Metinvest & DTEK owner loses hearing on USD 821 mln award

SCM Financial Overseas, a member of the SCM group that
owns 71.24% of Ukraine’s largest steelmaker Metinvest (METINV), lost its civil
case against Raga Establishment Limited in London’s High Court of Justice,
according to a May 3 release by SCM. The hearing was conducted on Apr. 23-24 on
SCM’s application to have the London Court of International Arbitration (LCIA)
Arbitration Tribunal reconsider a USD 821 mln award to Raga.
The court award was related to Raga’s claim that SCM paid only USD 100 mln out
of the agreed USD 860 mln amount for the purchase of over 92% shares in
Ukrtelecom (UTLM UK) in 2013. The High Court of Justice made its decision on
May 3, according to SCM.

The decision has no bearing on the legitimacy of SCM’s
ongoing court cases against Raga, SCM said. Furthermore, the High Court of
Justice’s judgement conceded that the LCIA Arbitration Tribunal failed to
consider “potentially extremely important evidence” in its deliberations that might
have led to a different outcome, according to SCM.

In its turn, Raga commented to Reuters on May 3 that
the ruling by London’s High Court of Justice was a “final and binding” order
confirming that SCM’s obligation “remains due for immediate payment.”

Dmytro Khoroshun: The court
decision is negative for the credit of Metinvest, SCM’s biggest and most
cash-generating asset. If and when SCM has to pay the USD 821 mln award, most
of the cash will have to be provided by SCM’s operating assets, and foremost by
Metinvest.

We believe Metinvest should be able to arrange cash
outflow via several means, including dividends, operating working capital and
related party lending. Via dividends, SCM may receive about USD 330 mln from
Metinvest this year, we estimate. Namely, Metinvest should be able to
distribute half of its USD 617 mln profit for 2017, as well as half of its 1H18
profit, of which SCM will receive 75%, or about USD 330 mln. Analyzing
Metinvest’s offering memorandum for the recently issued Eurobonds and a March
19 report by S&P, we see the necessary condition to enable such payment is
a reduction of PXF loans currently outstanding by up to USD 90 mln.

Because SCM’s dividend withdrawals from Metinvest
during 2018 would amount to less than half of the USD 821 mln award, we
acknowledge the risks of Metinvest channeling the money to SCM via working
capital, if needed. In particular, at the end of 2017, Metinvest had
substantial amounts of trade and other payables to its two joint ventures,
Zaporizhstal (USD 317 mln) and Southern Iron Ore (USD 400 mln).

SCM’s electricity holding DTEK (DTEKUA) could be
another source of cash for SCM, but we conclude that this business cannot bring
more than USD 150 mln to the group this year, via working capital financing or
related party lending.