ULF, Avangardco bond restructuring offers imply NPV over 30%

Bakhmatyuk-related agricultural and food holdings
Ukrlandfarming (ULF,  UKRLAN) and Avanagardco (AVINPU) published debt
restructuring offers to some of their bondholders, said on Jan. 2 Reorg
Research, a distressed debt information provider. The bonds offer a NPV of
about 35% of the original amount of bonds outstanding, assuming a 10% discount
rate, according to restructuring materials.

 

ULF offered a 50% haircut to par value of the bond as
of end-2016, based on information from Reorg Research. It proposed a coupon of
2.5% to be paid semi-annually (down from 10.875% originally). The restructured
bond would amortize by 10% in 2022, 15% in 2023, 20% in 2024, 2025 and 2026,
and 15% in 2027. One year after ULF’s Net Debt to EBITDA ratio falls below
3.0x, the company will offer additional recovery compensation: the bonds will
get an additional USD 54 mln tranche (10% of end-2016 par value) paying a 5%
coupon and maturing in five years.

 

ULF expects that its operating cash flow before
working capital changes will increase from USD 93.6 mln in 2017 to USD 154.9 mln
in 2019, and will be between USD 145 mln and USD 160 mln in 2020-2023, and then
will gradually grow to USD 196 mln by 2027.

 

Avangardco also offered a 50% haircut to par value of
the bond as of end-2016. It proposed a coupon rate of 3.0% for 2017-2019, 4.0%
for 2020-2021 and 5.0% afterwards, to be paid semi-annually (down from 10.0%
originally). The restructured bond would amortize by 10% semi-annually in
2023-2027.

One year after Avangardco’s Net Debt to EBITDA ratio
falls below 3.0x, it will offer additional recovery compensation: the bonds
will get an additional USD 22.2 mln tranche (10% of end-2016 par value) paying
a 5% coupon and maturing in five years.

 

Avangardco expects that its operating cash flow before
working capital changes will increase from USD 0.2 mln in 2017 to USD 29.2 mln
in 2019 and USD 37.0 mln in 2020, and will gradually grow to USD 55 mln by
2025.

 

Alexander Paraschiy: The
suggested restructuring offer implies a NPV of the ULF bond of 32% of the
current par value (assuming a 12% discount rate) and about 36% assuming
recovery compensation starts working as of 2025. For Avangardco’s bond, the NPV
would be 36% of the current par value (and 41% in case of recovery compensation
as of 2023).

 

The offers look generous taking into account the
current prices of ULF and Avangardco bonds (21% and 24% of par, respectively).
It is very likely that bondholders will be glad to approve the offered
conditions. But as we wrote many times before, the most important issue for
Bakhmatyuk’s creditors is not tiny cash flow, but a lack of trust in the
results of his companies and in their investment decisions.

 

Therefore, it will be vital for the bondholders and
banking creditors to gain better access to control over the spending of
Bakhmatyuk’s companies, via their representatives in the controlling bodies of
ULF and Avangardco. Without such control, a further debt restructuring is very
likely.

We are not rating the bonds due to the still-huge
risks, but we do not rule out positive market reaction to the fact that the
companies finally presented some tangible offer after more than nine months of
silence.