Analyst: It's not clear whether the stated motivation for the external administration, which is combatting the railway blockade, is the real motivation behind it, or just a convenient pretext to take control of assets.
DONETSK, Mar 1, 2017 (UBO) - The leaders of the self-declared, Russian-backed Donetsk and Luhansk People's Republics plan today to take control of Ukraine-registered enterprises located on their territory, Concorde Capital informed clients based on an Interfax-Ukraine news agency report that cites anonymous officials. “An external administration is being introduced by LNR, and taxes will be paid to the budget,” said an official in the Luhansk People's Republic (LNR), as reported by Interfax. The separatist governments threatened on Feb. 27 to impose control of enterprises if Ukrainian activists didn’t halt their blockade of railway connections with the occupied territories, which is still ongoing.
In response, the Ukrainian steel holding Metinvest (METINV), which has large exposure to the occupied regions, commented on Feb. 28 that “such expropriation, if it occurs,” will have no negative effect on the implementation of its debt restructuring. The threatened assets “have been loss-making in each of the previous three years,” the holding said, seemingly referring to Yenakiyeve Steel, Khartsyzk Pipe, Krasnodon Coal and a dozen smaller firms.
DTEK Energy (DTEKUA), the coal and power holding with large exposure in the occupied territories, did not comment yesterday directly on the threats of “external administration.” The holding’s CEO told journalists in a Feb. 28 press conference that it “works and will work exclusively within the framework of the Ukrainian legislation.” DTEK Energy has four major assets in the occupied territory, including three coal mines and one thermal power plant. Its distribution companies are also involved in electricity supplies to the occupied territory of the Donetsk region.
Both Metinvest and DTEK are owned by Rinat Akhmetov, Ukraine's wealthiest individual.
Concorde analyst Alexander Paraschiy added: “It's not clear whether the stated motivation for the external administration, which is combatting the railway blockade, is the real motivation behind it, or just a convenient pretext to take control of assets. The targeted companies do not pay taxes to the self-declared republics and the DNR website cited documents with its own laws that allegedly enable its government to impose an external administration on non-resident entities (companies not registered there) that have not signed an agreement with tax authorities by March 1.
It’s also not clear exactly how this “external administration” will work and what exact implications it will have for the targeted companies. For instance, it may mean just requiring some “tax” payments to the companies and introducing some tax managers to them, or it may be full expropriation of the companies with complete replacement of the current management.
In our understanding, the DNR/LNR terrorist leaders are not interested in expropriating large enterprises located on their territory, but are more interested in taxing them to swell “state” revenue streams. So we don't expect any change in ownership of the companies controlled by Metinvest and DTEK on the occupied territories so far.
As we wrote in our Feb. 22 note, the possible loss of assets on the occupied territory will result in about a 12% drop in Metinvest's potential EBITDA and will not affect its ability to smoothly service its debt this year, as well as deleverage. Metinvest’s Feb. 28 statement confirms our conclusion, which allows us to remain comfortable with our bullish view on Metinvest’s Eurobond.
The bigger threat of the blockade and asset expropriation is to DTEK, affecting up to 35% of its potential EBITDA. However, potential losses may be partially or fully compensated by upward adjustments of electricity rates for DTEK’s power plants, and DTEK may earn additional profit in case RAB regulation will be introduced for its power distribution companies. Also, if DTEK stops supplying electricity to the occupied districts of the Donetsk region, it will save lot of money that it annually writes down as bad receivables. So, we remain cautiously neutral on DTEK Eurobonds.