Ukrainian record breaker

  • BNP Paribas signed a record-breaking Ukrainian deal last year that involved the largest transaction amount ever made to a Ukrainian corporate, the longest tenor ever for a Ukrainian corporate, and the first transaction in the former Soviet Union (FSU) to a non-exporting commodity producer but utilising the core security elements of traditional pre-export financing. 

    The three and a half-year transaction was significantly oversubscribed with commitments of US$715mn, and scaled back to US$400mn.

    Severny GOK & Centralny GOK, through their holding company Metinvest, approached BNP Paribas early last year to obtain medium-term financing. After studying the commercial flows of the borrowers and main offtaker Azovstal, BNP Paribas developed a new structure that allowed the GOKs (mining and processing integrated works) to obtain medium-term money while providing the lenders with a secured pre-export finance-like structure.

    The funds are to be used for capital expenditure and were drawn down in late September.

    The structure rests on two pillars: an onshore ‘mines-to-steelmaker’ leg, which relies on pledge of rights and receivables and a priority clause which allows the lender to capture the proceeds from any sales to third parties and second, an offshore ‘steelmaker-to-offtaker” leg, that combines the classic element of a pre-export finance transaction.

    The facility benefits from a first demand guarantee from System Capital Management (SCM), the largest company inUkraine.

    “This transaction is highly innovative,” says Patricia Isaeva, director, client relationship management, Russia/CIS, at BNP Paribas, says: “The GOKs produce iron ore products but do not export in sufficient quantities to raise a classic pre-export finance loan. Most of their sales go to an onshore steel maker (Azovstal) which belongs to the same company, SCM. Azovstal then sells the steel to the offtaker, Leman Commodities, (which also belongs to SCM).

    “Because of these sale practices, BNPP implemented a two-leg security structure which follows the flow of commodities: onshore security between the GOKs and Azovstal and offshore security between Azovstal and Leman.

    “The structuring solution of this transaction can be used in the future by other vertically integrated companies for raising financing for their non-exporting subsidiaries.”

    “The contemplated financing for the GOKs is in US dollars,” adds Isaeva, “while most of the GOKs’ revenues are in Ukrainian hryvnya. Therefore this financing should imply foreign currency exchange risk. This risk is however mitigated since the payments under the facility will be made in hryvnya but denominated in dollars and pegged to the official US$/UAH exchange rate of the National Bank of Ukraine.

    “The GOKs will grant the lender the withdrawal rights in respect of their onshore bank accounts held at UkrSibBank in case of default. The risk also will be mitigated by export sales, though limited, of each GOK.”

    The steel industry is highly cyclical, with volatility and to some extent unpredictability, of steel prices and prices for raw material inputs. But for Metinvest, the GOKs” holding company, this risk is mitigated by its vertical integration. “The group owns iron ore and coal mines and so is able to control main input costs. In addition, vertical integration allows the group to book the profit at the production-cycle-level desired:  either at the mines or at the steel plant or at both,” says Isaeva.

    “From the political point of view, the GOKs’s facility was brought to the market at the time of an unprecedented political stability in the recent history ofUkraine,” adds Isaeva. “The majority coalition among the main political forces ofUkraine was formed. The president ofUkraine and leaders of the four major political parties signed a national unity pact, the document proclaiming political tolerance and stability inUkraine.”


    Deal information:

    Borrower: Severny GOK & Centralny GOK
    Amount: US$400mn
    Split into:

    • US$300mn for Severny GOK
    • US$100mn for Centralny GOK

    Mandated lead arranger, underwriter, bookrunner: BNP Paribas
    Tenor: 3.5yr
    Guarantors: System Capital Management (Ukraine); Metinvest (Netherlands)
    Onshore buyer and exporter: Azovstal
    Offtaker: Leman Commodities
    Margin: Libor + 2.8%
    Law firms: Denton Wilde Sapte (lenders); Baker & McKenzie (borrower)
    Date signed: August 2006