NWR bondholders seek Czech state bailout after Bakala exits

NWR bondholders seek Czech state bailout after Bakala exits
It remains far from clear how coal miner NWR will escape insolvency, given its €298mn in net debt and the gloomy outlook for coking coal prices.
By Robert Anderson in Prague February 24, 2016

Controversial Czech tycoon Zdenek Bakala has agreed to renounce all his shares in New World Resources (NWR), giving a trio of big bondholders a majority in the struggling Czech coalminer.

At the same time, the bondholding group has agreed a temporary standstill on debt repayments and to relax covenants on their debt until the end of July, providing the company with a vital breathing space, and enabling auditors KPMG to report that NWR is still a going concern.

But it remains far from clear how the coal miner will escape insolvency, given its €298mn in net debt and the gloomy outlook for coking coal prices, which have halved since 2011.  

The Czech government has so far refused to take part in a rescue, because of Bakala’s unpopularity with the ruling Social Democrats, and opposition from powerful Finance Minister Andrej Babis to any bail-out. Economy Minister Jan Mladek told bne IntelliNews last week that he had rejected a request from bondholders in December to provide €150mn, and the government would not step in to stop the company becoming insolvent.

The company hopes Bakala’s exit could clear the way for a state-led rescue, but it may still just be too politically sensitive for the government to offer NWR more help. With Bakala washing his hands of the company, and bondholders and the government playing “chicken” over who will make the first offer to inject more money, NWR therefore risks sliding into insolvency.

Gareth Penny, NWR executive chairman, told bne IntelliNews that, given the change of ownership and the bondholders’ renewed commitment, the company now hoped to start discussions with the government on the way forward.

“The government is an important part of the solution here,” he says. “They are huge stakeholders in this.”

Penny insists “no-one is waiting for a handout”, adding that “no-one is expecting the government to carry the can on its own.”

Reacting to the announcements, Mladek told Reuters on February 24 that the government would only meet to discuss OKD after Bakala is finally out of the company.

Burning cash

In its audited full-year results, also released on February 24, NWR fell back into negative ebitda of €4mn in 2015 on revenue down 7% to €630mn. It made a net loss of €223mn after booking €199mn of impairments and a €67mn positive gain from revaluation of its convertible loans in the fourth quarter.

The company had negative operating cash flow of €7mn and, with debt payments, is expected to burn through its remaining €86mn of cash during the third quarter.

“The numbers are still very weak,” says Bohumil Trampota, analyst at J&T Banka in Prague, pointing out that the increase in cash on hand was due to one-offs such as selling down inventories.

“They are burning cash and the question is how long they can last,” he says. “Now they just have a little bit more time to negotiate with bondholders, the government, and the unions.”

NWR said its average operating cost/tonne was €66 last year, while it achieved prices of €90 for coking coal and only €50 for thermal coal, with a mix of around 53:47.

Even if agreement is reached with the government, OKD looks set to be radically downsized. OKD Chairman Dale Ekmark said in January that in the long term OKD only needed 5,000 of its 13,000 workers and two of its five mines.

A decision on whether to close the Paskov mine would be made “well before” the middle of the year, Penny says. Lazy mine is also expected to be closed, with total costs of closing both mines estimated to be around €85mn-100mn.

Coal production is already being shrunk – it fell 7% in 2015 to 8mn tonnes, and the company expects to mine 7mn this year – while investment is being slashed, falling 42% last year to €34mn.

Driving seat

Under the agreement with the bondholders, Bakala, together with his partner Peter Kadas, will transfer their 50.4% shareholding, held via Cercle Mining Holdings and Asental Property, into NWR’s treasury for zero consideration, ending the financiers’ turbulent involvement in the company.  

Bakala bought coalminer OKD from its managers in 2004, loaded it with debt, withdrew an estimated €1.5bn in dividends and floated it as NWR on the London Stock Exchange in 2008. The shares are now worth 1% of their listing price.

Ashmore Investment Management Limited, Gramercy Funds Management, and M&G Investment Management Limited – who hold an estimated 65% of the group’s €388mn in fair value gross debt – will now control around 60% of the company’s voting shares. The bondholding group already took part in a debt restructuring in 2014 in which they injected €75mn of equity and €35mn of new debt, and agreed to write off €235mn of existing debt.

“The bondholders are now in the driving seat,” says Penny. “It gives us a lot more room to play.”

The bondholders have agreed a standstill agreement on their debt and will relax covenants on the super senior credit facility until the end of July. The €35mn debt comes due this autumn, before which the company hopes to agree another restructuring plan with bondholders and the government. Penny said the bondholders “were very positively disposed towards the company”.

In response to a request from Mladek, the bondholders group issued a statement on February 24 voicing their commitment to the company, but they stopped short of offering to inject more cash into the company as a first step.

“The ad hoc group’s ability to successfully help with the restructuring and recovery of OKD is dependent on all stakeholders, including the government, suppliers, customers and employees working together constructively to agree an operational turnaround plan,” the bondholders said. “As a first step, the ad hoc group hope to engage with the government as soon as possible.”

Bondholders last met the government in December when, according to Mladek, they asked for €150mn to save the company, which is based in the depressed North Moravia region, a Social Democrat stronghold.

The government would like any cut in the workforce to be gradual and has offered to help pay to alleviate the social consequences of redundancies. But it has refused to put money into the company itself, though it has not ruled out buying some OKD assets during insolvency proceedings.

Agreement has been impossible so far because the Social Democrats felt betrayed by Bakala, who benefited from very favourable terms when the last state stake was sold in 2004 when they were last in power.

At the same time Finance Minister Andrej Babis, the country’s second richest man, and his media empire are constantly criticising the party, alleging the sell-off was corrupt. There has also been a lot of speculation that Mladek himself will be forced out, weakening his position in the cabinet.

Penny hopes the government will recognise that the company is opening a new chapter.  “There is a line in the sand that we all need to recognise,” Penny says. “Whatever the rights and wrongs of what happened is irrelevant now.”