Metinvest prepays PXF loan, ready to pay dividends

Ukraine’s largest steelmaker Metinvest (METINV) reported
on May 8 that it has voluntarily repaid ahead of schedule the amount of the PXF
due in the first year after its recent refinancing and restructuring
deal. The holding said that this prepayment reduced the
amount of the PXF loan outstanding to USD 624 mln from USD 765 mln right after
the deal.

This early repayment allowed certain PXF agreement
restrictions to be eased, including some restricted payments, Metinvest said.
It reported it used USD 205 mln in additional liquidity generated in the recent
deal for the prepayment.

Dmytro Khoroshun: Metinvest
is now ready to pay dividends, if needed, for matters such as financing
payments related to the USD 821 mln arbitration award to Raga
against Metinvest’s majority owner, SCM group.

Indeed, the amount by which Metinvest reduced the PXF
loan outstanding, USD 141 mln, is more than our estimate of what is needed for
dividends to be allowed under the PXF facility agreement, or USD 90 mln. We believe
the “restricted payments” unlocked by the repayment of the PXF that Metinvest
explicitly refers to in its release are in fact dividends. Metinvest should be
able to pay USD 309 mln in dividends immediately from its 2017 profit (SCM
should receive 75%, or USD 232 mln). Also, Metinvest should be able to provide
further liquidity to SCM via dividends from its 1H18 profit (not earlier than
July-August) and possibly via working capital flows
(accounts payable at the end of 2017 amounted to USD 317 mln to Zaporizhstal
and USD 400 mln to Southern Iron Ore, both related parties).

If Metinvest provides substantial amounts of cash to
SCM, especially in a short amount of time, it would be negative for Metinvest’s
credit. However, if SCM negotiates with Raga and spreads the payments over
several years, then Metinvest’s operating cash inflows should be sufficient to
cover the entire USD 821 mln award amount several times over, provided steel
and iron ore markets do not crash. Furthermore, SCM might continue to fight Raga in courts
and overturn, or substantially delay, its obligation to pay the award.

The prepayment itself might prove negative for the
ratings of Metinvest’s Eurobonds in particular. For example, Fitch justified
assigning Metinvest a Positive outlook by citing the holding’s generation of
additional liquidity as a result of the deal. However, Fitch estimated the
additional liquidity after all fees and interest payments as only USD 90 mln. Therefore,
we believe the holding having spent at least USD 141 mln on prepaying its PXF
creditors right after the deal might be negative for the Eurobonds.