (March 23, 2017)

Market news

  • Metinvest completed restructuring its three Eurobond issues due in 2016-2018
  • Ferrexpo reports revenue increase of 2.6% y/y in 2016

Market comment

The UX index decreased by 0.5% Yesterday while the PFTS index was down by 0.4%. The WIG-Ukraine index declined by 0.4%. On the interbank exchange market, the USD/UAH was up by 0.1% tp UAH 26.90 (mid price), according to Thompson Reuters. The official exchange rate reported by the NBU was UAH 26.92


Metinvest completed restructuring its three Eurobond issues due in 2016-2018

On March 22, 2017, Metinvest B.V. ( “Metinvest”, “the Group”, or the Company) announced the completion of the process to restructure USD 2.3 bn in financial debt. As a result of the operation, three series of guaranteed notes – due in 2016, 2017 and 2018 – have been cancelled and delisted and replaced with new listed senior secured notes totaling approximately USD 1.2 bn, due in December 2021 and with new terms and conditions. In addition, four PXF syndicated loan facilities have been combined into one facility of approximately USD 1.1 bn due in June 2021. Under the restructuring agreement, the new notes are issued with a coupon rate of 10.875% payable in equal quarterly installments. The restructuring provides cash flow flexibility to the Group through a payment of only 30% of accrued interest in cash until the end of 2018, the Company stresses. A waterfall coupon payment schema is allowed for the first year of the notes. During the initial period of the new notes, beginning from May 18, 2017 and ending on February 19, 2018, the coupon payments are distributed between Payment in Cash and Payment in Kind (one-year PIK Notes issued in form of additional notes), according to the following schedule: 2.793% of the coupon payment is made in cash, and the other part in Cash or in Kind depending on liquidity position. The issuer may also pay 1.5025% additional coupon payment in cash pending availability of free fund. In the meantime, the agreement allows a cash sweep arrangement, supposing that each Note shall be partially repaid, and redeemed in installments on each Interest Payment Date. The schema allows an early partial or full redemption of the notes. The terms of Metinvest’s new debt instruments provide, in respect of the new PXF facility, two years of grace period on the scheduled amortization of principal

Our view:

The completion of the debt operation is highly POSITIVE, especially considering the challenges which arose before the company in connection with the seizure of the assets located in the disputed territories of Donbas by the pro-Russian forces, and subsequent freezing of the trade and economic relations with the self-proclaimed republics. Though noting that the debt operation resulted in high liquidity pressure on the company by the year 2021, we see the consolidation of the outstanding debts into only two Eurobond issues to be supportive to a more efficient debt management policy, whereas leaving the liquidity buffer needed to boost the company’s development and competitive strategy against the complicated operating environment.


Ferrexpo reports revenue increase of 2.6% y/y in 2016

On March 22, 2017, Ferrexpo plc (the Group, Ferrexpo, or the Company) announced its financial results for the year ended 31 December 2016. The Goup’s revenue increased by 2.6% y/y to USD 986 mn, nurtured by an increase in sales volume by 3% y/y to a record 11.7 MT thanks to higher sales in Western Europe (45.4% y/y), North East Asia (30.4%) and Turkey (27.5% y/y). Premium 65% Fe made 94% of sales volume (up from 88% in 2015), with 6% coming from Ferrexpo Basic Pellets of 62% Fe (12% in 2015), and 1% from Ferrexpo Pellet Feed (0.4% in 2015). In the meantime, production costs declined by 10.3% y/y to USD 400 mn, thanks to the depreciation of the Ukrainian currency, the dramatic decline in oil and gas prices, and internal cost reduction initiatives. Ferrexpo reports an EBITDA increase of 20% y/y to USD 375 mn on higher revenues and lower costs, and including operating foreign exchange gains of USD 14 mn (USD 25 mn in 2015). The company declared a profit before tax in the volume of USD 231 mn (USD 25 mn in 2015), leaving a net profit of USD 189 mn (USD 31 mn in 2015). Operating cash flow before working capital changes amounted to USD 358 mn (27% y/y), ending in a robust net cash flow from operations in the volume of USD 332 mn (USD 128 mn in 2015). Ferrexpo used USD 43 mn in investing activities (-79% y/y), mostly on maintenance works. The company reported a cash outflow of USD 177 mn (-64% y/y) on financing activities mostly related to debt repayments. The overall development resulted in a net cash inflow of USD 111 mn in 2016, leaving the company with a balance of cash and cash equivalent of USD 145 mn (309.7%) as of end-2016. Ferrexpo’s total assets fell by 5.1% to USD 1163 mn, mostly due to depreciation of properties, plants and equipement (-12.2%), as well as reduction in the volume of recoverable taxes (-74.3%). Total liabilities declined by 14.5% to USD 840 bn, mostly thanks to debt repayments. Gross debt decreased by 32.2 y/y to USD 733 mn, thanks to the USD 196 mn debt settlement. The Group’s ratio of Net debt to EBITDA improved considerably from 2.78x in 2015 to 1.57x in 2016, thanks to the revenue growth and the reduction in net debt by 32% y/y to USD 589 mn. The company’s equity grew by 32.5% to USD 323 mn on increasing reserves (5.8%) and higher retained earnings (10.3%). An optimistic vision for 2017 allowed the company announcing a return to dividends in 2017 in the total volume of USD 38 mn (evenly distributed between ordinary and special dividends). In 2017, the Group has USD 201 mn of debt amortizations, according to Ferrexpo estimates

Our view:

The results POSITIVELY demonstrate Ferrexpo’s strong cash generation capacity, justifying the Company’s strategy of moving towards the segment of premium pellet, and geographically towards Western Europe, Northern Asia, and Turkey. The Group also benefitted from the depreciation of the Ukrainian currency, low international energy prices and transport costs, together with the commodity price rally. The company’s profit margin, however, may be eroded in 2017 as a result of additional production and logistic costs ensuing from the negative development in the relations between Ukraine and the disputed territories of Donbas, together with uncertainties with the global economy