From Bust to Boom: MMC plans bond return

After a difficult few years, Mongolian Mining is on the up again. It plans to issue US dollar bonds as part of the company's rebound from default in 2016.
Mongolian Mining's coal exports are expected to improve this year
Mongolian Mining's coal exports are expected to improve this year

After a near-knockout in 2016 on the back of a default, Mongolian Mining Corproation (MMC) is on track to restore its financial health. The Hong Kong-listed coking coal producer has announced plans to tap the US dollar bond market for the first time in nearly two years.

In 2016, MMC defaulted on a $600 million bond and US dollar bank loan to lenders that included BNP Paribas Singapore and ICBC. The default came after coking coal prices fell to their lowest level in a decade. The company’s main product is hard coking coal, all of which is exported to China.

PwC led the restructuring of the firm’s $900 million of debt which was completed in May 2017.

Alongside the recovery in coking coal prices, the company has gradually put its house back in order. Onshore coal price futures traded as low as Rmb550 ($82) per ton in early 2016 but they had rallied to Rmb1,321 at the end of last week.

After five consecutive years of losses, MMC returned to profitability in 2017. It was also profitable last year.

Part of the proceeds from the upcoming Reg S/144A deal will be used to tender for $607.5 million outstanding paper. Its subsidiary Energy Resources has $412.5 million remaining on its five-year 8% 2022s, and Mongolian Mining has $195 million zero-coupon perpetual bonds of its own. Any remaining proceeds will be used to repay other debt and for general corporate purposes.

The roadshow for the new bonds and the tender offer both began on Monday. The new bonds are expected to price on April 2.

The outstanding five-year senior notes traded up 6% to par on Monday; the highest jump in the notes' history.

This happened after MMC announced a tender offer to buy the senior notes at $1,010 for every $1,000 of the bonds if bondholders accept the offer before April 1 (5pm CET). If bondholders accept the offer from then until April 16 (11am CET), they will receive $960 for every $1,000 of the bonds held.

Holders of the perpetual notes will receive between $450 and $510 for every $1,000 of bonds held if they accept the offer before April 1 (5pm CET), and between $400 and $460 if they accept the offer from then until April 16 (11am CET).

“The purpose of the perpetual securities tender offer is to improve the company’s financial position. The purpose of the senior notes tender offer is … to enable additional flexibility necessary to grow its business in Mongolia,” MMC explained.

On Monday, Fitch assigned its first rating to MMC at B, indicating material default risk with a limited margin of credit safety, and an average recovery rating in case of default of RR4 to its upcoming bonds.

S&P rates the new bonds at B-, indicating that adverse conditions might impair debt repayment. It also reaffirmed its B- issuer rating on the company.

The agency's rating is an improvement from its default rating of the company in March 2016 and its junk ratings of CCC-, CCC and CCC+ from February 2014 to January 2016.

S&P expects MMC’s sales volume and costs profile to improve over the next 12 months.

The company posted a 24% rise in revenue to $590.7 million last year, while net profit fell from $311 million to $82.8 million. But after stripping out a one-time $263 million debt restructuring gain, adjusted net profits surged 72.5% to $82.8 million.

Fitch expects MMC to generate positive free cash flow for the next three years. It said, “Mongolian Mining's cash flow has recovered from the trough, driven by the recovery in coal prices.”

Coal is Mongolia’s main export commodity, virtually entirely sold to its neighbour China. These rose 9.6% to an all-time high of 36.5 million tonnes last year, according to the Mongolian Customs General Administration. The country aims to increase its annual coal exports to 40 million tonnes in the coming years.

In 2016, Mongolia narrowly avoided a balance of payments crisis after it raised $500 million in the debt markets.

MMC faces high regulatory risk, given its sole dependence on the China market, warned a JP Morgan report in January last year. “We believe that Mongolian Mining’s business risk profile is high.”

JP Morgan and Morgan Stanley are dealer managers of the tender offers for the outstanding bonds, as well as the joint bookrunners and lead managers of the new bonds. The Bank of New York Mellon is the trustee of the new bonds.

This article has been corrected in paragraphs nine and 10

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