Not the worst times for Akhmetov…

A black streak for still No 1 Ukrainian businessman seems to be coming to an end. The problem of debts of the companies owned by Rinat Akhmetov was frontmost recently in connection with the economic crisis. The so-called "blockade of Donbass" added difficulties, but anyway, the clouds are gone now. The authorities do everything to compensate the losses of the oligarch even despite the threat of partial nationalization of his main asset in telecommunications, PJSC Ukrtelecom, the national landline telephone communications provider.

A call from the SPFU

The media reported at the end of March this year that the State Property Fund of Ukraine (SPFU) begins the termination of the contract of sale of 92.79% of Ukrtelecom (UT), which the SCM group of R.Akhmetov bought from the Austrian-registered firm Epic in May 2013.

The formal reason is the failure of investment obligations in the part of transferring of the governmental special communication to the state, which was in the structure of UT even when it was a state-owned company.

At the same time UT states that they are ready to hand over all the necessary cables and equipment to the State Communications Service for a long time – but it does not want to accept their transfer of ownership for some reason.

The situation with the accusation of the current owner in the failure of investment obligations for UT is no less complicated.

The concept of post-privatization development of UT, approved by the SPFU and the Cabinet of Ministers of Ukraine (CMU), is available to the public.

It provides for an investment of $16.7 million for a period of 5 years. Whereas UT reported on the implementation of $16.9 million capital investment just in 2012, i.e. even before the purchase by R.Akhmetov.

Moreover, the company entered into a contract with Huawei Chinese manufacturer for $250 million in 2016 for the supply of equipment for its automatic telephone stations until 2018.

Nevertheless, as it follows from the statement of the head of the SPFU Igor Bilous, he does not doubt the court's decision on the return of UT to governmental property

But the current owner should return $408 million paid in 2011 by Epic on buying UT in this case. But this is exactly what I.Bilous does not want to do.

"We will certainly receive a lawsuit for a large amount which we will not be able to pay. Who will we sell it to later for $408 million? A compromise is needed", - he stated in an interview with the media.

That is why the media point out with reference to sources on the telco market that it is likely that such a compromise will be realized in the form of returning of a fraction in UT to the state.

Then SCM will stay the main owner, but will receive benefits to pay debts to the state-owned Oschadbank and Ukrsimbank. This is quite a serious amount – $148.5 million.

The deadline for repayment of debts was March 15 this year. And since neither banks, nor UT and SCM – no one reported payments, it means they did not take place.

So the SPFU has a weighty additional argument to demand the termination of the contract on privatization of UT – and then the state becomes the owner of a fraction in the company in exchange for writing down of part of the debt and deferment of the remaining payment.

This option is indeed very likely and convenient for both parties.

This is an opportunity for the state to keep its front going officially – it is simply cannot "forgive" a large amount to the debtor. This scheme is even more advantageous is for SCM.

If the state gets 20-25% in UT, it means that the management of the company, the control over its financial flows – all remain with the managers of R.Akhmetov.

The state will be able only to claim dividends – a part of the allocations from the net profit received for the year worked.

The dividend rate for companies in which the state is a 100% owner is 50% of the received net profit. It is much smaller for some state-owned companies. For example, it is 30% for PJSC Ukrhydroenergo and Oschadbank.

These standards do not work in private companies – the owner himself decides there how much he wants to put in his pocket. Dividend payout can amount to 100% of net profit and can be 0%.

By the way, we can remember how the Cabinet of Ministers strove for the payment of dividends from PJSC Ukrnafta, in which the state owns 51%, and the co-owners of the Privat group - 43%.

The general meeting of shareholders which approves the distribution of dividends was disrupted there for years. Suffice to say that the state received payments for 2006 only in 2011.

But even if we assume that there will be no such feints and shareholders will approve the payment of 30% of net profit as dividends in the case of UT – what then?

