Ferrexpo wants to restructure its $500 million debt. The reason is Ukraine's low credit ratings.
Ferrexpo (UK), which controls the Poltava and Yeristovo Mining and Processing Plants (GOKs), offered its $500 million Eurobond holders a debt restructuring. In October 2014, Rinat Akhmetov's Metinvest made a similar offer to European creditors.
Ferrexpo's proposals are as follows: $500 million in Eurobonds with an interest rate of 7,875% and a guaranteed repayment date of April 7, 2016, will be exchanged for new Eurobonds with an interest rate of 10,375% and a guaranteed repayment date of April 7, 2019. At the same time, an amortization mechanism is provided for the repayment: the company will pay 50% of the par value on April 7, 2018.
Previously issued bonds whose term has expired will be redeemed as follows: 20% - prepayment of the par value, 80% - will be paid in new bonds.
The international rating agency Fitch assigned the company's planned Eurobond issue a preliminary CCC rating. Ferrexpo expects to sell at least 60% of the new Eurobonds, worth $300 million.
A good bond is worth more than money
Ferrexpo's offer came as a surprise to the financial and industrial markets. "The market wasn't quite expecting it, as their maturity date isn't coming up anytime soon. However, this move is entirely understandable: for now, they can extend the maturity of their securities and hedge their bets for next year without any losses," says Sergey Fursa, a debt securities sales specialist at Dragon Capital.
I don't quite understand how to sell these new bonds to investors. Ferrexpo has over $600 million in cash on its balance sheet. And it's always maintained that balance. Even when they took out these loans, they always had the largest cash reserve among the Ukrainian companies that issued similar bonds. Ivan Uglyanitsa, investment analyst at DCH Investment
He is supported by Roman Topolyuk, an analyst at Concorde Capital. Between now and April 2016, when Ferrexpo's Eurobonds mature, Ukrainian companies' repayments on corporate and quasi-sovereign Eurobonds, according to current schedules, total $2,87 billion. However, only one borrower, Myronivsky Hliboproduct, has already reached an agreement with its creditors to refinance its debt. Others may find themselves at greater risk.
"2015 will be a challenging year for both borrowers and holders of Ukrainian bonds, so it would be beneficial for Ferrexpo to agree on a new bond maturity date and repayment schedule before creditors reach a certain point of exhaustion," explains Topolyuk. "Furthermore, if the majority of bondholders support the latest restructuring proposal, Ferrexpo's debt repayment schedule will be relatively even. It will better align with the company's expected operating cash flow, compared to the current one, where the peak repayments occur in 2016."
The prudent Zhevago took this step even though the company's solvency was in good shape. "I don't quite understand how to sell these new bonds to investors. Ferrexpo has over $600 million in cash on its balance sheet. And it always maintains that balance. Even when they took out these loans, they always had the largest cash reserve among Ukrainian companies that issued similar bonds," emphasizes Ivan Uglyanitsa, an investment analyst at DCH Investment.
The near-junk rating assigned by Fitch to the planned bond issue (Moody's simultaneously affirmed the company's Caa2 corporate credit rating) is linked not to the company's financial condition, but to Ukraine's country rating, as the company's main assets are located there. If this link were removed, the company's rating would be investment grade," Uglyanitsa believes.
Considering that analysts call Ferrexpo's offer quite "generous," the exchange is likely to take place. "The restructuring terms may suit those investors willing to accept the high country and industry risks of Ferrexpo's new Eurobonds in exchange for higher yields," explains Alexander Martynenko, a financial analyst at ICU Group's mining and metals sector. However, the expert believes that Ferrexpo will not be taking out new loans in the near future.
We're increasing the speed
Ferrexpo has already reported that, based on its 2014 results, it increased pellet production by 1,9%, or 208,200 tons, compared to 2013, to 11,02 million tons. Of this total, 5,2 million tons were produced from ore with a 62% iron content and 5,8 million tons from ore with a 65% iron content. Following the restructuring and extended debt repayment periods, Ferrexpo plans to completely transition to pellet production from ore with a 65% iron content in the near future. In the long term, it plans to also transition to pellets with a 68% iron content.
With significant revenues from pellet exports, Ferrexpo has been actively modernizing and developing its production facilities over the past few years. The company is now effectively in the final stages of implementing investment projects at its existing facilities.
The higher the iron content of a product, the higher its price on the global market. This is especially relevant for Ukrainian iron ore producers, more than half of which is exported—approximately 45-47 million tons. Due to falling prices in 2014, export volumes amounted to $3,3 billion, compared to $3,7 billion in 2013. And prices will continue to fall in 2015. Given the expected commissioning of new mining capacity in Australia and Brazil, the market may face an even more significant drop in ore prices than experts currently predict: by 21% to $75 per ton.
With significant revenues from pellet exports, Ferrexpo has been actively modernizing and expanding its production facilities over the past few years. The company is now effectively in the final stages of implementing investment projects at its existing facilities.
"At the same time, Ferrexpo has postponed its main, expensive development project, the feasibility of which has been under consideration for the past three years: the construction of the Yeristovsky Mining and Processing Plant for the production of commercial concentrate. Only the mining process at the deposit is being maintained there. Ferrexpo currently plans to minimize capital expenditures on this project and develop it based on its available current operating cash flow. This means not shifting risks to creditors," explains Roman Topolyuk.
Alexander Martynenko also confirms Ferrexpo's cautious approach to lending. He says that Ferrexpo had long been planning new borrowings on the market, but management was unsatisfied with investor terms, as was the case, for example, in early 2013, when the company postponed its Eurobond issue. "Now, due to investors' significantly worsening assessment of Ukraine's creditworthiness and pessimistic expectations regarding global iron ore prices, Ferrexpo's issuance of new Eurobonds in the near future does not appear feasible," Martynenko concluded.
This means that the company's most ambitious project—the construction of the Belanovske Mining and Processing Plant (Poltava Oblast), the largest in Ukraine—is being delayed for a very long time. Until recently, the company had been investing small amounts in the gradual development of the Belanovske deposit (stripping operations, infrastructure). However, under the current circumstances, this project is not a priority.
"The key focus for mining companies now is preserving cash to maintain financial stability. Active development of the Belanovskoye deposit is not expected until the Yeristovskoye deposit reaches its design capacity, which is 25 million tons of ore per year. This requires the construction and launch of a full-scale mining and processing plant," states Roman Topolyuk.
The expert identified ore price stabilization as another critical condition for the development of investment projects in Ferrexpo's portfolio, as well as other mining and metals companies. However, no one can currently pinpoint a precise date for this.
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