Metinvest affiliate Donetsksteel updates deal with creditors

The shareholders of PrJSC Donetsksteel approved at
their Jan. 15 EGM an updated version of a settlement deed with the company’s
creditors that amounts to USD 1.34 bln in total, according to the company’s regulatory
filing from the same date.

 

The settlement deed, which is a part of a London Court
of International Arbitration case, as approved on Jan. 15 foresees Donetsksteel
paying directly its two creditors – Barlenco Ltd. (Cyprus) and Itineris
Holdings Ltd. (British Virgin Islands) – the sum of USD 835 mln, according to
the filing. Donetsksteel also agreed to pay USD 500 mln to the two creditors
indirectly, by reimbursing USD 500 mln to PrJSC Pokrovske Coal, which will pay
the creditors in turn.

 

At their previous EGM on Sept. 2, Donetsksteel’s
shareholders approved an earlier version of the settlement deed that amounted
to USD 840 mln in total, including paying the two creditors USD 340 mln
directly and USD 500 mln indirectly (via Pokrovske Coal).

 

At the end of 2019, Metinvest B.V., the top holding
company of Ukraine’s largest steel and iron ore producer Metinvest (METINV),
owned 24.99% in Donetsksteel, according to the latter’s annual report.
Metinvest acquired this stake in Donetsksteel in August 2018
together with a 24.99% stake in Pokrovske Coal.

 

Three other companies that are likely affiliated with
Metinvest’s owners, the SCM and Smart groups, became owners of 24.99% each in Donetsksteel
as of August 2018.

 

In October 2020, Metinvest obtained permission from
the Antimonopoly Committee of Ukraine (AMCU) to consolidate control over nine
companies that include PrJSC Pokrovske Coal and Svyato-Varvarynska Enrichment
Plant LLC. In its 2019 financial statements, Metinvest named these two
companies the most significant assets of what Metinvest calls the Pokrovske
coal business, in which the holding owned 24.77% as of the year end. Pokrovske
Coal owns 55% in Svyato-Varvarynska, according to Pokrovske Coal’s 2019 annual
report.

 

Metinvest purchased the 24.77% stake in the Pokrovske
coal business in July 2018, according to the holding’s September 2020
prospectus. At the same time, Metinvest also obtained a ten-year option to
purchase, from several co-investors, the remaining 75.22% in the Pokrovske coal
business.

 

It is unclear whether the Pokrovske coal business, as
defined by Metinvest, includes PrJSC Donetsksteel, which was not among the
companies mentioned by the AMCU in its October decision.

 

Pokrovske Coal was a guarantor for several loans to
Donetsksteel, the total amount of which (including interest accrued but unpaid)
at the end of 2019 was about USD 1.3 bln, according to Concorde Capital’s
analysis.

 

East West United Bank S.A. of Luxembourg (EWUB), which
in 2019 accused Donetsksteel of unfair treatment of creditors,
mentioned Itineris Holdings as a creditor to Donetsksteel under the same USD
500 mln loan agreement under which EWUB was a creditor, according to a Concorde
Capital analysis of Ukrainian court documents.

 

Barlenco is affiliated with Metinvest.

 

Dmytro Khoroshun: This event
is neutral for Metinvest because an increase in future payments – agreed to by
Donetsksteel – to USD 1.34 bln, close to its end-2019 obligations, was likely.

 

We emphasize that Donetsksteel will likely continue to
deprive Pokrovske Coal (and Metinvest, if it increases its stake in the coal
miner from 24.99% to close to 100%) of profits that Pokrovske Coal could earn
by enriching its raw coal itself at its subsidiary Svyato-Varvarynska.

 

Namely, Donetsksteel’s only current business is
enriching (at Svyato-Varvarynska, via a tolling agreement) the raw coking coal
mined by Pokrovske Coal. Indeed, the revenue from coking coal concentrate sales
was 99.95% of Donetsksteel’s total revenue in 2019 (98% in 2018). It is likely
that this business will be the only source of funding for Donetsksteel’s entire
USD 1.34 bln future payments to its creditors.

 

Notably, Donetsksteel for several years has already
been earning massive profits from its position as a coal enrichment
intermediary. For example, in 2019 its EBITDA amounted to 133 mln (2018: USD
178 mln), while we estimate Pokrovske Coal’s EBITDA was USD 120 mln in 2019
(2018: USD 48 mln). In both 2018 and 2019, Svyato-Varvarynska’s EBITDA was less
than USD 1 mln, according to our analysis.

 

If Metinvest consolidates control over Pokrovske Coal
but not Donetsksteel, such as by exercising its option, Metinvest’s debt might
rise by USD 0.5 bln because the coal miner agreed in October to
pay this sum to Donetsksteel’s creditors. By exercising
its option, Metinvest will have to pay USD 0.5-0.6 bln to its co-investors for
corporate rights in the Pokrovske coal business. Furthermore, as said above,
Pokrovske Coal might need to continue allowing, for no known formal reason, Donetsksteel
to earn large profits by enriching the raw coal Pokrovske Coal mines and by
using Svyato-Varvarynska’s enriching services at cost.

 

If Metinvest consolidates control over both
Pokrovske Coal and Donetsksteel in the near future, its debt would rise by USD
1.34 bln, but we consider this less likely. One reason is that Pokrovske Coal
and Donetsksteel are clearly different in their net obligations arising from
the approved settlement deed (zero for the former, the entire USD 1.34 bln for
the latter). Such an arrangement seems tailored not to
overburden with debt (save for the USD 0.5 bln in gross obligations to
Donetsksteel creditors) Pokrovske Coal, and Metinvest as its potential parent
company.