Tim Gosling in Moscow -
In April, DTEK issued the largest-ever Ukrainian corporate Eurobond and the country's first since 2007, and investors snapped it up. Now Ukraine's largest vertically integrated power company plans another as it looks to expand both at home and abroad.
As the global economic crisis hit, DTEK was preparing to jump on the IPO bandwagon, which was racing along fuelled by cheap money and risk appetite. Two years after that joyride careered off the road, DTEK discovered a new route to financing via the Eurobond market, and is planning another trip in late summer when it hopes money will be even cheaper for Ukrainian borrowers.
DTEK hit the sweet spot when it debuted on the Eurobond market with a $500m, five-year issue with a 9.5% coupon in late April, surfing the peak of a debt market wound ever tighter since the second half of 2009 by a wave of cash breaking around the globe.
At the time, Raiffeisen International analysts credited the move with "reviving the primary market for Ukrainian non-financial, high-yield segment borrowers for the first time since the outbreak of the financial crisis." Just days later, events in Greece instantly pushed spreads wider, especially in countries with high public debt and deficits such as Ukraine.
The offer was oversubscribed by over three-times, smiles CEO Maxim Timchenko, who used the cash to restructure DTEK's debt - of which 80% was short term at the end of 2009, according to Raiffeisen - to leave a loan portfolio of around $660m.
With five years grace then, the company can now concentrate on its ambitious expansion plans. That means another Eurobond is in the pipeline. "With markets the way they are, we wouldn't expect to look at an IPO for the next two to three years," Timchenko says, "especially as we've now established ourselves in the debt markets."
In fact, since cleaning up its balance sheet and issuing its first internationally traded financial instrument, investors are lining up to lend DTEK cash, the CEO claims, adding that although the company is ready to issue more debt at any time, those lenders will have to wait until the end of the summer at least. By that point, Timchenko hopes that conditions both inside and outside Ukraine will combine to push yields down further.
In the first place, this assumes that the Euozone debt fears stalking the markets will subside, raising sentiment across the board and reviving the hunt for yield. Closer to home, Ukraine's newfound political stability since Viktor Yanukovych was elected president in February will have another quarter's track record under its belt to convince investors that the chaos of the last few years is really over.
At the same time, what the likes of DTEK will be hoping for perhaps most of all is that the International Monetary Fund (IMF) will finally ship out of Kyiv's Boryspil international airport with a smile on their faces. Until this happens, as Timchenko suggests, DTEK is "hampered by the sovereign rating, the implied rating of the company as a debtor during the last Eurobond being three to four grades higher than the state."
Safety in diversity
Yet with its debt restructured, DTEK is in no great hurry to raise more cash right now. The first step in its expansion strategy is to grow the current 47% stake in Dniproenergo and 11% in Zapadenergo to majority ones through forthcoming privatizations, but Timchenko doesn't expect to see them on the block before December, forecasting that, "if the privatization process goes forwards as has been announced, we'll likely have to raise more debt in August or September."
The plan to acquire more Ukrainian generating assets is prompted by DTEK's vertical structure - it has the output of 11 coalmines to sell. However, one of the key reservations for investors is that DTEK is so heavily dependent on its home market. Although it does export electricity and coal to Europe, the vast majority of customers and assets are within Ukraine (in fact, electricity exports from Ukraine have been suspended recently due to the pricing situation across the border in the EU). That leaves the company open to - mainly government-related - risk.
These are not just the standard concerns over a heavy regulatory hand and large state ownership of assets (the government has said it won't sell national utility Ukrenergo). Timchenko claims that DTEK remains completely neutral when it comes to Ukraine's Machiavellian politics. However, it's no secret that Yanukovych is now trying to sideline DTEK owner Rinat Akhmetov, Ukraine's richest man and previously the president's main sponsor.
With this in mind, plans for geographic diversification are a definite positive. Timchenko says that competition from some of Europe's biggest power companies won't deter DTEK from pushing outside the country - with Turkey and "neighbouring countries" likely the main targets for acquisitions - once DTEK reaches anti-monopoly limits and finally floats on the public markets.
Rather, he hopes such stiff competition will help the company continue to improve corporate governance and transparency - a process he says saw huge strides during the (ultimately unexecuted) IPO plan and in preparation for the Eurobond, although he does admit that operating efficiency still needs to see a serious uplift.
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