UT reported about $16.5 million net profit at year-end 2015, $9 million – in 2016. Frankly, it is quite modest amount for the company with an annual income of $245-252 million.

So, if the state has a 25% stock of shares in UT, then it gets $1.2 million for 2015 and even less for 2016 – $679 thousand. Let us remember that the company's debt to the state-owned banks is $148.5 million.

It seems that these simple calculations clearly illustrate whether it is profitable or unprofitable for SCM to convert the debt to the state-owned banks into UT shares.

So, if the events around Ukrtelecom develop according to this scenario, R.Akhmetov is definitely not a loser.

Debts for the future

Metinvest Holding that manages the mining and smelting business of R.Akhmetov and V.Novinsky reported on the debts restructuring for $2.3 billion at the end of March this year.

According to the report, payments from 2016-2018 are moved to 2021. The company avoided the troubles associated with default this way.

Moreover, Metinvest will pay only 30% of its debt obligations before the end of 2018. And this is surely an achievement.

It has its price: R.Akhmetov-V.Novinsky's group was forced to put in pledge shares and equipment of the Central and Ingulets Mining and Processing Works to the creditors, as well as Ilyich Iron and Steel Works of Mariupol.

Now their future depends on whether the group will be able to clear its debts in 2021. This is primarily affected by the conjuncture of foreign markets, i.e. the world prices for iron ore and rolled steel.

The internal situation in Ukraine where the majority of enterprises of Metinvest is located can come into play.

The company's activity was negatively affected earlier by the blockade of freight railway service with the uncontrolled territories of the Donetsk and Luhansk oblasts where a part of its assets, currently declared lost, remained.

Furthermore, the problems of deficiency of the wagon fleet of Ukrzaliznytsia state-owned company which did not provide the transportation of end products and raw materials - ore and metallurgical coal, for the Metinvest works on a full scale, arouse in the second half of 2016, had also backfired.

Moreover, the further tax and tariff policy of the Cabinet of Ministers of Ukraine remains absolutely unpredictable. If, for example, it decides to raise railway tariffs or rent for iron ore again, this will negatively affect the financial results of Metinvest.

Therefore, it is impossible to completely exclude the negative scenario, in which in 2021 Ingulets GOK, CGOK and Illich Iron & Steel Works will be sold for repayment of the company's debts.

And here it is necessary to pay attention to one more important circumstance. Earlier, payments for Metinvest's bonded loans totaling $1.2 billion were stretched for 3 years: 2016-2018. Now all the debt has to be repaid in one installment at the end of 2021. This is more difficult to do and thus possible risks raise.

There are other questions regarding the debt policy of its management. So, as of August 2016, the total debt of Metinvest was $2.932 billion.

This corresponds its pre-crisis indicators: $2.95 billion in 2007 and $2.65 billion in 2008. But Rinat Akhmetov was in different political and economical circumstances.

Thus, in 2008, the net profit of Metinvest was $2.8 billion with revenue of $13 billion. The group was confidently ahead of most of its competitors i.e. Russian metallurgical companies.

For example, the profit of the Severstal Group for 2008 was $2 billion with revenue of $22.39 billion, Evraz Group - $1.87 billion with revenue of $20.38 billion.

Only the most profitable Russian company in this sector, the Novolipetsk Steel Group, outperformed Metinvest in 2008 in terms of profit-to-income ratio: $2.28 billion and $11.7 billion, respectively.

But now, in 2017, much has changed not for the better: for metallurgy in general and for business of Rinat Akhmetov in particular.

This is reflected in the financial results. The company has not yet published its financial statements for 2016, but in 2015 it had a net loss of $1.003 billion.

Most likely, the 2016 result will be close to 2014, which resulted in a net profit of $156 million. This is indicated by interim results for the first half of 2016 - a net profit of $90 million.

But most importantly, due to the fall of prices for ore and steel, the revenues of Metinvest dropped to $6.83 billion in 2015, i.e. almost 2 times compared with the pre-crisis indicator.

