Fixed Income. Petropavlovsk - Tender Offer for 2022 Notes Announced

Petropavlovsk (B- S&P/B Fitch) has announced a capped tender offer for its 2022 notes. The maximum tender amount is set at $200 mln out of the $500 mln outstanding. The tender offer price is set at 102.5% of par with an early tender payment of $30 per $1,000 principal, thus bringing the total offer price to 105.5% of par. The early tender deadline is set as July 26, for which the result will be announced the following day. The tender offer expiration date is August 9 and the offer is being made with respect to both the RegS and 144A tranches of the bonds.> According to Interfax, which cited Petropavlovsk CFO Danila Kotlyarov, the tender offer will be financed by a loan from Gazprombank. The buyback will improve the company's debt maturity schedule: the largest part of its gross debt is represented by the $500 mln Eurobond issue, with a bullet maturity in November 2022. The partial refinancing will extend the repayment period for a significant part of the company's debt until mid-2023 and reduce its cost of borrowing (the coupon rate of the notes is 8.125%, the interest rate on the loan is 3.6%). Earlier this year the company reported that in 1Q21 it secured a revolving credit line from Gazprombank totaling $66 mln at 3.5-4.5% per annum with an option to increase the amount of the credit line. The remaining part of the notes outstanding after the buyback might be refinanced through a new Eurobond issue this fall, according to Kotlayrov. The terms of the notes include a make-whole call option and maturity par call (three months before the repayment date).> Just before the announcement of the tender offer, the bond was trading at 104.5% of par at mid-price levels (YTM of 3.80%). The company is thus offering an approximately 1.0 pp premium to the secondary market price, which we think is reasonable given that the bond has limited liquidity. In our view, it is worth taking advantage of the offer so as to exit a quite illiquid bond at a premium to the secondary market. Moreover, our commodities team expects gold prices to start correcting in 2H21, under pressure from rising Treasury yields and a stronger dollar. For 2021, Petropavlovsk's total gold production is projected at 430-470 koz, a 15-20% decline y-o-y, and we see substantial risks that its 2021 financials will be weaker than 2020. We also note that the legal proceedings with the former shareholder Pavel Maslovsky are still ongoing. > See our recent comments on the company's 2020 financial (from May 18) and 1Q21 operating (from April 21) results.