Eurotorg (part of Euroopt), Belarus’s largest private company and largest food retailer, looks set to offer a yield close to double digits for its debut international benchmark offering to draw EM bond shoppers through its doors. But even this may prove insufficient to bag the deal at the check-out desk, according to a Moscow-based banker, a fixed income analyst, a fixed income advisor and two portfolio managers.
The trolley load of concerns that investors need to price up include the company’s high leverage, a mismatched foreign currency-denominated debt burden, and the strength of the retail sector as well as the closeness of the Belarusian economy to that of Russia.
Also on their worry list will be the seniority (or lack of) of the notes on offer, the company’s continued default of a Belarusian ruble-denominated loan, a lack of ringfencing of the shareholder’s banking business as well as a lack of event-of-default language in the deal docs for nationalisation or appropriation, the market participants add.
It is the company’s debt metrics that are under the strongest spotlight. In addition to the volatility of the retail sector, the fact that the company has a lot of secured debt with Sberbank and other lenders “makes you cautious as an unsecured creditor”, one of the portfolio managers said.
Shelves stocked with debt
The denomination of the company’s debt has also caused concern. A second portfolio manager highlighted the company’s large FX debt burden, which is coupled with local currency-denominated revenues.
As the Belarusian economy is tied closely to the Russian economy, any future devaluation in the Russian ruble will lead to a depreciation of the Belarusian ruble. This would be strongly negative for the company, he added.
Euroopt’s leverage was highlighted by two banking sources when Debtwire reported that the company was planning an international bond. One cautioned against the taking on of foreign-currency debt, given that the company receives revenues in Belarusian rubles.
Given its overflowing basket of debt, the company was even in discussion as late as in 2016 regarding bringing one bank onboard as an advisor to restructure its debt. Instead, the company looks to be restructuring its debt via this bond, the banker said.
According to Debtwire’s sister company Xtract Research there is ample room to make adjustments to the leverage calculations, especially with regards to the numerator. “The Leverage Ratio test is in fact NET of uncapped cash/eq: netting of cash at the Bank Sub level (including, eg, Bank customer deposits), its report says.
Net leverage is at 3.6x, but the company is targeting organic deleveraging to 3.2x by the end of the year and a medium-term leverage target of 2x, said a source close to the deal responding to investor queries.
Even though 73% of the company’s debt is US dollar-denominated as of 1H17, the share of FX debt is decreasing, and the company is aiming to increase its relative share of local currency-denominated loans, the source close added.
But, regarding Belarusian ruble-denominated loans, there is some spillage in the aisle as the company remains in breach of a leverage maintenance covenant.
This occurred in 2015, when leverage increased following the devaluation of the Belarusian ruble, the source close said.
The company will repay the in-default facility from the bond proceeds and continue a shift away from maintenance covenant-based bank debt, the source close noted.
Additionally, the company will retain USD 40m of the new issue as a cash buffer to cover FX volatility going forward, the source close continued.
The source close also added that the company’s share of secured bank debt is decreasing from 80% to less than 50% pro forma. This will drop further as it continues to repay bank loans in line with its deleveraging plans.
But despite the decrease in secured debt, there is no guarantee that the company will not pile on more secured debt in future, the first portfolio manager said.
Xtract Research highlights in its report on the transaction that, as presently drafted in the preliminary prospectus, the permitted debt basket allows for unlimited amounts of additional debt to be incurred in the future.
“There are no cast iron guarantees that they do not do nasty things going forward… or even pay back the debt at all,” the first portfolio manager added.
Bag full of concerns
The lack of ringfencing of the group’s banking business was also highlighted by Xtract.
StatusBank is not ringfenced from the food retail business. While enabling assets to be moved around the restricted group freely as in other high-yield bonds, this also enables cash/asset leakage/guarantees and intercompany loans from the food business to the banking business or vice versa, which alters the overall risk profile for noteholders, Xtract notes.
A second source close to the deal said that the bank’s operations are negligible in the group’s assets, while the first source close added that the banking business is completely separate from the group.
But, this still does not guarantee that cash cannot be syphoned off into the bank, the first portfolio manager said.
Xtract also highlighted the fact that an event of default clause for nationalisation or appropriation was absent, which should be present for any emerging markets deal.
The second source close to the deal said that there is no risk of nationalisation as the company is one of the largest employers in the country with over 33,000 employees. In addition, Belarus has a sound business environment, the second source close added.
Double-digit price tag?
Despite the concerns, the company has worked hard to reassure the investment community.
“The company did non-deal investor work in the summer, and I do not think, that it would risk announcing the deal publicly unless it was sure it would see good demand,” the banker said.
Still, from a credit perspective, the company’s leverage means that it could provide the highest yield in the CIS markets for some time, he noted.
“I expect it will be a very high yield issue, close to double digits,” he continued. But, the company is ready to offer this, he added.
A 9%-10% yield is likely, especially because the company is targeting up to five-years. I do not think anyone will look at a yield below this, a fixed income analyst said.
“In the relatively stable environment at present, I would recommend holding the bond for one or two years, but not for five years should the company go for that tenor,” he added.
At its tightest, the company could launch a deal in the middle of the 9%-10% range, the first portfolio manager said.
But, not even such a yield will be able to bag all buysiders. “The deal is beyond our risk appetite,” a fixed income advisor noted.
Eurotorg is marketing a debut Reg S/144A benchmark-sized US dollar-denominated loan participation notes with an up to five-year maturity, as reported.
JPMorgan and Sberbank are mandated as joint global coordinators and joint bookrunners, with Renaissance Capital participating as joint bookrunner.
Eurotorg is rated B- by both S&P Global Ratings and Fitch.
The company declined to comment.