Ukrlandfarming: defending the core (November 24, 2016)

  • The Eurobonds of Ukrlandfarming (“ULF”), a major Ukrainian agroholding, have declined in prices by 40% YTD amid the uncertainty of the operational environment, company’s continued debt restructuring efforts and the beneficial owner’s standoff with the National Bank of Ukraine (“NBU”) regarding his personal liabilities to the NBU.

We note that the market has overreacted to the news flow, and consider the expected YTM of 55% (post-restructuring) as being highly-attractive compared to other Ukrainian corporates.

  • ULF reported a net profit of USD 0.2 mn in 1H2016, therefore returning to the positive territory after having being in losses over the two previous years of 2014 and 2015.

The revenue of ULF fell by 13% y/y in 1H2016, undermined by the turbulent market and operating environments in Ukraine and the MENA regions, coupled with low grain and agricultural products prices on global markets, as well as shrinking consumption and declining prices on the domestic market. The company’s balance of cash and cash equivalent contracted by 51% y/y to USD 49 mn as of end of 1H2016, showing therefore the company to continue losing liquidity, and hardly sufficient to meet all its current financing needs. ULF’s EBITDA has been steadily shrinking over the last two years, declining by 44% y/y in 2015 to fall further by 40% y/y to USD 135 mn in 1H2016, as a result of the adverse economic and operating environment.

  • A full restructuring of ULF’s debt, currently standing at USD 1.68 bn, remains critical for the financial stabilization of the company, as its ratio of net debt to EBITDA stood at 12.07x in 1H2016, while the company is facing a heavy debt payment schedule of up to USD 840 mn in 2018, on background of further uncertainties in its core crop and egg businesses.

ULF managed to restructure over USD 1 bn of its loans and borrowings as of end of 1H2016 on aggregate. However, a standoff between the major shareholder of the company Oleg Bakhmatyuk with the National Bank of Ukraine (NBU) about UAH 11 bn due by two banking assets of the businessman, declared insolvent by the Central Bank in 2015, on NBU refinancing loans came across the path of ULF towards financial stabilization.

  • We consider that the standoff between the National Bank and Oleg Bakhmatyuk should not affect the operations of ULF. In our view, the negotiations will end in a restructuring deal, supposing a maturity extension on the liabilities to the National Bank in the amount of up to UAH 8.5 bn, and an amortization schema of five to seven years.
  • Meanwhile, we think that ULF will seek a maturity extension on its USD 500 mn Eurobonds due in 2018 by up to three years.

Considering that the company has already agreed on a provisional restructuring schema for the payments on the Eurobonds in 2016, redistributing the coupon payments for the year into Payment in Kind and Payment in Cash, we expect ULF to seek a restructuring solution along the same schema as for Avangard, allowing no write-off on the debt principal, no change in the coupon rate, and repaying the debt and the accrued unpaid interest at maturity. We estimate such restructuring terms to be fairly attractive, estimating the bond YTM to reach nearly 55% if purchased at current market prices.