Flash Fixed Income Report /
Brazil

Samarco postpones restructuring talks until at least November; reiterate Buy

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    23 May 2019
    Published by

    Bloomberg reports that Samarco Mineracao (SAMMIN) is postponing talks with creditors over cUS$3.8bn of debt – comprising bonds, loans and other obligations – until November at the earliest. 

    Because of the confidentiality agreement between Samarco and a "subset of certain creditors", Tellimer has not received official confirmation of the news; however, we regard the information as valid and credible.

    According to the report, the talks have been postponed because of uncertainty regarding the amount Samarco will have to pay in fines and other liabilities related to the dam collapse of 2015. Bloomberg adds that Samarco's joint owners, Vale and BHP, are unlikely to have "a clear idea of those figures until the end of October".

    We have always said that the company would need to have two things in place before it could start meaningful and realistic talks with creditors:

    1. Precise knowledge of its liabilities related to the accident (including, of course, the fines); and
    2. The permits to allow it to restart its operations (which have been suspended since 2015). This would allow Samarco to draft a full business plan, including the timing of the ramping-up of its operations and its cash flow generation capacity, which would depend on market conditions at the time of restart.

    On 10 May, during Vale's Q1 results conference call, CFO Luciano Siani Pires said that Samarco and its owners "still have to fill one or two requirements from authorities to get the restart license" and that "we should finish by September, which is our expectation for when we will have the restart license."

    Reiterate Buy

    We still have a Buy recommendation on the SAMMIN bonds (see below for details) as we believe Samarco's operations could resume late in 2019 or early 2020, and that, at current levels, there will be upside for bondholders once this happens.

    We estimate that, in a restructuring scenario where there is an exchange of existing bonds for new securities with longer maturities, the probability of lower or step-up coupons and cash flow sweeps, fair recovery value could be in the mid-70s – similar to where the bonds are trading now.

    Of course, there is no plan for a restructuring yet, so we must rely on assumptions based on previous Brazilian restructuring processes, where exchanges have been made and the new bonds have been structured according to the debtor's expected capacity to pay. At this time, there are no specifics regarding Samarco, so our valuation is based purely on our scenario assumptions, which could be very different to what transpires.

    However, we have seen how sensitive the bonds are to headlines (positive and negative) and are of the view that, once the company obtains its restart license, the bonds will experience substantial price appreciation

    Prices could fall after the final restructuring proposal is announced, if the actual recovery value is lower than what the markets are telling us through current bond prices, but we will cross that bridge when we come to it. 

    The outstanding SAMMIN bonds

    • US$1.0bn 4.125% bonds due 2022 (WR/NR/C) trade at cUS$72.78 (ALLQ).
    • US$700mn 5.75% bonds due 2023 (WR/NR/C) trade at cUS$75.639 (ALLQ).
    • US$500mn 5.375% bonds due 2024 (WR/NR/C) trade at cUS$75.597 (ALLQ).