Fixed Income Analysis /
Ukraine

Metinvest: Liability management and other positive news

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    20 September 2019
    Published by

    Reiterating Hold. Metinvest has been in the news in the past few days announcing a liability management transaction, publishing a new reserves report, being upgraded by two rating agencies and disclosing its H1 19 financial results. The company has joined the ranks of EM issuers trying to take advantage of lower interest rates to refinance debt. In the case of Metinvest, there is no pressure to roll over debt maturities. Debt repayments are less than US$100mn-300mn per year in 2020-22, but there is a big bullet maturity in 2023 that the liability management exercise is targeting. The company is a big steel and iron ore producer and exporter with moderate but increasing leverage, adequate but declining profit margins, and strong cash flow generation. With steel prices stubbornly trending down, iron ore coming off its supply-squeeze peaks and the local currency strengthening against the US dollar, we expect the negative pressure on financials to continue through H2. If issued today, the new US$-denominated bonds could be priced in the range of 7.25-8.05%.

    Liability management transaction to address 2023 peak maturities. This week, Metinvest has launched a tender offer on its US$945mn 7.75% notes due 2023. The company is willing to pay a price of 103 and an early bird premium of 3, taking the total consideration to 106 for up to US$440mn of par value to the investors submitting their interest by 30 September. The tender offer is conditional on a successful placement of new hard currency bonds. Metinvest is looking to issue a benchmark size US$ notes with 8-10-year maturity and, potentially, a 5-7-year EUR tranche, subject to market interest. Metinvest has an established yield curve until 2026. In September, METINV 26s (+553bps - z-spread, 7.13%-YTM) have offered an averaged 95bps spread pick up over the sovereign but have tightened to c70bps in the past few days. The new US$-denominated notes could be priced in the range of 7.25-8.05% depending on their tenor, the requirement for a new issue premium and sentiment in the credit markets towards the end of the roadshow (27 September).

    H1 19 results weaker on softening steel prices but leverage still low. Performance was negatively affected by softening steel prices, which was only partially compensated for by a supply squeeze driven by higher iron ore prices. Revenue declined by 6% yoy to US$5.8bn. EBITDA ex. JVs fell by 35% yoy to US$756mn and the EBITDA margin shrank to 13% (from 19% in H1 18). Net leverage remained at a moderate level, having increased to 1.3x on the back of the deteriorating EBITDA. The company discloses headline financials on a monthly basis, so the magnitude of the EBITDA decline was no surprise. With steel trading below H1 levels, the iron ore market normalising and the local currency appreciating, we expect the pressure on Metinvest’s margins to continue and financials to weaken further in H1 19. In our view, net leverage could increase to 1.6x- 1.9x by the end of 2019.

    Rating upgrades confirm better-than-the-sovereign credit profile. Two rating agencies have upgraded Metinvest this week. After an upward revision of the Ukraine sovereign ceiling to “B”, Fitch assigned Metinvest a “BB-” rating keeping it two notches above the sovereign. S&P upgraded Metinvest to “B”, one notch above the sovereign.

    Iron ore reserves support 25 years of production at the 2018 rate. Metinvest assessed its iron ore reserves and resources under the JOCR Code and publicly disclosed results for the first time since 2010. According to the reports, the company’s three iron ore mining and processing facilities in Ukraine – Central GOK, Northern GOK and Ingulets GOK – have 2.3bn tonnes of ore reserves, with a total Fe content of 34.2% and magnetic iron content of 25.3% (currently mined). According to the company, these reserves are sufficient to ensure mining operations for over 25 years.