DTEK draws closer to Russian assets sale for USD 436 mln

Ukraine’s leading coal & power holding DTEK Energy (DTEKUA) released a letter to bondholders on June 17 asking them to approve a complicated transaction that will result in the sale of its Russian assets in exchange for debt reduction by USD 436 mln. The holding will need the approval of more than 25% of bondholders to complete the deal. The deadline for receiving written consent from bondholders is June 29, which may be extended.

The assets that DTEK Energy is going to divest are one coal mine and one coal enrichment factory, located in the Rostov region of Russia. The Russian assets produced 2.1 mmt and 1.9 mmt of coal in 2014 and 2015, respectively, or less than 7% of DTEK’s total mining. Their revenue was USD 145 mln and USD 114 mln in 2014 and 2015, respectively, or 1.9% and 2.7% of the holding’s total. Their EBITDA was USD 41 mln and USD 29 mln in 2014 and 2015, respectively, or 4.1% and 15.3% of the holding’s total. As a result of the deal, DTEK expects its total debt will decrease by about 17%.

Alexander Paraschiy: We expect the bondholders will vote in favor of this deal, which will enable DTEK Energy to significantly decrease its leverage, with no harm to its integrated coal & power chain and with minimal harm to its P&L and cash generation potential. We view the possible failure of this deal, with an EV/sales multiple of nearly 4x, as one of the key risks for bondholders. We saw recently the risk for the deal has increased as the operational performance of DTEK’s Russian mine worsened in 1Q16 (coal mining fell 24% yoy, based on our calculations). With the June 17 letter, DTEK is getting closer to finishing the deal, which adds some optimism for the successful and mutually beneficial restructuring of the holding’s other debt. Thus far, we remain neutral on the price performance of DTEKUA bonds, given they trade close to what we estimate as far value, 60 cents per dollar of par.