Industrial Union of Donbas appeals having to pay USD 58 mln

Ukraine’s Supreme Court opened on Feb. 6 proceedings
in the cassation appeal filed by Ukrainian steel holding Industrial Union of
Donbas (IUD) regarding enforcement in Ukraine of a USD 58 mln award by London
Court of International Arbitrage (LCIA) in favor of Reachcom, an IUD creditor,
as announced in the court’s filings last week.

In April 2012, Reachcom won a USD 47.9 mln award in
the LCIA against IUD regarding a loan agreement signed on Sept. 16, 2005.
Reachcom is the SPV via which IUD issued its USD 150 mln, 9.25%, five-year Loan
Participation Notes (LPNs) that were priced on Sept. 16, 2005, according to
Bloomberg. In addition to USD 47.9 mln in loan principal, Reachcom was awarded
USD 9.4 mln in interest, and GBP 0.28 mln in arbitrage and legal costs
reimbursements.

In August 2015, Reachcom started court proceedings on
enforcing the LCIA’s award in Ukraine, which it won in the trial court and
appellate court, but lost in May 2016 in IUD’s cassation appeal, which returned
the case to the trial court. In 2016-17, Reachcom again won the trial court
ruling and appeals, and now the case is back to the final cassation appeal
stage.

Alchevsk Steel, an asset over which IUD recently lost control, is a
co-defendant in Reachcom’s enforcement cases. The guarantors for IUD’s LPNs
were Alchevsk Steel and Reeferway Ltd, a company that is also mentioned in
Reachcom’s lawsuits.

IUD defaulted on its LPNs in September 2010, refusing
to redeem the principal.

Dmytro Khoroshun: The saga of
IUD’s LPNs might be nearing its end, but we do not see this as an opportunity
because the LPNs were highly illiquid even before the default. Furthermore,
even though IUD is likely to lose the cassation appeal, we think it will likely
have no money to repay Reachcom right away.

One potential source of funds for IUD’s eventual
repayment of this debt is profits from its Dniprovskyy Steel asset, which
recently restarted its production in
cooperation with Metinvest.