Expect the unexpected: Ferrexpo returns to debt market

Amid an uncertain political and economic landscape in Ukraine syndicated debt offerings have been few and far between. Ferrexpo’s decision to tap the PXF market indicates that banks are still able to finance good assets in otherwise tricky jurisdictions.

Ukrainian iron ore pellet producer Ferrexpo is back in the market for a new PXF with a four-year $400 million deal launched earlier this month. While unexpected the move serves to highlight the potential for select Ukrainian corporates that perform to raise structured debt in difficult circumstances. 

Ferrexpo, rated Caa2 by Moody’s, have BNP Paribas lead arranging the facility which is set to contain an accordion mechanism to take the deal to $500 million if needed. The producer is expected to use part of the financing to repay the outstanding debt of its 2013 $350 million PXF which matures in August 2018. Ferrexpo made the final payment on a 2011 $420 million facility in August last year.

The debt raising marks a turnaround for Ferrexpo, headquartered in Switzerland and incorporated in the UK, which entered debt restructuring in 2015 following difficulties in Ukraine. The company’s latest move would be its first syndicated loan since it discharged financial advisors in April 2016. In that time, only agribusiness Kernel has raised structured debt out of Ukraine. Kernel paid 590bp for its most recent $300 million PXF, a cost level worlds away from the 225bp Ferrexpo paid on its 2011 PXF. The lenders on 2011’s facility included ING Bank, UniCredit, Societe Generale, ABN Amro, Citigroup, Credit Suisse, ICBC, WestLB and JP Morgan.

TXF understands that ING and Citi are not involved in this year’s facility, with a number of banks citing the unexpected nature of Ferrexpo’s move. Up to eight banks are understood to be currently presenting the deal to their credit committees, with no new lenders likely for this facility. One London-based lender tells TXF: “We didn’t think Ferrexpo would tap the market this year and with Ukraine in the position it’s in we need to know much further in advance.”

The majority of banks currently on the deal are understood to be looking at takes of between $30 million to $40 million. A number of these have also approached the private insurance market in London, looking to cover between $5 million to $10 million of their proposed loans. A number of the banks already have pre-approved limits for Ferrexpo. One market insider tells TXF: “The deal will get done. Ferrexpo is a good asset in the western part of Ukraine.  The company has always performed, and we have to keep these companies going otherwise the place will implode.”

Ferrexpo has defied some expectations by coming in for debt in 2017 given a belief that the company would look to utilise cash flow generation and available cash given refinancing risk in Ukraine. The signs of a Ukrainian revival in debt markets have been muted against an ever-changing geopolitical situation in the region. In recent weeks Russian-backed rebels in Eastern Ukraine announced the creation of a Malorossiya or ‘Little Russia’ as tensions flared over the country’s future.

However, Ferrexpo will be buoyed following an uptick in iron pellet premiums in the second half of 2016 following multi-year lows in the first half of last year. The company reached record levels of production on the back of increased sales in 2016 leading to a net debt to EBITDA of 2.1x in the last twelve months, according to Moody’s.

Financiers have suggested that Ferrexpo’s deal, though unexpected, has been well received by the market. The company’s revenues have dropped since 2014 but so has its indebtedness meaning improved fundamentals. Ferrexpo’s credit rating is constrained by Ukraine’s sovereign debt rating and given that all of its operations are within the country any significant changes could have an adverse effect on the business.

The producer has maturities totalling $202 million for 2017 as well as a $346 million Eurobond due in April 2018 and April 2019, and $65 million of ECA funding maturing over the next five years. The company’s upcoming PXF deal is expected to be priced at around 600bp due to current issues with Ukraine risk, according to financiers. A close date at the end of September or beginning of October has been mooted by lenders.

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