Metinvest proposes amending restricted payment terms

Metinvest (METINV), Ukraine’s largest steel and iron
ore producer, proposed to its noteholders amendments to certain terms and
conditions that govern restricted payments, according to a consent solicitation
announcement distributed on Nov. 22.

 

Metinvest is convening noteholder meetings for all
five tranches of its outstanding notes, asking the noteholders to pass
resolutions that will approve certain changes to the terms and conditions of
the notes.

 

Namely, Metinvest proposes that it not be limited in
its restricted payments if its net leverage ratio (pro forma following the
payments) is below 1x, and will be limited to paying out the aggregate of 100%
of its consolidated net income (CNI) accrued since the beginning of 2017 if its
net leverage ratio is between 1x and 2.25x. If its net leverage ratio is
between 2.25x and 3x, Metinvest will be limited to paying out the aggregate of
50% of its CNI accrued since the beginning of 2017.

 

Currently, Metinvest is unable to make any restricted
payments if their aggregate exceeds 50% of its CNI accrued since the beginning
of 2017 without any reference to its leverage.

 

Restricted payments include dividends and other distributions,
certain investments (including acquisitions of minority interests in other
entities), and the purchase or redemption of equity interests and subordinated
indebtedness, the announcement said.

 

Metinvest intends to pay a fee to noteholders who will
deliver their consent by the early consent deadline (indicatively, 4pm London
time on Dec. 7), provided certain conditions are met, including that the
resolutions with respect to all tranches are passed. The consent fee is 0.375%
of the principal note amount for the METINV’23 tranche, 0.75% for METINV’25,
0.95% for METINV’26, 1.25% for METINV’27, and 1.75% for METINV’29.

 

Some other items of the indicative timetable for the
deal are: launch date, Nov. 22; record date, 10pm London time on Dec. 6; expiration
time, 11am-noon (depending on tranche) London time on Dec. 13; start of
noteholder meetings, 11am-noon (depending on tranche) London time on Dec. 15;
announcement of results, Dec. 15; consent fee payment date, not later than five
business days after the announcement of the results.

 

Metinvest distributed on Nov. 18 a cleansing
announcement that disclosed that Metinvest was engaged in bilateral discussions
with its noteholders regarding a potential amendment of the notes’ terms and
conditions. The cleansing announcement mentioned indicated consent fees that
were up to 0.5pp smaller than the amounts announced on Nov. 22.

 

Metinvest was allowed to pay about USD 1.6 bln in
dividends as of early September, according to S&P,
which mentioned that the amount of dividends Metinvest will pay might reach USD
1.5-2 bln in 2021 and USD 1-1.4 bln in 2022. In 1H21, Metinvest paid USD 423 mln in dividends.

 

During 2017 – June 2021 Metinvest earned USD 5.4 bln
of consolidated net income, according to Concorde Capital calculations.

 

At the end of August, Metinvest had USD 2.0 bln of cash on its balance
sheet.

 

Recall, in August Metinvest bought back USD 142 mln of its 2026 notes
at a price of 114.9% of par. Initially, Metinvest intended to purchase up to
USD 250 mln of these bonds at a price not less than 114% of par. In June,
Metinvest bought back USD 116 mln of its 2023 notes with the initial intention
to buy up to USD 150 mln.

 

Dmytro Khoroshun: We expect
that the noteholders will approve the amendments. This is because the upward
revision of the consent fees from the cleansing announcement values, together
with the launch of the consent solicitation itself, might indicate that
Metinvest thinks it understands the noteholders’ positions sufficiently well.

 

Conversely, if the resolutions do not pass, it would
indicate that the noteholders intend to keep Metinvest on a leash that is
possibly too tight regarding the company’s ability to manage its capital.

 

Granted, Metinvest should probably be able to exhaust
its current dividend basket using its cash on hand, and allowing it to increase
the basket by at least about USD 2.7 bln (the additional 50% of USD 5.4 bln
earned since the beginning of 2017) will be a significant step.

 

However, the noteholders need effectively to decide on
their stance toward other stakeholders, including Metinvest’s shareholders and
future other creditors.

 

In particular, we think that a significant share of
Metinvest’s future CapEx, including that for the eventual decarbonization of
its business, might need (in order to minimize the cost of capital) to be
financed with credit that will be cheaper and less restrictive than its current
Eurobonds outstanding, and much cheaper than shareholder capital. And if
Metinvest feels it will be able to attract enough of such credit (including
green finance and loans backed by export credit agencies), then the proposed
amendments look reasonable, we think.

 

Furthermore, the ability to return capital to its shareholders
is another move that Metinvest needs to have in its arsenal to minimize its
cost of capital, especially if the company wants to maintain the option of
going public.

 

In other words, letting in creditors other than the
current noteholders will mean that the noteholders should either reduce their
participation in Metinvest’s capital (which they apparently are not very
interested in, judging from the results of Metinvest’s recent buybacks) or
allow for the possibility of sufficient returns to shareholders in situations
when credit capital and own cash flows are plentiful. And we understand that
this is the discretion Metinvest is asking for with its current proposal.

 

We maintain our neutral view on METINV bonds.