New Coverage: EuroChem Silent on H1 Earnings With $700M Eurobond at 40 Amid Russia Sanctions Impact; Company Asks Bondholders to Defer 4 Remaining Coupons to 2024 Maturity Date

Relevant Documents:
2024 Bond Prospectus
2021 Annual Report
2021 Presentation

EuroChem, which has major fertilizer operations in Russia, is yet to release its first-half earnings as investors wait to see how the company copes with Western sanctions on its founder. The company recently removed the 2021 financial calendar from its website, which showed that management released 2021 first-half financials on Aug. 18 of that year. The company has not responded to a request for comment.

Zug, Switzerland-based EuroChem is formally owned by Aleksandra Melnichenko, the wife of EU-sanctioned Russian billionaire industrialist Andrey Melnichenko, who ceded control to her in March.

EuroChem extracts raw materials in Russia, Kazakhstan and Brazil to produce fertilizers in all three primary nutrient groups; nitrogen (9.3 million tons in 2021), phosphate (7.2 million tons in 2021) and potash (2.5 million tons in 2021) across Europe, Russia and China. The company runs its own logistics including trucks, storage and port facilities, rail rolling stock and river barges.

The company, rated BB by S&P before Russia’s military attack on Ukraine, posted a 66% increase in topline in 2021, to $10.2 billion. Its EBITDA rose 127% year over year to $3.9 billion. EuroChem recorded a $1.83 billion free cash flow in 2021 and employed about 27,000 people. It reduced short-term debt by 27% to $1 billion at the end of December.

The company’s capital structure is below:
 
EuroChem’s founder, Andrey Melnichenko, held 90% of the shares in EuroСhem Group AG through his 99.9%-owned Cypriot investment vehicle AIM Capital plc until he was sanctioned by the EU on March 9 following Russia’s invasion of Ukraine. A wholly-owned EuroChem subsidiary holds the remaining 10% stake in EuroChem Group.

The EU stated in March that Melnichenko belongs to the most influential circle of Russian business people with close connections to the Russian government and pointed out that EuroChem’s owner was in the group of 37 business people who met with President Vladimir Putin immediately after Russia’s initial military attack on Ukraine to discuss the impact of Western sanctions.

The European sanctions on Melnichenko wiped 50 points off EuroChem’s $700 million 2024 eurobonds, which are still hovering in the 40s, and the founder resigned immediately from the board of directors while his wife, Aleksandra Melnichenko, took over the role as main beneficiary of the trusts holding the EuroChem shares.

The EU later imposed sanctions on Aleksandra Melnichenko on June 3 alongside a number of wives of sanctioned Russian industrialists, as reported. EuroChem itself is not sanctioned and on Aug. 2, OFAC in Washington even clarified in a FAQ that “based on information available to OFAC, EuroChem Group AG is not owned 50% or more by blocked persons or otherwise considered the blocked property of Andrey Igorevich Melnichenko.”

The U.S. has exempted the agricultural and medical trade from its sanctions target list and General License 6B specifically authorizes transactions related to agricultural commodities such as fertilizers.

A week after Melnichenko was blacklisted, the EU also targeted EuroChem CEO Vladimir Rashevskiy, who subsequently resigned and left the board. On June 1, CFO Kuzma Marchuk, who is not sanctioned, stepped down as CFO and left the board of directors.

Bond Payment Hurdles

The European sanctions on Melnichenko caused Citibank NA, London Branch, the paying agent under EuroChem’s guaranteed $700 million 5.5% 2024 bonds, to launch an internal compliance check which held back the $19.25 million coupon payment due on March 13.

Despite bondholders not receiving the funds, EuroChem declared that it had “discharged its obligation to make payment in accordance with the terms of the Trust Deed” arguing that Citibank’s hold-up was “purely administrative” and well beyond the company’s control.

A month after that statement, EuroChem announced on April 29 that Citibank had completed its internal investigation and allowed the money to hit the investors’ custodian banks.

On July 19, Citibank resigned as the company’s bond trustee, paying agent and account bank, prompting EuroChem to launch a consent solicitation on Aug. 16 proposing a new bond trustee and postpone the remaining four coupon payments on the $700 million 2024 bonds to March 13, 2024, when the notes mature. EuroChem says the proposal, which also releases the issuer and guarantors from covenants and certain events of defaults, will allow it to “punctually perform” its bond obligations in a “quickly evolving and drastically changing environment.”

Bondholders can vote until 5 p.m. BST on Sept. 5 and the noteholder meeting is scheduled for Sept. 7 after which the results will be published. At least 75% of the bond principal has to be represented to form a quorum and the proposal will only pass if 75% of the participants approve. The quorum requirement falls to 25% of the principal at an adjourned meeting.

SUEK, a Russian coal company also owned by Melnichenko, is conducting a similar consent solicitation for its $500 million 3.375% eurobonds.

- Magnus Scherman and Declan Bush