Metinvest confirms standstill with creditors, doesn’t rule out haircut

Ukraine’s largest steel producer Metinvest (METINV) reached a standstill agreement until Jan. 31, 2016 with both banks and bondholders, CEO Yuriy Ryzhenkov told a Sept. 9 press conference, confirming previous unofficial media reports. He declined to comment on what would be the approach to designing a new amortization schedule that could satisfy different classes of creditors, saying that it would be a subject for negotiation.

At the same time, he didn’t rule out the possibility of a haircut on the top of a maturity extension, referring to the haircut was recently agreed upon for the Ukrainian government’s sovereign debt. Steel and iron ore market forecasts will be the basis for the exact terms of Metinvest’s debt restructuring, Ryzhenkov said. Market conditions will remain tough in 2016 and the first signs of recovery won’t be earlier than 2017, he said.

Regarding the company’s operating performance, Ryzhenkov expects Yenakiyeve Steel will demonstrate 50-60% capacity load and two steel mills in Mariupol will reach 70-75% capacity loads in 2015, on average. Given the ceasefire continues to take effect in Donbas and the destroyed railroads and bridges will be repaired, he expects that Yenakiyeve could reach 90% capacity load in 2016. The company expects higher capacity loads for its Mariupol steel mills as well, Ryzhenkov said.

Iron ore mines are operating at almost full capacity loads, though global iron ore prices present a challenge: production cash costs of iron ore concentrate are around USD 20-24/t and transportation costs to China are around USD 30/t. Against the current CFR iron ore prices in China at USD 57/t, Metinvest is merely breaking even, we estimate. Meanwhile, pellet production is in a safer position, possibly reaching higher margins of USD 15/t, we estimate. Metinvest will suspend production if its iron ore mines prove loss-producing for some extended period of time, Ryzhnekov said.

Roman Topolyuk: The prospects for restored steel production will partially compensate the recent weakness in steel prices, which fell around USD 15-20/t only in August. At the same time, Metinvest is ready to wrap up the production of iron ore concentrate if iron ore prices dip below the breakeven level. That’s a necessary, but not very easy, solution to implement, given the social consequences (layoffs, reduced hours).

Regarding a possible haircut on the top of the maturity extension, we think that Metinvest is preparing for another tough round of negotiations with creditors. The company will try to secure the most lucrative terms, operating in an environment in which prices are in a downward spiral and key operations are still at risk of interruption by warfare.