SINGAPORE, May 5 (IFR) – Mongolian Mining Corporation this week completed the first corporate debt restructuring by a Mongolian company, as a US court approved its Chapter 15 filing after more than a year of negotiations.
MMC defaulted on a US$600m offshore bond and a US dollar bank loan last year, but managed to win creditor agreement to exchange its debt for new loans, senior bonds, perpetual securities, equity and contingent value rights (CVRs).
The outcome balanced the interests of the company and different creditor groups – perhaps a surprise, considering that it was the first restructuring from the frontier market and offshore bondholders have not yet tested Mongolia’s corporate bankruptcy regime.
Some observers estimated that creditors could have received as little as low double digits on the dollar in the event of a liquidation, which, on the face of it, gave them a weak hand to negotiate. The company also faces an uncertain future, even without the restructuring, and is waiting to learn whether its consortium will be awarded the right to develop Mongolia’s Tavan Tolgoi coalfield.
In January 2016, the coking coal producer hired JP Morgan and SC Lowy to advise on the restructuring of its bonds. Moelis played a similar role for a steering committee of bondholders comprising Value Partners and Ashmore funds.
“One challenge was that the coking coal price was extremely low and the other unknown was whether the TT concession would come their way,” said Bert Grisel, managing director at Moelis in Hong Kong.
“To its credit, MMC always tried to be sensible with creditors. They are Hong Kong-listed and did not want to lose that, and a bankruptcy would have made Mongolia look bad. It would also have made it difficult for MMC to do the TT project, which would have made it much less attractive to investors.”
Under the agreement, bank lenders will receive a US$30m first-ranking, amortising senior secured facility, maturing on September 30 2019. Bank lenders and holders of MMC’s US$600m 8.875% senior notes due March 2017 also received US$395m in senior secured notes due September 30 2022, as well as CVRs linked to company performance.
Both parts pay interest on a sliding scale, based on the average monthly price of premium hard coking Australia coal.
The payment ranges from 0% in cash and 5% payment in kind, if the coal price is below US$110 per tonne, to 8% in cash, if the coal price is above US$140. The hurdles will be lowered by US$10 if Energy Resources, a subsidiary of MMC, enters into a transaction related to the Tavan Tolgoi project.
Noteholders and lenders also received US$150m of perpetual securities, and QGX, which held MMC promissory notes, received US$45m of perps. The securities pay 0% initially, but step up to 5% twelve months after the trigger event and rise a further 1% annually to a maximum of 15%.
“The commodities recovery didn’t really have much influence on the process. Key for us was to tie interest payments to benchmark coking coal prices to reflect better the cyclical nature of the business and smoothen out short-term volatility”, said Florian Schmidt, head of DCM at SC Lowy.
“We also based the step-ups in the perps on operating trigger events, while the cashflow-triggered CVRs allow for an alignment to share upside with investors if operating income improves. The recent price surge in coking coal points into such direction.”
Noteholders and lenders will also receive 1.03bn shares, but MMC was limited in the amount of debt it could convert to equity. In order to participate in the TT joint venture, the company needed to remain majority-owned by Mongolian investors. That meant that any equity component of the restructuring could only total around a 10% stake – far less than in most debt restructurings.
Additionally, MMC’s key production assets were secured against a loan taken from development finance institutions. The company managed to negotiate a redemption of that senior secured facility, which was replaced with Tug105.6bn (US$43.7m) of tugrik-denominated promissory notes from Mongolia’s Ministry of Finance.
MMC had received the MoF promissory notes as compensation for terminating an agreement related to the development of railway-based infrastructure between Ukhaa Khudag and the Gashuunsukhait border checkpoint. The transaction allowed for the security to be released and used for the new restructured notes.
The company and its creditors had seemed close to approval when the initial proposal was put forward last July, but BNP Paribas, one of the bank lenders, surprised everyone in seeking to wind up the company shortly afterwards. The company countered by appointing PwC as provisional liquidators.
“The banks were somewhat difficult and I feel that we could have concluded the transaction six months earlier if parties had been a bit more pragmatic where the company could have been producing more when the coking coal price was peaking,” said Moelis’ Grisel. “Also, seeing winding-up petitions being filed was quite surprising and aggressive.”
Bank lenders and bondholders disagreed on the appropriate value for the US$150m bank facility backed against separate collateral, including certain cash accounts, coal collateral and rights to coal sales agreements. Lenders put the value at US$93m, while bondholders viewed it as almost worthless, given the difficulty in moving piles of coal out of Mongolia to sell. In the end, it was agreed to convert it to US$30m.
The final outcome leaves MMC with a manageable debt and a potential boost to business if it wins the right to develop the new concession.
“MMC reduced debt of US$828.9m, including arrears, to US$425m,” said SC Lowy’s Schmidt. “The zero coupon perpetual securities count as equity. So, the company could show up-front deleveraging, which the Mongolian government required for the company to be considered for the TT joint venture.”
(Reporting by Daniel Stanton, editing by Vincent Baby and Dharsan Singh)