Avangardco won’t pay dividends before it deals with bond holders

The management of Ukraine’s largest egg producer Avangardco (AVGR LI, AVINPU) sees working capital outflow of USD 58 mln, CapEx of USD 40 mln in 2015. This was stated by the company’s CEO during her Mar. 31 conference call.The amount of such investments exceeds the current cash position of the company, which the management estimates at USD 95 mln.

Avangardco admits that the market power of the company has worsened amid macroeconomic turmoil in Ukraine. The company has to sell more of its products on credit, thus increasing working capital outflow, despite the fact it has already invested heavily in working capital in 2012-2014.

With the deterioration of fundamentals, Avangardco might be close to breaching its 3x total debt to LTM EBITDA covenant. Should this covenant be breached, the ability of the company to raise new debt would be limited, which is the most material consequence. In addition, Avangardco would have to negotiate certain waivers with banking lenders, but it does not expect that worsening of the liquidity position would lead to the acceleration of the debt repayment.

The management sees flat yoy sales of shell eggs in 2015, or around 4.3 bln pieces, and it also sees the selling price of eggs in dollar terms remaining flat at USD 0.063 per piece (a 74% yoy increase in hryvna terms).

Avangardco voiced that it is considering several options regarding its scheduled USD 200 mln Eurobonds redemption in October. Refinancing with some Western bank was mentioned as one of the options. The company’s CEO commented that the decision regarding payment of dividends will be approved after the issue with bonds is set. The company was initially planning to pay dividends (USD 0.4625 per DR) by end-2014, but it later decided to postpone the payment to March 2015.

Roman Topolyuk: The indicated increase in egg selling prices, however unrealistic it looks, will not be enough for Avangardco to generate enough cash flow to service its debt, and invest in capex and working capital. In our estimates, the company would have to increase selling prices in hryvna terms at least 2.2x to bring it to USD 0.084 per piece, a level observed in 2013, and to compensate for the hryvna devaluation. Should the hryvna devalue more, the ability of Avangardco to generate cash would subside further and the liquidity gap would widen.

In such circumstances, we see it is inevitable that Avangardco will restructure its Eurobonds. In our view, an option to refinance the notes does not look viable. The macro environment is not suitable for that, and company’s ability to attract funds seems to be limited even without the tough macro environment. This can be concluded from the unsuccessful placement of convertible papers of Ukrlandfarming in late 2014. Pushing the bulk of maturity to later periods is the most likely approach the company would pursue.