Government allows Kernel to purchase part of Kreativ debt

11 February 2016

Ukrainian government allowed state-owned bank Ukrgazbank to sell to Kernel USD 95.8M debt of one of Kreativ legal entities (JSC Kreativ). Newest oilseeds crushing plant of Kreativ (legal owner PE Ellada) with annual capacity of more than 600k tons of seeds was pledged under this loan.

As a result of this transaction Kernel can increase its total crushing capacities by 20-25% up to 3.7 mln tons of seeds. In addition plant is seemed to be rather efficient from processing cost point of view (as it is new one and has modern equipment), situated in raw materials-rich region, so can be seen as potentially good acquisition for Kernel.

Terms of debt purchase by Kernel imply 50% down payment and repayment of remaining part during next 5 years in UAH (deal was fixed under current USD/UAH rate). Even assuming average crushing margin at USD 30 per 1 ton of sunflower seeds, 600k tons crushing capacities of new plant potentially mean annual EBITDA generated at more than USD 18M.

Such developments were expected by us. In August 2015, after change of official owners of Kreativ Group, one of Kernel production managers Mr. Kapustyan joined Kreativ. After that Kernel started tolling operations on Kreativ assets and was considered by us as one of main potential purchasers of Kreativ assets in case of their sale. Other potential off-takers international companies like Cargill, Bunge and others could hardly be involved into not fully clear schemes with Kreativ debt, while Kernel principal owner Mr. Verevskiy seems to have better understanding of how to deal in such situation. His business and political connections can help him to solve all the issues with new/previous owners of Kreativ and to legally acquire new asset.

On the other side Ukrainian state banks are to be losers from this situation because of absence of common position in general approach to dealing with Kreativ debt. In total Kreativ owned to 3 Ukrainian state banks more than USD 500M, backed by Fixed Assets of the group. After selling debt, covered by the best asset for USD 96M, coverage of remaining more than USD 400M of debt significantly worsened. Along with it, in case of fully clear procedure of assets realization by state banks, assets could attract other potential purchasers international companies, so that realization price for already sold debt/asset could be higher.

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