Flash Fixed Income Report /
Ukraine

DTEK: Awaiting restructuring proposal

  • DTEK announces debt restructuring

  • Deteriorating earnings power could require interest reduction and principal haircut

  • DTEKUA price reflects a c40% haircut – a reasonable assumption given the circumstances

DTEK: Awaiting restructuring proposal
Tellimer Research
31 March 2020
Published byTellimer Research

Restructuring comes out of the blue. On 27 Mar 2020, DTEK Energy announced that it will not pay interest on bank debt and its US$1.3bn 10.75% amortising bonds on 31 Mar 2020 and 1 Apr 2020, respectively. The company is working on a standstill agreement and a restructuring proposal. Less than two months ago DTEK reported weak preliminary FY 19 results, but we did not see signs of an imminent restructuring then and, if bonds prices are a measure of market sentiment, neither did the market.

How serious is DTEK Energy’s financial situation? In July 2019, Ukraine made a transition to a new electricity market model with prices established daily based on the balance of supply and demand. Transition to the new pricing model, an abnormally warm winter and the reopening of electricity imports from Russia and Belarus dramatically reduced prices per kWh and DTEK Energy’s profitability in H2 and particularly in Q4 19. According to Market Operator, electricity prices remained weak in Q1 20, which suggests that Q4 19 could be a good proxy for 2020. In this case, DTEK’s EBITDA could fall below US$200mn, causing net leverage to increase to 10x and interest to be barely covered, if at all. According to DTEK’s presentation, the company does not have sizable debt repayments in 2020-22 (US$90mn in total), with most of the US$2bn debt maturing in 2023-24. However, if our rough estimate of 2020 EBITDA is not entirely wrong, DTEK could indeed struggle to pay cUS$190mn interest on debt.

What restructuring may look like? While DTEK is working on the restructuring proposal, we look at the company’s operating cash flows and financial position trying to answer the key question: is it a liquidity problem, a solvency problem, or both? If Q4 19 is a good proxy for FY 20, which seems to be a justified assumption, DTEK’s liquidity must be quite tight. The company’s EBITDA would not be enough to cover interest expense and refinancing even a small amount of debt could be difficult. If this is the case, then DTEK’s debt is too high for the company and a haircut on the principal is necessary. Unless there is a strong case for electricity price recovery in Ukraine or a substantial cost reduction on the company level, we expect DTEK’s restructuring proposal to suggest both a reduction of cash interest and a haircut on principal.

Are DTEKUA bonds rich or cheap at a price of 45? The answer depends on restructuring assumptions. We estimate that a price of 45 reflects a number of restructuring scenarios, which combine a maturity extension to 2025-27, reduction of cash interest to 7-9% and a haircut of 40-50%. With substantially weaker earnings power of the company, the debt service cost has to be reduced in order to generate cash for deleveraging. We estimate that with a 40% haircut, a reduction of cash interest to 7.0-8.5% and maturity extension to 2025-26, DTEKUA could be valued in the range of 45-50 cents on the dollar.

No direct implications for Metinvest and DTEK Renewables. DTEK Energy, DTEK Renewables and Metinvest are controlled by SCM Group, which is ultimately beneficially owned by Rinat Ahmetov. DTEK Energy and DTEK Renewables are sister companies under DTEK B.V. holding company, which is a sister company of Metinvest. This means that from the financial point of view the DTEK Energy restructuring is an isolated case. There are related party transactions between DTEK B.V. companies and Metinvest, but we believe that the majority of financial flows go from Metinvest to DTEK as payments for electricity and gas.