DTEK Energy offers to exchange existing debt for 10Y bonds, 6Y Oil&Gas bonds

Ukraine’s leading coal and power holding DTEK Energy
(DTEKUA) offered in late November to exchange most of its existing debt into USD
350 mln of DTEK Oil&Gas bonds due in 2026 and new DTEK Energy bonds due in
2030, Reorg Research reported. In its note, DTEK Energy stressed on Nov. 27
that it was not able to reach a deal with the ad hoc group of bondholders on
such conditions.

Based on the Nov. 27 offer, DTEK Oil&Gas bonds
will have a 7% cash coupon and will amortize in four equal annual installments
since December 2023. The total debt of DTEK Oil&Gas to DTEK Energy was USD
487 mln as of end-2019.

On top of that, DTEK Energy is offering to exchange
the remainder of its debt (including loans) into new DTEK Energy bonds with
ultimate maturity in 2030. The new bonds will offer 3.49% of fixed cash
interest and up to 3.51% of variable cash interest (payable in case the
company’s actual cash flow after debt service exceeds the planned value). The
company is going to direct 25% of its planned cash flow after debt servicing
towards the repayment of the new bonds at par annually. Besides contractual
repayment, the company will convene Dutch auctions to repurchase its bonds, at
least once a year.

DTEK Energy estimates that its cash flow before debt
servicing will be USD 74 mln in 2020, USD 92 mln in 2021, USD 222 mln in 2022,
will peak at USD 235 in 2024 and then will gradually decline to USD 109 mln in
2030. Its EBITDA is planned at USD 309 mln in 2020, to peak at USD 478 mln in
2024 and will then gradually decline to USD 207 mln by 2030.

Alexander Paraschiy: The company’s offer doesn’t look bad for bondholders, as it
effectively sets the minimum bond value (in NPV terms, assuming a 10.75%
discount rate) at 65% of the bond’s par value, based on our estimates, which is
close to today’s price of DTEKUA bonds. However, the problem is that the
potential ceiling for the bond’s value is limited to about NPV of 85% of par
(based on our estimates). Therefore, creditors’ potential upside is below the
price of DTEKUA bonds that was observed before the current crisis erupted.
Also, it indeed looks strange that despite being a cash-generating enterprise,
DTEK Oil&Gas will be effectively forgiven 28% of its obligations to the
distressed DTEK Energy. All in all, we see the potential for creditors to
demand more upside from the new DTEKUA bonds and better terms from DTEK
Oil&Gas.