Ukraine’s largest cheese maker is requesting restructuring of its debts

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The shares of one of Ukraine’s largest cheese makers — Milkiland, owned by Anatoliy Yurkevych — dropped on Friday by 6% to a record low PLN 3.69 per share, according to the company’s quotations on the Warsaw Stock Exchange (WSE). This was the reaction of the market to the violation of the schedule of debt repayment by the company and the decrease of certain financial indicators, in particular Debt/EBITDA and EBITDA-to-Interest Rate Coverage ratios.

«EBITDA is forecast by the company during budget planning. The forecast dynamics and the indicator should not fall below the level stipulated in the loan agreements,» explains Investment Banking Director at Pro Capital Investment Ihor Lyzohub. According to the report published by the company, as of June 30, 2014 EBITDA amounted to EUR 13.45 mn (EUR 15.88 mn in 2013), net debt — EUR 97.60 mn (EUR 92.77 mn). The Debt/EBITDA ratio, which should not be violated, is 7.3 (against 5.8 in H1 2013). «It is quite obvious that the company’s situation has somewhat deteriorated, which led to violation of the obligations under the loan agreement,» says Lyzohub.

As a reminder, Milkiland N.V., a holding company of the Milkiland Group, attracted a US $100 mn syndicated loan in December 2011. Austria’s Raiffeisen Bank International AG is the organizer and Austrian UniCredit Bank Austria and the Russian subdivision of Raiffeisen Bank are the creditors. The Royal Bank of Scotland is a member of the syndicate. According to the annual report of Milkiland, the interest rate on the loan is 7.75% + LIBOR. The repayment period is from December 2012 to December 2015.

In search of a way out

The company has been hit by the prohibition of exports of Ukrainian milk products to Russia, says Executive Director Anatoliy Yurkevych. «Russia was the key export market for the company,» notes analyst at Eavex Capital Ivan Dzvinka.

As Capital wrote earlier, Milkiland reported a net loss of EUR 27.26 mn in H1 2014 versus a net profit of EUR 5.54 mn in H1 2013. In order to pull out this difficult situation, the company is asking creditors to restructure its debt. «We are trying to fully exploit the price advantage on the world market thanks to hryvnia devaluation and working on promoting the company’s products in EU countries and seeking new markets,» adds Yurkevych. He hopes that these efforts will help the company renew sales growth in Q4 2014 and in early 2015.

To the question of Capital whether the bankers were ready to meet the producer halfway, the Ukrainian office of the loan initiator — Raiffeisen Bank Aval — gave no response.

Cheese has a chance

The probability that the financial institutions will heed the borrower’s request is quite high. «The company’s indicators did not fall drastically under the influence of such important factors with its earnings in euro having dropped by a mere 1%,» specified Lyzohub. He predicts that after changes are made to the company’s business plan taking into account the impact of hryvnia devaluation and the conflict with Russia, the creditors will agree to a new Debt/EBITDA and EBITDA-to-Interest Rate Coverage ratios. «Taking into account the devaluation, the company gained serious advantages in the increase in exports, which should positively influence the indicators of Q4 2014,» assures the expert.

If the financial results are not improved, Milkiland may be facing trials. «The bank, of course, may take the amicable solution and agree to debt restructuring, but that is a right, not an obligation. If the borrower’s situation is bad and further violations of the debt repayment schedule are possible, we would recommend preparing for a trial in court,» emphasized Managing Partner at the L.A. Group law firm Oleksandr Shkelebei. He says that a well-built strategy of defense in court often forces the bank to agree to negotiate with the borrower on discounts or debt restructuring.