Metinvest distributes USD 56.7 mln to noteholders

Ukraine’s largest steelmaker Metinvest (METINV)
reported on Nov. 20 that on Nov. 18 it paid interest on its notes due 2021 and
redeemed a part of the principal. In detail, Metinvest paid USD 8.51 mln of its
compulsory Cash-pay interest at the rate of 2.793%.

Because the Average Cash Balance during Aug. 1 – Oct.
31 amounted to USD 271.9 mln, that is, above the USD 180 mln threshold,
Metinvest proceeded with the Cash Sweep procedure, distributing USD 48.18 mln.
According to the payment waterfall, for Level 1 the holding paid USD 13.35 mln
of Pay If You Can (PIYC) interest (for two months at 6.5795%). For Level 2 of
the waterfall, Metinvest redeemed the entire USD 20.14 mln of PIK notes
outstanding as of Nov. 17. For Level 3, noteholders received USD 4.58 mln of Catch-Up
interest at 1.5025%. According to Level 4 of the waterfall, Metinvest then
redeemed USD 10.11 mln of the principal amount of the notes (at 100% of par).

Dmytro Khoroshun: Metinvest
had to pay the total of USD 46.58 mln (Cash-pay interest, Levels 1-3 of the
waterfall) before it was allowed to redeem the principal, of which it managed
to repay only USD 10.11 mln. The fact that the principal redemption amount was
much smaller than the total of the other payments illustrates that the
holding’s burden of serving the interest on its debt is heavy. Therefore, we continue to expect Metinvest
will avoid having large amounts of PIK notes outstanding for long periods of
time. We also continue seeing the high risk of Metinvest refinancing and
repaying the principal at 100% of par, as we described in our Sept. 26 report.

In two weeks at most, Metinvest will report its
monthly results for September. We expect September’s EBITDA to be at least as
good as in August (USD 157 mln). We see two factors that might boost EBITDA
even higher than the August’s levels: the increase in export steel prices and
the release of inventories, slabs in particular. If such expectations
materialize, Metinvest’s Consolidated Net Leverage Ratio, which stood at 1.7x
as of June 30, might approach the crucial 1.5x level that determines whether
the holding is allowed to borrow more.

The Consolidated EBITDA, as defined for the purposes
of calculating Consolidated Net Leverage Ratio, does not – unlike the EBITDA
Metinvest reports in its financial statements – take into account exceptional
items such as impairments or reversals of impairments. This difference between
the EBITDA (financial statements) and Consolidated EBITDA (the Notes documentation)
definitions is important for investors to keep in mind. For example, it is the
likely reason for the difference between the values Metinvest reported as of
June 30 for Net Debt/EBITDA of 1.9x and the Consolidated Net Leverage ratio of
1.7x (Consolidated EBITDA likely did not account for the impairment provision
due to loss of control over assets in the temporarily non-government controlled
territory of Ukraine).

In the future, Metinvest might report, as soon as
for 3Q17, significant items such as a reversal of trade receivables or a gain
on a penalty imposed on a client (Dniprovskyy
Steel) that might be accounted for in EBITDA, but not in
Consolidated EBITDA.