Metinvest considering new bond issuance, media report

Metinvest (METINV), Ukraine’s largest steel and iron
ore producer, is considering issuing a new bond, according to a March 3 report
by Interfax-Ukraine, which cited information from Debtwire reported by
Renaissance Capital.

 

Metinvest had USD 0.8 bln of cash at the end of 2020,
and stated that it might spend money on M&A (the Pokrovske coal business),
early repayments of bank loans and possible partial prepayment of USD 0.3 bln
of METINV’23 bond outstanding, according to Renaissance Capital as cited by
Interfax-Ukraine.

 

Dmytro Khoroshun: Metinvest
might issue seven-year (due 2028) or ten-year (due 2031) bonds if it decides to
go ahead with the reported plans, we think.

 

The spread of Metinvest’s new bond to Ukraine’s
sovereign curve might be in the range of 50-100 bps, we estimate. Since
mid-February, the spreads of Metinvest’s existing bonds have been dropping and
reached negative 20-30 bps in early March, driven solely by the rise in yields
of the more liquid Ukraine’s sovereign bonds.

 

Metinvest might spend USD 0.4-0.5 bln from the
possible new bond issuance on repayment of existing debt due in 2021-2023, we
estimate. At end-2020, Metinvest had USD 203 mln of bank loans (including USD
133 mln of PXF and excluding trade finance) and other debt payable in 2021. The
company has to repay the remaining USD 94 mln of PXF in 2022, as well as USD
311 mln of bonds outstanding in 2023.

 

Metinvest might also spend up to USD 0.2 bln on
purchasing a 25.23% stake in the Pokrovske coal business in 2021. This brings
the total use of funds from the potential new bond issuance to USD 0.6-0.7 bln
before dividends.

 

The likelihood of Metinvest paying substantial
dividends in 2021 (several times more than USD 100 mln in 2020) will increase
if Metinvest places its new bond in the amount of USD 0.5-0.7 bln or more, we
think.

 

Paying up to USD 0.4-0.5 bln of dividends in 2021 will
be reasonable for Metinvest if it issues the new bond in early 2021, unless the
company wants to be very conservative and focus on substantially decreasing its
debt or maintain a large cash pile of USD 1 bln or more. This is because
Metinvest is likely to earn about USD 400 mln or more per month in total EBITDA
(more than twice the 2020 USD 184 mln monthly average) at least during 1Q21 and
possibly later in 2021 due to the high steel and iron ore prices at the global
markets. Also, Metinvest’s cash pile at the end of 2020 was USD 0.5-0.6 bln
more than its minimum cash requirements, we estimate. The company’s CapEx plans
for 2021, USD 800-850 mln, are only USD 150-200 mln higher than the amount
invested in 2020.

 

Summarizing, if Metinvest issues USD 0.5-0.7 bln of
new bond in early 2021, it might maintain its gross debt below USD 3.3 bln and
its net debt below USD 3.0
bln if it spends around USD 0.4-0.5 bln on pre-paying its existing debt and USD
0.4-0.5 bln on paying out dividends to its shareholders. Metinvest’s EBITDA before
joint ventures (JVs), which averaged USD 200 mln per month in 2H20, might rise
to USD 250-300 mln per month on average in 1H21. This will mean Metinvest’s
ratio of net debt to last 12 month EBITDA (excluding JVs), which had dropped to
1.16x at end-2020, will remain below 1.5x, and possibly as low as around 1.0x,
at least in the next few quarters, and possibly longer if the high steel and
iron ore prices at the global markets persist.

 

We maintain our neutral view on METINV bonds.