April 08, 2016 | Cbonds
|Fitch Ratings has affirmed Ukraine-based metals group Metinvest B.V.'s (Metinvest) Long-term Issuer Default Rating (IDR) at 'RD' (Restricted Default). The company's outstanding notes have been affirmed at 'C'/Recovery Rating 'RR6'. A full list of group ratings is attached at the end of this commentary.|
The ratings have been affirmed pending the outcome of current negotiations between the company and its creditor groups regarding a comprehensive debt restructuring plan. The current scheme of arrangement approved in January 2016 provides for a moratorium on creditors taking enforcement action before 27 May 2016. While we understand from management that the broad parameters of a restructuring plan have been agreed with creditors there is no certainty that an agreement will be finalised by the expiry of the current agreement, raising the possibility of an extension to the current agreement.
KEY RATING DRIVERS
Scheme of Arrangement Agreed
Key terms under the existing scheme of arrangement include that the outstanding Eurobonds and Pre-Export Finance (PXF) loans be combined into two new instruments on a par basis. That two separate groups are maintained reflects differences in applicable interest rates and security.
Capex will be limited to USD28m per month with unspent capex to be carried forward to subsequent periods. Metinvest also agreed to pay 30% of accrued interest on the outstanding bonds and PXF facilities accrued prior to 31 January 2016 and 30% of interest accrued up to the scheme termination date of 27 May 2016. In addition, Metinvest agreed to pay an additional amount of accrued interest if unrestricted cash is above USD180m. The remaining accrued but unpaid interest is to be capitalised. To date Metinvest has made all scheduled payments in respect of interest due up to but excluding 15 March 2016. Dividend and principal repayments will not be made under the scheme. The company has also recently confirmed the subordination (turnover subordination) of shareholder loans and the granting of new or amended/restated suretyships from Ilyich Steel in favour of PXF lenders and the Notes Trustee.
No Operational Improvement
Under the terms of the scheme of arrangement Metinvest has commenced reporting financial and operational performance on a monthly basis. Latest results for December 2015 and January 2016 indicate no stabilisation in operational performance, with overall revenue continuing to fall and group EBITDA remaining negative. The group continues to burn cash with reported cash and equivalents of USD138m as at 31 January 2016. At present the group is holding back capex (USD15m in January 2016 compared with USD32m in December 2015) to limit cash burn.
Damaged Operations Reduce Cash Generation
Military actions in the Donetsk and Luhansk regions continue to severely impact the company's main metallurgical and coal assets and the regional transport infrastructure. The company's Ilyich Steel and Azovstal steel plants (77% of total crude steel production in 9M2015) are located close to the conflict zone and decreased their steel production by 30% and 8% y-o-y respectively in 9M2015, while the Yenakiieve steel plant (23% of total crude steel production in 9M2015) is located in the conflict zone, and decreased its production by 22% y-o-y.
The Avdiivka coke-processing plant was damaged several times since August 2014, causing total coke production volume to fall by 33% yoy in 9M15. The company's iron ore mining activities are operating normally. Supplies of coking coal are dependent on third-party supplies, as one of the group's coal companies - Krasnodon Coal- significantly decreased delivery of its production to the processing coke facilities due to the damaged rail infrastructure.
Exposure to Ukraine
The rating reflects the exposure of Metinvest to Ukraine as the source of raw materials, the location of its major plants, and as a key end-market for its products. It also reflects high exposure to geopolitical risks in the Donbas region, where the company's main assets are located, generating significant risk of further operational disruption. Metinvest, as with other Ukrainian corporates, does not have access to international markets for refinancing of upcoming maturities and can only rely on its internally generated cash flows.
Fitch's key assumptions within our rating case for Metinvest include:
- Fitch iron ore price deck: USD45/t in 2016 and 2017, USD50/t in 2018 and in the long term
- USD/UAH 25 in 2015
- Production volumes in line with 2015 results
- No dividends payments
- Capex of USD300m in 2015 and USD320m in 2016
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Metinvest entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-Successful financial restructuring, which will lead to 'RD' rating being revised to reflect the appropriate IDR for the issuer's post-exchange capital structure, risk profile and prospects in accordance with Fitch's relevant criteria.
As of 31 January 2016 Metinvest had USD121m unrestricted cash, significantly less than the USD300m it considers appropriate in the ordinary course of its business, and USD2.9bn outstanding current debt, of which USD247m as of 8 January 2016 are trade finance facilities.
The company's operations are reliant on the existence of those trade finance facilities as they are the company's main source of the working capital financing. These lines are not committed; hence Metinvest is exposed to a significant risk of a further decrease in limits or additional drawing restrictions imposed by its trade finance banks, as many of them have done over 2014 and 2015 by withdrawing their facilities, reducing the outstanding amount by USD665m since 2013.
Absent the successful debt restructuring plan to be agreed by 27 May 2016 at the end of the standstill/moratorium periods, or an extension of the standstill/moratorium, the company would be forced to file for bankruptcy and would be likely to lose all its trade finance lines. This would have a significant impact on the company's ability to maintain its business operations. On 11 January 2016 Metinvest had USD637m current outstanding payment defaults under its PXF facilities and is liable to repay another USD140m between January and May 2016.
|Full company name||Metinvest B.V.|
|Country of risk||Ukraine|
|Country of registration||Netherlands|