Metinvest purchases of Dniprovskyy Steel assets face legal challenges

Dniprovskyy Steel’s sales of its assets to Metinvest’s
subsidiary Dniprovskyy Coke are being legally challenged, 
Interfax-Ukraine reported on Oct. 25.

 

Namely, Indumet S.A. (Luxembourg) sued Dniprovskyy
Steel, demanding that the results of the sale of its assets at an auction in
July, conducted as a part of its bankruptcy and financial recovery process, be
declared void. The initial hearing on the case will take place on Nov. 9 in
Dnipropetrovsk Region Economic Court, according to the court’s Oct. 19
decision.

 

Recall, in July, Dniprovskyy Coke acquired for USD 339 mln the PP&E
and other assets from Dniprovskyy Steel. The other assets included USD 457 mln
of accounts receivable.

 

Indumet also filed a criminal complaint claiming that
Dniprovskyy Steel’s sale of three blast furnaces
and a power transformer to Dniprovskyy Coke in May 2018 was fraudulent,
according to an Oct. 13 decision by an investigative judge of Zavodskyy
District Court in Kamianske, Dnipropetrovsk Region. Indumet claimed that the
amount that Dniprovskyy Coke paid for these assets, USD 12.8 mln (excluding
VAT), was too small, which was embezzlement of property. Indumet has claims of
at least USD 255 mln against Dniprovskyy Steel and some other Ukrainian
companies, and alleged that it was hurt as a result of this deal.

 

Indumet is affiliated with the Russian state
development corporation VEB.RF, according to Interfax-Ukraine. VEB.RF
reportedly was a stakeholder in Industrial Union of Donbas (IUD), which owns
Dniprovskyy Steel, the entity that has sold its key metallurgical assets to
Dniprovskyy Coke.

 

Dmytro Khoroshun: The risks
to Metinvest are potentially significant but are difficult to assess.

 

In short, the creditors of Dniprovskyy Steel have
chances of successfully arguing that the company sold its assets to Metinvest
at prices that were too low, as we previously suggested,
and that these deals have to be declared void.

 

Indeed, in total Metinvest paid about USD 355 mln to
acquire the integrated iron and steel PP&E assets able to produce about 4
mmt per year of crude steel, or less than USD 100 per ton of annual capacity,
we estimate. It might be claimed that the fair value of the assets is several
times larger, even considering that they produce mostly semi-finished,
low-value steel products and that they are in poor technical condition.

 

Furthermore, as we emphasized before, for the amount
it paid, Metinvest also acquired accounts receivable that might allow it to
collect as much as USD 457 mln, which means that it paid essentially nothing
for the PP&E assets. This deal might be difficult to accept as fair for
Dniprovskyy Steel creditors.

 

The worst-case scenario might be court decisions
requiring Metinvest to return the assets to Dniprovskyy Steel. Subsequently,
Dniprovskyy Steel might need to conduct additional auctions to sell the assets,
and Metinvest will either have to pay more or accept that someone else will own
the assets that consume raw materials (iron ore and coke) produced by
Metinvest. Metinvest also resells the iron and steel products of Dniprovskyy
Steel assets and also rerolls its billets at a Bulgarian plant, and these
arrangements might be compromised if someone other than Metinvest takes control
of the assets.

 

It is also possible, however, that these and potential
other similar legal complaints related to Metinvest’s acquisition of
Dniprovskyy Steel’s assets will result in nothing.

 

There might also be immediate negative consequences of
these risks to Metinvest. Namely, the holding might withhold much-needed
capital investments into the acquired assets until the situation is clarified.
Also, the price Metinvest pays for future borrowings might include some premium
for these risks.

 

We maintain our neutral view on METINV bonds.