Ferrexpo studies market for Eurobonds issuance

Ferrexpo (FXPO LN) announced on Jan. 30 that it hired Morgan Stanley and Credit Suisse First Boston to test demand for a potential unsecured Eurobonds placement. The company didn’t disclose the amount it expected to raise, stating that proceeds will be used, among other purposes, to reduce reliance on secured lending and to improve liquidity. S&P assigned a “B” rating to the expected Eurobonds issue on Jan. 30, while Fitch assigned a “B (EXP)” rating. Analysts from both rating agencies estimated the company could raise about USD 500 mln in bonds.

Meanwhile, Ferrexpo disclosed its 9M12 financials – revenue decreased 17.5% yoy to USD 1,083 mln, EBITDA plunged 46% yoy to USD 329 mln, PBT dropped 57% yoy to USD 229 mln. Cash balance was USD 674 mln as of end-3Q12. The last 12-month EBITDA to net debt ratio was below 1x, the company said.

Roman Topolyuk: Ferrexpo is the third Ukrainian company that is trying to use excess global liquidity to attract new debt this January (after JKX Oil & Gas and Ukreximbank). Since the company has a huge load of cash on its books, we don’t see major CapEx purposes for the new loans based on its approved projects pipeline. Therefore, we believe the company is mulling a new large project – possibly a new 10 mmt concentrator facility, with a needed investment of more than USD 700 mln. This project will enable company to further increase iron ore extraction from its Yeristovo Mine. Debt issuance would be an indirect signal that the company’s board is close to approving this long-awaited project, which can be a positive driver for the stock.

We expect that Ferrexpo is able to obtain YTM of around 8.5% for its potential five-year bonds, or about a 150 bps spread to the sovereign curve. The timing selected seems to appropriate – a recent upsurge in pellets prices (+9% YTD) would be a supportive background for the road show, as well as further restocking by Chinese steel makers before and after Chinese Lunar Year (ending Jan. 16).

However, there is a substantial risk of the market cooling in 2H13 once additional iron ore capacities from world majors (including from Rio Tinto and Fortescue) come on stream. Another negative driver would be possible negative news from the Kyiv courts regarding the fate of a 40% interest in Ferrexpo’s key subsidiary, Poltava Mine. The next hearing is scheduled for Feb. 4 and the litigation could intensify potentially.