• Nature of the beast

October 2018

How do commodity-backed structures work in the face of adversity? flow’s Clarissa Dann takes a closer look at Ukrainian metals and mining group Metinvest, and how it worked with its financiers to stay on its feet after a commodity price collapse, geopolitical turmoil and an economic downturn

When prices are high, commodity finance deals seem pretty straightforward, but it’s harder to make money safely when prices come down – that is when the structures get tested.

Two that have stood the test of time are pre-export finance (PXF) and prepayment finance (PPF) facilities. These are, in the words of Deutsche Bank’s Global Head of Structured Commodity Trade Finance, John MacNamara, “performance-based lending” structures where the credit is structured around an export contract between an exporter (the seller) and an off-taker (the buyer). The proceeds of the exports are “typically used to enhance the repayment of the loan and the credit risk of the borrower can be monitored through the due performance by the borrower under the export contract”1

Financing growth

A long-standing client of Deutsche Bank, Metinvest had been an enthusiast of the PXF structure for some years as it built capacity and grew revenues, a high point being the US$14.189bn in revenues it posted in the 2011 accounts, up 51.6% on the previous year and driven mainly by record sales of steel and iron ore products. It had also vertically integrated its operations into two separate divisions of steel and mining because, as it said at the time, the company’s assets were consuming all the raw materials it produced.

Metinvest had enjoyed a strong PXF performance track record, from well before its incorporation within the System Capital Management Group in 20062, navigating through the ‘Orange Revolution’ and then the Global Financial Crisis without so much as even a covenant waiver, which was remarkable in 2008-09 when steel and iron ore prices collapsed by anything up to 80%. They also achieved scale, with Ukraine’s largest commercial syndicated loan of US$1.5bn, also on a PXF basis, in 2007. This was a record borrowing in the company’s history, the largest loan attracted by a private company in Ukraine during 2007, and its repayment confirmed to the international financial community the company’s “conservative financing approach and flexible business model”3.

US$ 8.9bn - Metinvest's revenue in 2017



While structured commodity trade finance was an important source of dependable liquidity, Metinvest was also in a position to tap the capital markets. It had issued two Eurobonds – US$500m in 2010 and US$750m in 2011 – totalling US$1.25bn, and the fixed rate senior secured notes had original maturity in 2015 and 2017 respectively.

The unfolding of the crisis in Eastern Ukraine changed everything. However, the hryvnia (the Ukrainian currency) collapse assisted the company as an exporter, with lower local currency costs and existing contracts having been negotiated in hard currency payments.

We have increased our creditors’ confidence and maintained the Group’s access to international capital markets

Yuriy Ryzhenkov, CEO, Metinvest


We can work it out

In March 2015, a full year into the crisis, after running down its cash reserves to the bare minimum, the company was forced to default on a US$113m payment due under its PXF facilities and confirmed that discussions with PXF lenders were “ongoing” with a view to “negotiating a standstill and waiver agreement, paving the way for a broad rescheduling of the group’s debts”.


On 9 April 2015, the company issued a press release announcing that it was in default and was beginning talks with the holders of its 2015, 2017 and 2018 bonds about a postponement of the repayment of principal on bonds maturing on 20 May 2015. It also sought consent that bondholders would waive their right to make claims in connection with certain cases of default that had occurred or would occur in the future.

The nature of PXF lenders is that repayment is credit-enhanced by the underlying commodity exports they finance, but, should commodity prices fall dramatically, or production and exports suddenly be hit, there may not be enough exports by value to repay, and then they face delay. “When prices go back up again, and production recovers, then repayment should catch up again as well, off the back of the improved flows. It’s why you should always see a ‘cash sweep’ in successful PXF restructurings,” explains MacNamara.

This isn’t necessarily how bondholders may see it, of course. The PXF lender is uniquely incentivised to keep the company alive. This means all lenders working together with the objective of everyone getting repaid – eventually – and trying to avoid a situation where some lenders try to force liquidation. In liquidation, everyone is unsecured, so the restructuring is based on this and the restructurer having control of payment flows and all the security. From the bondholder perspective, though, while the company is alive, they are unsecured creditors, but the PXF lenders control the export revenues and get them first (and here there were no domestic revenues to be had, due to the country collapse). But if the bondholders push the company to liquidation, then the PXF lenders no longer have their ‘future’ security, and all creditors are in the same boat.

Reconciling emerging market debt approaches

Metinvest’s great achievement was to convince sufficient bondholders that the boat would be a substantially bigger one if they let the company run on. The challenge then for the restructurers is that the bondholders have taken a higher price because they have accepted a higher level of risk, with unsecured bullet repayment at final maturity; conversely, PXF lenders have accepted a significantly lower price to take a lower order of risk, which is amortised (after a grace period of two years) and backed by the export flows, and reconciling these two conflicting approaches to emerging market debt requires a foot in both conceptual camps.

