Metinvest allowed to buy Dniprovskyy Steel assets

Ukraine’s largest steel producer Metinvest (METINV) obtained
permission from the Antimonopoly Committee of Ukraine (AMCU) to acquire the
PP&E assets of Dniprovskyy Steel, a Ukrainian steel plant, according to a
May 20 release by the AMCU.

 

Two entities have so far applied for AMCU permission
to acquire Dniprovskyy Steel’s PP&E assets, the release said. Participation
in the auction for assets does not require prior permission from the AMCU, and
the future buyer of the assets might apply for AMCU permission within 30 days
after winning the auction, according to the release.

 

Recall, in February Metinvest said it had not decided whether it
will participate in an auction for Dniprovskyy Steel PP&E assets. Metinvest
mentioned the poor technical conditions of Dniprovskyy Steel assets as a factor
preventing the holding from bidding for them.

 

Dniprovskyy Steel entered receivership in October
2020, with creditor claims amounting to UAH 130 bln (USD 4.7 bln), including
UAH 20.9 bln (USD 751 mln) by Optimal Trade LLC and UAH 20.7 bln (USD 744 mln)
by Metinvest Holding LLC, according to Interfax-Ukraine.

 

In 2020, Dniprovskyy Steel produced 2.58 mmt of crude
steel (+16% yoy), its revenue was USD 1.02 bln (+2%), and its unadjusted EBITDA
was a positive USD 3 mln (a negative USD 541 mln in 2019), according to the
plant’s 2020 financial report. Its net operating cash flow was USD 11 mln in
2020 (7x yoy) and its CapEx was USD 9 mln (2x yoy).

 

Dmytro Khoroshun: We continue
to doubt that Metinvest will acquire Dniprovskyy Steel’s assets in the near
future even if it decides to participate in the auction for their sale.

 

The reason is the legal risks related to bankruptcy
proceedings involving both Dniprovskyy Steel itself and its owner, Industrial
Union of Donbas. We think that Metinvest, as a company with a substantial
volume of publicly traded debt, might be inclined to let these risks play out
before considering acquiring these assets, possibly in a few years from whoever
buys the assets at the upcoming auction.

 

Nevertheless, should Metinvest itself win the auction
and consolidate the assets in the near future, this would signal to us the
holding’s view that the legal risks are manageable and that it intends to bring the assets
(via CapEx and operational improvements) to profitability levels commensurate
with the acquisition price.

 

We maintain our neutral view on METINV bonds.