Metinvest client Dniprovskyy Steel to sell assets on July 26

Dniprovskyy Steel, a Ukrainian steel plant and a
client of Ukraine’s largest iron ore, coke and steel producer Metinvest (METINV),
will sell its PP&E assets at an auction on July 26, according to
ProZorro.sale electronic marketplace platform, as part of its bankruptcy and
financial recovery process. The initial price for the assets was set at UAH
8.395 bln (USD 308 mln), according to the auction’s documentation.

 

Recall, in May Metinvest obtained a permission
from the Antimonopoly Committee of Ukraine (AMCU) to acquire Dniprovskyy
Steel’s PP&E assets. Metinvest currently re-sells Dniprovskyy Steel’s
billets and likely supplies iron ore and coke to the plant. In January, the
AMCU issued permission to Optimal Trade LLC,
a Ukrainian commodity trader, to acquire Dniprovskyy Steel’s PP&E assets.

 

The assets being sold at the auction include (in
addition to the PP&E assets) UAH 12.4 bln (USD 453 mln) of accounts
receivable. About 99.9% of this amount is receivable from Palermita Management
Ltd (Belize).

 

In March, the Dnipropetrovsk Region Economic Court
decided to require Palermita Management to pay Dniprovskyy Steel EUR 179 mln
(USD 211 mln) for steel products sold during February 2020 – January 2021. The
court said that during this period Dniprovskyy Steel supplied to Palermita
Management steel products for the total of EUR 523 mln (USD 618 mln), but
Palermita Management paid only EUR 344 mln (USD 406 mln).

 

During February 2020 – January 2021, Metinvest re-sold
USD 578 mln of billets, most of which was likely produced by Dniprovskyy Steel.

 

In the July 2021 auction documents related to the
accounts receivable Dniprovskyy Steel plans to sell, Maksym Azarkhov was
mentioned as a director of Palermita Management. Earlier, in documents related
to a February 2019 auction for sales of steel scrap by Ukrainian Railways,
Maksym Azarkhov was mentioned as a procurement director of Optimal Trade.
Before that, in October 2018, Maksym Azarkhov was mentioned as a corporate
legal contact for Palermita Management in a filing by Puyang Refractories Group
Co., Ltd., a Chinese company from which Palermita Management purchased USD 7.2
mln of accounts payable by Dniprovskyy Steel.

 

Dniprovskyy Steel entered financial recovery 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 (up 7x yoy) and its CapEx was USD 9 mln (up 2x yoy).

 

Dmytro Khoroshun: We continue
to doubt that Metinvest will acquire Dniprovskyy Steel’s assets at the July 26
auction even if it decides to participate.

 

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.

 

In particular, we think that the accounts receivable
that Dniprovskyy Steel plans to sell together with its PP&E assets
exemplify the potential risks associated with the auction. Namely, whoever wins
the auction will, for a price potentially as low as USD 308 mln, acquire, in
addition to the PP&E assets, the accounts receivable that might allow the
new owner to collect immediately as much as USD 453 mln.

 

Granted, Dniprovskyy Steel’s PP&E assets might be
worth little because of their technical conditions, the need for investments,
and potentially low profitability even after the investments. Nevertheless,
from the point of view of Dniprovskyy Steel’s creditors, to which the plant
owes USD 4.7 bln, it might be difficult to understand why the plant does not
try to collect itself these USD 453 mln of accounts receivable but instead is
ready to sell these assets together with its PP&E assets for as low as USD
308 mln.

 

If Optimal Trade wins the auction and it is later
established that Palermita Management and Optimal Trade are somehow connected
(which is possible because the two companies might be represented by the same
person, Maksym Azarkhov), it might raise additional questions from the
third-party creditors of Dniprovskyy Steel, we think, again in relation to the
accounts receivable.

 

We maintain our neutral view on METINV bonds.