This achievement is testament to the strong reputation of the borrower and the robust credit structure

Boris Jaquet, Head of Distribution EMEA, Deutsche Bank


The traditional model in restructuring practice, where the inevitable question, “how much do we think they are going to sell in the next 12 months?” was, in this case, severely impacted by the relevant commodity prices for iron ore and for steel. Not only was this price all over the place, but so were the forecasts for where it would go through 2016 and 2017. Happily, the price has now recovered to a reasonable level, but that’s not what the forecasts were saying in the winter of 2015/2016. This is a dollar-earning group, but a large proportion of costs, as we have seen, are in hryvnia – so knowing what FX rate to use was a challenge, given the volatility of FX movements. Production output estimates were another challenge. A trainload of iron ore was blown up on a major bridge and careered into the waters below4. Metinvest didn’t wait for the Ukrainian government to repair the bridge and did so themselves in two days to maintain production, the pricing of which was impossible to estimate.

23% - Metinvest’s EBITDA in 2017



The final denouement of the restructuring broke the surface on 23 December 2016 when Metinvest announced that the principal finance documents had been agreed, although it still took another three months to work through all the legal processes and conditions.

Turning the corner

On 22 March 2017, Metinvest announced the completion of the US$2.3bn restructuring5: the series of guaranteed notes due in 2016, 2017 and 2018 were cancelled, delisted and replaced with new listed senior secured notes totalling approximately US$1.2bn, due in December 2021 with new terms and conditions. The four PXF syndicated loan agreements were combined into one facility of around US$1.1bn due in June 2021. A shared security between bondholders and PXF lenders provided an incentive to allow the company to continue to perform. “Nobody was allowed to run for the exit,” commented one lender.

Commenting on the deal, CEO Yuriy Ryzhenkov said, “The Group has always respected its obligations to creditors, having never demanded a write-off of any part of debt. With creditors’ support, we have arrived at a common solution, cured defaults, deferred repayments for five years and issued new instruments. As such, we have increased our creditors’ confidence and maintained the Group’s access to international capital markets.”


Fast-forward to 24 April 2018. The political situation stabilised in Eastern Ukraine and Metinvest reorganised itself so that it could manage without supplies and materials from trapped assets in the occupied territory of Donbass, in effect freezing the conflict. In addition, commodity prices had rebounded. In this environment, the 22 March 2017 deal, while good at the time, was now restrictive, particularly the shared security between the PXF lenders and the bondholders. To tap the bond market further, Metinvest needed to unbundle the restructured facilities, which had to be done in one transaction. This meant removing the shared security, along with the additional limitations on dividend payments and acquisitions that were agreed during the restructuring, so that they could re-enter the bond market, refinance the bonds and use some of the proceeds to pay down the PXF (reduced to US$624m on 8 May 2018)6 – which had been in restructuring rather than repayment mode.

“We agreed everything with the PXF with certain conditions on repayment, and some price increasing. Although the total tenor of the facilities was extended to 4.5 years, the average life of the facility decreased because the PXF had a large repayment at the end – but they accelerated the repayments profile,” explains Sander Stuijt, Head of Structured Commodity Trade Finance EMEA at Deutsche Bank. Deutsche Bank and ING served as global coordinators and, together with Natixis and UniCredit, acted as joint bookrunners of the bond refinancing and coordinating mandated lead arrangers of the PXF deal.

The deal had a lot of moving parts and participants, but track record is all. Boris Jaquet, Deutsche Bank’s Head of Distribution EMEA, reflects, “It had been a major exercise to manage 26 existing lenders to agree to the amendment and extension, while attracting new investors into the amended PXF and managing conversion of some lenders to new bond issuance. This achievement is testament to the strong reputation of the borrower and the robust credit structure.”

When the new US$765m PXF was all signed, Metinvest approached the bond market and issued US$1.592bn in new bonds that had the necessary liquidity, as they were not encumbered with the restructuring elements7. On balance, notes Stuijt, the PXF lenders ended up with a more standardised PXF loan with increased pricing, albeit less security, and the bondholders were happy because they had a fully functioning liquid instrument.

Moving on up

The deal – following Metinvest’s posting of US$8.9bn with an EBITDA of 23% for the calendar year of 2017 – marked a return to comparative normality in the recovering Ukrainian economy, despite the latest difficulties facing Ukrainian exports as a result of lower steel prices, “weighed down by tariffs imposed by the United States” as summarised by the National Bank of Ukraine8.

Chinese wisdom teaches, “The toughest steel is forged in the hottest fire,” and the Metinvest story demonstrates just that. Having been through rather a lot over the years, from the austerity of the post-Soviet era, through several revolutions, national economic mayhem, military conflict and commodity price volatility, the Metinvest story demonstrates that stubborn optimism, track record – and patient financiers with a collective approach to getting repaid – keep the home fires burning.



1 Chapter 12, 20 Years in the Loan Market (Loan Market Association)

2 See https://www.scmholdings.com.cy

3 See metinvestholding.com

4 See https://bit.ly/2LHs0s5 at metalbulletin.com

5 See https://bit.ly/2K11tBc at metinvestholding.com

6 See metinvestholding.com

7 See https://bit.ly/2vcvRmE at metinvestholding.com

8 See https://bit.ly/2uUVYzd at bank.gov.ua