Metinvest restructures part of Pokrovske debt

Metinvest (METINV), Ukraine’s largest steel and iron
ore producer, has restructured over UAH 1.5 bln (USD 55 mln) of Pokrovske coal
business debt, according to the company’s May 19 investor release.

 

The long-term repayment schedule of the debt, owed to
Ukraine’s state-owned Ukreximbank (EXIMUK), will allow Metinvest to develop the
Pokrovske coal business effectively, according to Metinvest’s CEO Yuriy
Ryzhenkov as cited in the release.

 

Recall, Metinvest acquired control over the Pokrovske coal business
in March. Two main assets of the Pokrovske coal business are PrJSC Pokrovske
Coal, Ukraine’s largest coking coal miner, and Svyato-Varvarynska Enrichment
Plant LLC.

 

Dmytro Khoroshun: This is a
positive but small step toward bringing the Pokrovske coal business’ debt to
market terms following its acquisition by Metinvest, we think.

 

Namely, the Ukreximbank debts represent only about 11%
of the USD 500 mln total debt, bearing a 10% interest, that Pokrovske Coal had on its balance sheet at end-2020,
we estimate.

 

It would be positive if in the future Metinvest not
only reports further progress with restructuring the debts of the Pokrovske
coal business, but also affirms its intention to separate itself from the
debt-servicing efforts of PrJSC Donetsksteel, we think.

 

Donetsksteel, a company formerly associated with the
Pokrovske coal business, had more than USD 1 bln of debt
at end-2020. Until recently, Donetsksteel has had no business other than
enriching the coal mined by Pokrovske Coal at Svyato-Varvarynska and selling
the resulting coking coal concentrate (mostly to Metinvest assets).

 

However, this business as an intermediary between what
are now Metinvest’s assets has allowed Donetsksteel to earn substantial profit
and cash flows, at least until recently, and to use the proceeds to service its
debts. For example, in 2020 Donetsksteel managed to pay USD 50 mln of interest
on its debt (2019: USD 42 mln), with its net debt repayment for the year
reaching USD 129 mln (USD 170 mln) and net loans issued being USD 84 mln (USD
11 mln). These cash outflows, which total USD 264 mln for 2020 (2019: USD 222
mln), were almost fully covered by Donetsksteel’s operating cash inflow of USD
264 mln in 2020 (USD 216 mln).

 

If Metinvest stops allowing Donetskteel to earn cash
from doing business with its subsidiaries, which is possible after the holding
took control over the Pokrovske coal business, it will become unclear how
Donetsksteel intends to service its debts.

 

We maintain our neutral view on METINV bonds.