March 02, 2018 | Cbonds
Expectations of a deal. We speculate that by May 2018 Metinvest will propose a deal to its creditors, and that the value of its outstanding bond will increase as a result. Metinvest’s motivation is to be able to pay dividends earlier than is possible under the current Cash Sweep mechanism. The deal will be either Restructuring (modifying parameters of the Cash Sweep) or Refinancing (issuing new debt for up to USD 2.3 bln with a buyback of the outstanding loans and notes).
Restructuring: dividend outflows beneficial to noteholders. The Restructuring deal will increase the note’s fair value by allowing for dividend outflows, reducing early note repayment and boosting return on noteholders’ capital by increasing the note’s average life.
Restructuring: fee and coupon cut offer value now, reduce risks. As part of a possible deal, Metinvest might propose cutting total interest on the bond by the Catch Up part (1.5%) in exchange for a restructuring fee, which could be value-enhancing for the holders.
Refinancing: a buyback above current market price. Rumors are circulating that Metinvest is seeking to redeem/refinance the entire USD 2.3 bln debt. To make it happen, we see the holding will have to issue USD 1-2 bln in new notes. This will require Metinvest buying back the outstanding notes at 104.9%-109.1%, or above the current market price, we estimate.
PXF lenders prefer Refinancing. Unlike the noteholders, which should cherish Metinvest’s note for its risk-reward profile, the PXF lenders might have comparable opportunities to invest elsewhere. This factor might be decisive in shaping the deal in favor of Refinancing, not Restructuring.
Recommendation: Speculative Buy. We recommend buying Metinvest’s note on expectations of the coming deal, with the fair value in the range of 104.9%–110.0% (current price: 102.6%).
Risks to our recommendation:
• Metinvest refinancing by May 2018 and redeeming bonds at par (as stipulated by bond documents) results in a fair value close to 100%. In our view, it doesn’t look material, as Metinvest will have to approach the existing creditors/noteholders in its refinancing task. Therefore, success in attracting new debt will depend on Metinvest’s ability to agree on a beneficial buyback price.
• No deal. If the deal is not reached, then the fair value of the note is 104.6%-109.1%, depending on Metinvest’s profitability and whether it attracts new borrowings in the future and redeems at par.
• Change of control due to the legal troubles of SCM, Metinvest’s majority owner, results in a fair value of 101%, or substantially less if the new owners default.
• Metinvest’s default, e.g. because of a dividend payment when it’s not allowed, results in a fair value below 100%.
|Status||Country of risk||Redemption (offer)||Volume||Emission Rating (M/S&P/F)|
|Full company name||Metinvest B.V.|
|Country of risk||Ukraine|
|Country of registration||Netherlands|