DTEK improves exchange conditions for its April Eurobond

Ukraine’s leading utility holding DTEK (DTEKUA) has amended its exchange offer for USD 200 mln worth of Eurobonds maturing on April 28, according to its Apr. 1 release. In updated conditions, DTEK re-iterated its wish to exchange each existing bond for a mix of 20% of cash and 80% of new bond, as was proposed on March 23. Though, this time the holding offers a higher early instruction fee (3% vs. 2% offered earlier) for those expressing their readiness to exchange by the April 8 deadline. Additionally, DTEK changed the maturity profile of its new notes. It now plans to redeem them in two equal installments in September 2017 and March 2018 (earlier a bullet payment was offered for April 2019). The coupon rate of the new bond is the same as offered before, 10.375% (up from 9.5% for the current Eurobond).

On top of that, DTEK has increased significantly the minimum bondholders acceptance level that will allow it to pursue the exchange: to 98% from 85%. As before, DTEK is planning a scheme which aims to force all the holders of existing 2015 notes to exchange them for a combination of cash and new notes (providing at least 50% of the holders of existing notes vote in favor).

Alexander Paraschiy: The amended conditions have increased the expected IRR of the existing bonds through both an increased early instruction fee and a significant decrease of the new bond’s duration. The offered repayment of new bond in two tranches also increases the chance that the new paper will not be restructured any more. At the same time, the increased acceptance threshold to 98% gives little chance that there will be any voluntary exchange of old bonds. We believe it will not be possible to get such high acceptance level. Therefore, most likely, DTEK will force all holders of existing notes to exchange. This means that current holders can only maximize their IRR from existing bonds by agreeing to exchange by the early deadline of April 8.

The bond holders have a choice to sell the bond now (at about USD 70.5 per USD 100 of par, plus an accumulated coupon of about USD 4), to keep it and sell after the exchange happens, or to keep it until maturity. The latter choice allows the holders to generate a 38% IRR to maturity, which looks like a fair return. The alternative is to invest into other Eurobonds that offer a higher YTM, about 50% (longer bonds of DTEK, Metinvest or PUMB). Restructuring risks associated with other DTEK and Metinvest bonds look higher than for the shorter DTEK bond. The notes of PUMB have the same risk as DTEK’s paper, in our view, though they are less liquid.

Investors choosing between selling the DTEK’15 bond now or after the exchange happens should sell it now, we believe. The new bond of DTEK will most likely be priced on par with other SCM papers, i.e. at YTM of about 50% (implying a price of 50% of par). That means, after the exchange of USD 100 in par value of exiting notes, holders of will receive cash consideration of USD 27.75 (including a USD 3.0 early instruction fee), and the new bond that can be sold at USD 40. Today, they can receive more for the existing notes, as the market suggests.