Petropavlovsk agrees refinancing of convertibles for new bonds, cash

New York, Dec. 8 – Petropavlovsk plc said it has reached an agreement with holders of 62% of its $310.5 million of 4% guaranteed convertible bonds due Feb. 18, 2015 to refinance the debt for new convertible bonds and cash.

The company will also carry out a $235 million rights issue at a deeply discounted price, according to a company announcement.

“I believe that this agreement and the refinancing of our convertible bonds to which it relates will, when implemented, secure the future of the group, and give Petropavlovsk the opportunity to take full advantage of the significant operating margin and the substantial reserves and resources that it now enjoys,” said chairman Peter Hambro in the announcement.

The refinancing deal was agreed with an ad hoc committee made up of five institutions holding 33% of the bonds and an additional four institutions owning 29% of the bonds.

These bondholders have signed a lock-up agreement which commits them to vote in favor of a bondholders’ resolution to approve the financing.

Some of these bondholders have agreed to provide $45 million in cash by participating in the rights offering. These bondholders will have priority in receiving cash or new convertible bonds for their existing holdings, with the cash capped at their commitment to the rights offering.

The bondholders participating in the agreement will also participate in a debt-for-equity exchange for more than $130 million of the bonds. These bondholders will have second priority in receiving cash or new convertible bonds for the existing convertibles that they own, capped at the level of their commitment to the exchange.

Any remaining cash raised in the rights issue and any remaining new convertibles will be allocated to redeem at par any of the existing convertibles that are still outstanding after these two steps. Accrued interest on the existing convertibles will be paid in cash.

An early consent fee of 0.25% is expected to be paid to bondholders who vote in favor of the recapitalization by an early deadline, which will be announced.

The refinancing may also include a mandatory debt for equity exchange, Petropavlovsk said, which would be on the same terms as the voluntary commitment, but without the priority election mechanism. Any mandatory exchange would be capped at 10% of the existing convertibles, or $31 million.

Petropavlovsk expects to have at least $50 million of cash to purchase the existing bonds at par.

The new convertible bonds will have a target size and minimum size of $100 million. They will be issued by Petropavlovsk 2010 Ltd. and guaranteed by Petropavlovsk plc.

The new convertibles will mature on Dec. 31, 2019 and pay a quarterly coupon of 9%. The conversion price will be a 50% premium to the theoretical ex-rights price.

Petropavlovsk will be able to call the new convertibles after three years subject to a trigger of 150% of the conversion price.

The rights issue will be priced at 5p per share and will be fully pre-emptive so that existing shareholders can maintain their holdings if they wish to do so. Petropavlovsk said the price was set by the board, as required by a group of bondholders.

The $235 million size includes any existing bonds exchanged for equity as part of the refinancing.

Hambro and chief executive Pavel Maslovskiy have committed $30 million in cash to the rights offering and have also entered into lock-up agreements.

The refinancing is subject to formal approval by the company’s senior banks, sufficient acceptance in the convertibles exchange offer and the passing of resolutions at meetings of the bondholders and shareholders.

Petropavlovsk expects to complete the refinancing before the Feb. 18 maturity date of the existing convertibles.

A fee of 5% will be paid for the cash commitments from existing holders of the convertibles and from Hambro and Maslovskiy. Investors who committed to the voluntary debt-to-equity exchange will receive 4%.

Bank of America Merrill Lynch and Sberbank CIB are co-ordinators of the refinancing.

Once the refinancing is complete, Petropavlovsk expects to have net debt of $700 million.

“Upside potential for the business exists because the margin between the U.S. dollar-related gold price that the group currently receives and its operating costs remains strong,” Hambro said in the announcement. “This is the result of a number of factors including: reduction in operating costs, lower stripping ratios, new gold discoveries and a substantial depreciation in the foreign exchange value of the Russian ruble against the U.S. dollar.”

He forecast “strong cash flow generation” in 2015.

Petropavlovsk, formerly Peter Hambro Mining plc, is a London-based gold mining company that operates in Russia.

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