For 2016, it will be about the same or even less, since for January-June the revenue was only $2.88 billion.

So, with such a radical deterioration in financial performance, the company's debt remained at a pre-crisis level.

While the same Russian groups tried their best to reduce the debt burden. And they succeeded.

By the end of the 3rd quarter of 2016, Severstal reduced its debt to $2.084 billion, while in 2010 it was $6.4 billion, the Novolipetsk Steel Group reduced it to $700 million against $2.7 billion at the end of 2013.

The world leader in metallurgy, the ArcelorMittal concern, which owns the Kryvorizhstal plant in Ukraine, planned to end 2016 with a debt of less than $12 billion.

In the pre-crisis 2008, it had a $26.5 billion debt. Although, it must be clarified that in order to reduce the debt burden, all of the above listed companies (and not only them) fell back on the sale of their most problematic enterprises. Or, as a last resort, they closed them down to better times in order not to generate losses.

Rinat Akhmetov did not sell and did not shut down any assets in metallurgy during the crisis. His managers were able to keep his mining and metallurgical assets in the pre-crisis state, with the exception of the enterprises that remained in the occupied territories of Ukraine, but this is force majeure.

However, only in 2021 it will be finally clear how successful was this approach, when the debt burden did not decrease, despite the worsening of financial indicators.

Ukrainian scenario

Now Akhmetov feels comfortable enough in Ukraine.

The decision of the Kharkiv Appeal Economic Court, which returned the Illich Iron & Steel Works right to lease the Kryvyi Rih Ukrmekhanobr GOK may serve as a confirmation.

The Ministry of Economic Development and Trade of Ukraine earlier tried to return it from the lease to the state property. Obviously, it is unlikely that the most just Ukrainian court would have made its decision in favor of the company if it did not came from the top.

Nevertheless, the scenarios in Ukrainian politics change like a kaleidoscope, and no one can say for sure that tomorrow, and the day after, Akhmetov will keep the status quo.

Another Kryvyi Rih GOK Sukha Balka, belonging to the Russian mining and metallurgical group Evraz, can serve as an example.

In March, this enterprise suspended its operation because it had run out of permit for the extraction of iron ore, and the Ukrainian Geology and Mineral Resources Service did not issue it.

A similar situation took place in 2016, when the GOK suspended its operation for 6 months for the same reason.

It is worth recalling that in July this year, Ingulets GOK’s special permit for ore mining ends, and Ordzhonikidze mine’s permit end in November. In addition, in October, a special permit for the Severhyj GOK will end. All these enterprises are the basic mining assets of Metinvest.

Thus, President Poroshenko has significant levers of influence on Akhmetov. The future fate of his business in many respects will depend on how he will be able to agree with the head of the state.

But for now there are reasons to assume that there will be no global shocks - in exchange for loyalty and the rejection of political ambitions.

This is also indicated by the state of affairs in Akhmetov’s DTEK Holding. Since April 1, the company has started exporting electricity to Moldova.

In terms of volumes, these are mere trifles. For example, in April it is planned to supply only 90 million kW-h, according to the balance sheet approved by the Ministry of Energy of Ukraine.

If we recall that under Viktor Yanukovych’s presidency DTEK was the only company that exported electricity and, accordingly, supplied it to Hungary, Poland, Slovakia and Belarus - then it will seem as a very modest "achievement".

Nevertheless, the very fact that the company, removed from electricity exports in 2014, was allowed to return to such profitable business, says a lot.

It remains to add that the external debt of DTEK is similar to Metinvest’s. In the first quarter of the year, the company managed to agree with the majority of creditors on the postponing of debt payments to 2024.

But at the same time they are consolidated into one bond issue, whereas earlier bonds were distributed by issues of 2013 and 2015, i.е. a single load in 7 years will be very significant - $1.275 billion.

However, this is a longer period than for Metinvest and for 7 years much can change both for the better or for the worse.

Valeriy Baikalov, OstroV