Metinvest considering liability management move, media report

Ukraine’s leading
steel holding Metinvest (METINV) wants more flexibility with dividend payouts
and is therefore considering a liability management move that might include
issuing new Eurobonds in January-February 2018 and refinancing its outstanding
Eurobonds, according to a Dec. 13 report by the Reuters news agency. It cited
an anonymous investor who claimed to have recently met Metinvest
representatives on their road show. The investor underlined that Metinvest’s
margins and cash flows are currently significant.

Dmytro Khoroshun: Metinvest is generating too much
money amid the current restrictions related to the recent debt restructuring,
which seem very outdated and in need of revision. Under the current
restrictions, if the margins and cash inflows remain at high levels, Metinvest
would be obliged to quickly redeem, at par, its Eurobond, shortening
substantially this Eurobond’s effective duration, which would not serve the
best interests of bondholders, in our opinion.

We think it might be
beneficial to Metinvest and the bondholders, firstly to allow the cash to get
out via channels such as increased CapEx or relaxed dividend restrictions, and
secondly to reduce the risks related to the effective duration of Metinvest’s
traded debt, including issuing a standard Eurobond without early redemption
options.

If, as reported by
Reuters, Metinvest pushes for relaxing dividend payment restrictions, then we
think the holding would be inclined to find common ground with the bondholders,
and a redemption of the outstanding Eurobond at its market price seems
achievable.

To summarize, the current restrictions guide Metinvest
to a low-debt state via one of the shortest routes, and this is not wanted by
neither the holding (it might want to pay dividends or to spend more on CapEx)
nor the bondholders (who might not want to reduce the effective duration of the
highly lucrative Eurobond). Nevertheless, we underline the risk that the
margins and cash flows might drop sometime in the future, and that the current
restrictions and their targeted low-debt state, if abandoned in early 2018,
might seem desirable again in retrospect.

Some of Metinvest’s peers are working hard on reducing
debt to low levels. For example, Vale (VALE US) seems to be preparing for
operating under the conditions of very low iron ore prices. Even though
Metinvest’s vertically integrated model might be more robust than that of a
pure iron ore miner, we think that Metinvest and its creditors, including the
class of PXF lenders, need to consider carefully the risks of abandoning the
low-debt target.

We are keeping our neutral view on METINV Eurobonds.