Ferrexpo redeems Eurobonds

Ukraine’s largest iron ore pellet exporter Ferrexpo
(FXPO LN) redeemed USD 173 mln of its Eurobonds outstanding on Apr. 8,
according to a company press release, cited by Interfax-Ukraine.

Dmytro Khoroshun: This
redemption leaves Ferrexpo without publicly traded debt. It is a tantalizing
question now whether the company will tap the bond market again. Ferrexpo sees at least two negative aspects  in bond financing –
the high interest rate and the refinancing risk related to bullet repayment –
and prefers cheaper, amortizing PXF loans instead. For example, this recent
redemption of Eurobonds that paid 10.375% per year in interest was likely
financed by a drawdown of up to USD 205 mln of PXF
that pays 450 bps over Libor and amortizes quarterly over three years. And the
very fact that Ferrexpo came out of its 2015 restructuring with partially
amortizing Eurobonds (half in 2018 and half in 2019) is also likely indicative
of the company’s aversion to bullet maturities of large amounts.

Nevertheless, if the company dares to expand significantly
its production capacity, it will have to seriously consider returning to the
bond market for financing. Namely, Ferrexpo has the potential to boost its
pelletizing capacity from 12 to 20 mmt per year in increments of 2 mmt per
year. We estimate that a 2 mmt per year expansion will come at a cost of USD
500 mln (USD 150/t of pelletizing capacity, and USD 100/t of ore beneficiation
capacity), and it might be difficult to borrow that much via PXF loans. An
alternative to issuing Eurobonds might be to finance such expansion steps
involving a mix of own funds from operations and project loans guaranteed by
export credit agencies in countries supplying the equipment.