Avangardco IPL: Eurobond Restructuring Looms

We expect Avangard to announce plans to restructure its USD 200 mln Eurobond due in October 2015, following in the footsteps of other Ukrainian issuers that have successfully re-profiled notes this year. The market looks to already be pricing the move in. Avangard has faced challenges over the past year due to the partial loss of production facilities in the east, weakening domestic and foreign demand, and a deterioration in working capital management. The company's liquidity position has slipped as cash balances fell to USD 52 mln at end-June from a USD 236 mln peak in mid-2014. We see the cash position falling slightly further to USD 45-50 mln by the Eurobond's redemption date. Since free cash flow is likely to remain negative through end-2016 this liquidity cushion will be needed to ensure smooth operations. We expect a restructuring offer that includes a 7-year maturity extension and no principal haircut. We withdraw our recommendation on Avangard DRs until the restructuring occurs; the company's viability depends on its ability to roll over all of its debts.

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