| Deal at a glance | |
|---|---|
| Deal Type: | Eurobond |
| Deal Structure: | RegS/144a |
| Issuer: | MMK International Capital |
| Guarantor: | MMK |
| Deal Size: | USD500mn |
| Issue Date: | June 2019 |
| Tenor: | 5-year |
| Coupon: | 4.375% |
| Price: | 100.00% |
| Yield: | 4.375% |
| Issuer Rating: | Moody’s Baa2 |
| Governing Law: | English Law |
| Location: | Russia |
| Listing: | Irish Stock Exchange |
| Organizers/ Bookrunners: | JPM, Citi and Societe Generale |
| Legal Adviser to Bookrunners: | Freshfields Bruckhaus Deringer |
| Legal Adviser to Issuer: | White & Case |
| Use of Proceeds: | Capex and debt refinancing |
Background
MMK is one of the largest steel producers in the world and a leader of the industry in Russia, with annual steel products sales of USD8.2bn and EBITDA of USD2.4bn.
Due to the prolonged absence from the international bond markets, the company dubbed the issue a “re-debut”. Among the challenges that faced MMK upon their return were reforms and changes in the country’s legislative landscape, which necessitated a “back to basics” approach from the DCM team.
The issuer held preliminary discussions with the troika of key partners – JP Morgan, Citi and Société Générale – during which it was decided that a loan participation note (LPN) transaction would be the best way forward as investors and funds were looking for guaranteed structures.
MMK came to the market amid dampened bond supply and volatile secondary market trading stemming from global growth slowdown woes; even as the corporate roadshow began, the Moscow Stock Exchange was on a downward trajectory.
However, the timing proved to be congenial, as towards the end of the roadshow stocks saw a significant rebound and a market window opened up for EM issuers following Jerome Powell’s announcement of further offcuts to Fed’s benchmark rate.
Transaction Breakdown
The USD500mn 5-year RegS/144a bond transaction closed on June 14 at an annual coupon rate of 4.375% (payable semi-annually), the lowest coupon by Russian or CIS corporate issuers in 18 months, with a 0bp new issue premium to the implied yield curve of their local industry peers. The issuer was an SPV, MMK International Capital DAC, which was registered in Ireland for the sole purpose of issuing on behalf of MMK.
While the bond can be considered plain vanilla, the use of an SPV allowed MMK to placate the targeted institutional investors that were seeking additional guarantees before coming onboard.
The issue saw USD2.2bn worth of demand at peak, reflecting a 4.5x oversubscription rate.
During the roadshow, the company had two teams on the ground – one in Europe, one in US; the high demand from US accounts resulted in a final allocation of an impressive 31% to American accounts. Another 29% went to Europe, 17% to the UK and 8% to Asia (historically, demand from Asia for steel producers has not been high) and the rest went to investors in other regions.
Russian corporate issuers in months leading up to MMK deal did not see large participation from US accounts due to sanctions risk. A number of factors allowed MMK to overcome those obstacles and attract broad-based appetite. First, while the outlook for the global and Russian steel industry remains tenuous due to both supply demand side concerns stemming from the US-China trade war (China is the largest steel producer in the world), timing the deal to coincide with a lull in tensions was very opportune.
Secondly, as sanctions continue to loom in the background of Russian industrial giants, MMK has the somewhat unique advantage of holding the largest domestic share of the steel market, making it less reliant on global supply chains. With a rise in internal premia after a hike in duty fees and consumption growth set to grow 2%, and with a host of major government-led infrastructure initiatives on the horizon, MMK could safely point to the domestic market as its main focus even if sanctions are tightened.
Notably, a lot of questions (particularly from European investors) were around ESG and the company’s compliance with sustainability principles. This is something that has increasingly become a priority both on a federal and a corporate level, as the company seeks to reduce its carbon imprint and introduce more eco-friendly initiatives. The Treasury team is currently discussing various ESG-linked financing instruments with the Russian government, while also working to create a dedicated ESG-compliance and reporting department internally.
With this transaction, MMK was able to source funds for investing into its capex programme, and refinance existing debt. The Eurobond also altered the company’s debt profile, extending average maturities from 1 to 4 years; it will seek to extend the curve further in the near future.
