Consent solicitation to amend bond covenants is credit neutral for KOKS - Moody's
LONDON. Feb 21 (Interfax) - Moody's Investors Service said on Thursday that it views as credit neutral for OJSC KOKS (B2 stable) the company's launch of a consent solicitation process, the agency said in a press release.
On 19 February 2013, KOKS submitted a consent solicitation to its bondholders to amend certain covenants, namely those limiting its ability to incur debt in excess of $150 million permitted indebtedness if its leverage, as measured by gross debt/EBITDA, exceeds 3.5x. In addition, KOKS's consent solicitation included a request to increase the maximum share of its secured indebtedness to 25% from the current 15%. Weak market environment, with prices for the company's pig iron and coke in 2012 on average 10% and 30%, respectively, lower than in 2011, will likely lead its debt/EBITDA ratio to approach 4.0x as of year-end 2012, Moody's reported.
On 15 February 2013, KOKS renegotiated its covenants package with Sberbank of Russia (Baa1 stable), its major creditor, and plans to soften its bond covenants accordingly.
Given that its Butovskaya coking coal mine is almost complete and expected to start production in H1 2013, Moody's considers that a cap on borrowings -- assuming that the company failed to obtain consent to soften the covenants -- would mostly affect Tikhova mine, as the company plans to invest approximately $300 million in the development of this mine over the next three years. Overall, the company has adjusted its 2013 capex plans downwards by around 30% (2012: by around 20%), Moody's said.
The company needs to obtain the consent from at least 75% of the responded bondholders to change the covenants. Moody's believes that the consent solicitation is likely to be accepted by the creditors due to (1) the remuneration they will receive, with the company paying up to 1.5% to those who consent by 4 March and 0.75% those consenting between 4 and 13 March; (2) substantial proportion of the bonds kept by relationship banks, which are likely to support the covenants reset; (3) the increased appetite for risk currently observed in the marketplace; and (4) the recent recovery in pig iron prices, which will contribute to an improvement in the company's metrics in 2013, the press release said.
Despite Moody's view that the consent solicitation process is credit neutral for KOKS, the rating agency notes that if the recovery in pig iron/coke prices is not sustained, this could weaken the company's credit metrics and increase its leverage further. This would put the company's ratings and/or outlook under pressure.
KOKS is a relatively small Russia-based producer of coking coal, coke, iron ore and pig iron. In 2012, it produced 1.6 million tonnes of coking coal, 2.6 million tonnes of coke, 2.2 million tonnes of iron ore concentrate and 2.1 million tonnes of pig iron. The group comprises seven mining entities with proven and probable reserves of 285 million tonnes of iron ore (44 years of production at current levels) and 115 million tonnes of coking coal (18 years of production) based on the Joint Ore Reserves Committee (JORC) methodology. KOKS's key production facilities are located in the Kemerovo, Belgorod and Tula regions of Russia. In 2011, the company reported RUB55.6 billion of revenue and RUB8.3 billion of EBITDA based on IFRS audited accounts. In H1 2012, KOKS generated RUB23.5 billion of revenue and RUB3.8 billion of EBITDA. KOKS is majority-owned by the Zubitsky family, which controls approximately 94% of the group's shares.
