Moody’s believes Metinvest is on the verge of default

From the lights Metinvest of the past, soon there will be only memories

Photo: Ukrainian photo

Yesterday, it was reported that the international rating agency Moody's downgraded Metinvest’s rating to Caa2-PD-LD. This means that the company’s debt liabilities are of very low quality and subject to an extremely high credit risk. Senior Analyst at the ART-Capital Investment Company Oleksiy Andriychenko says such a rating corresponds to the probability of the company’s default over the next five years at the level of 51% (according to the procedure of Moody’s). Metinvest’s creditors should be seriously concerned about such a situation.

Not that scary?

In this ranking industry analysts see a mere formality and a reflection of the political attitude not only towards Metinvest, but also towards Ukraine in general. The country’s rating is even lower – Caa3, says Andriychenko. Experts also believe that the downgrading of Metinvest’s rating is not a surprise, rather a predictable reaction to the partial restructuring of its debt for Eurobonds, which the company made public last week.

As a reminder, on November 28 Metinvest replaced Eurobonds, which means it actually deferred payments on Eurobonds maturing in 2015 for which it owes US $500 mn (the company made an early payment of another US $100 mn of the total amount of debt). The exchange for new bonds was carried out in the amount of US $386.3 mn. 77% of holders of the company’s Eurobonds agreed to exchange with losses, says Analyst at Dragon Capital Denys Sakva.

Maturity of new bonds was extended until 2017. The amount of Eurobonds that have yet to be repaid is US $113.7 mn. “The downgrading of the company’s rating is formal and related to the restructuring of Eurobonds. It means that the company is experiencing some difficulties with the timely repayment of its debts, not a default,” says Analyst at Concorde Capital Roman Topolyuk. He believes that it is much more important that the rating of Eurobonds remained unchanged. It is also a positive sign that the exchange of bonds took place and was supported by the holders of debts prior to maturity. “In other words, the holders agreed to support the company by giving it a reprieve, which means they believe that it will be able to pay its obligations in the future. It would be bad for the company if restructuring was not approved. But Metinvest still had some time until May 2015 to improve the proposal,” said Topolyuk.

Hryvnia devaluation was helpful

The decrease in the value of the Ukrainian currency allowed Metinvest to maintain its profitability for nine months of 2014, despite the war in the east, which lead to a reduction in the output of the company’s metallurgical products in the third quarter of this year. The company’s pre-tax earnings for that period exceeded US $2 bn. Efficiency was 24% compared to 18% in 2013, according to Analyst at the ICU Oleksandr Martynenko. “At the end of the third quarter of 2014, Metinvest managed to maintain the ratio of the net debt to the EBITDA for the last 12 months at a low level – 1.3. This index reflects the stability rating of the business, experts say. “And only when it exceeds 3 points, there is reason for concern,” said Andriychenko. Holders of Metinvest’s bonds will require early repayment if the company's debt increases by half of the current rate or if its EBITDA decreases by 1.5 times, he added. “After depreciation continued and production at the holding’s enterprises stabilized in the fourth quarter, there is no reason to expect a serious deterioration in the debt/EBITDA ratio at year-end,” said Martynenko.

Be that as it may, the prolonged military conflict makes operating and financial results extremely unpredictable in 2015, the expert believes. Though, in his opinion, it cannot be reflected in the estimates and expectations of the rating agencies.

Bank debt

Nevertheless, investors of Metinvest have serious food for thought. For example, it is still not clear how the company intends to pay off its US $ 800 mn debt to the banks. Metinvest borrowed these funds in 2011–2013 from foreign banks and is obligated to repay this amount in 2015, according to investment bankers. Also, the company’s managers still did not come up with any ideas of how to deal with the unstructured part of the debt of Eurobonds, which also should be paid off next year.

Metinvest intends to repay part of the bank debt (US $741 mn) in the second quarter of 2015. Analysts report that the company is currently holding talks with banks regarding debt repayment and will soon announce its decision. “We expect that this will be either a standard restructuring of debts through arrangements with banks or a partial repayment from its own funds and restructuring of the remaining part of the debt. Also, we are not ruling out the possibility that Metinvest may receive some assistance from its owners, who could grant it another loan to pay off its debts to foreign banks,” Andriychenko concludes.