LONDON – By handing a $650-million lifeline to Nyrstar, Trafigura Group cemented its power over the troubled zinc producer and raised its standing in a possible restructuring.
Trafigura granted extra cash to keep Nyrstar running smoothly as the company, the world’s second-largest zinc producer, faced a crisis over its massive debt burden. Analysts said the deal alleviates some of the short-term pressure on Nyrstar and makes a debt restructuring more likely in the future.
“The liquidity situation seems very critical and this is indeed a lifeline,” said Philip Ngotho, an analyst at ABN Amro. “For the zinc market, this is good. But for bondholders and shareholders, it doesn’t really change the story."
Nyrstar bonds plunged after Trafigura said the money can’t be used to repay debt. Trafigura also secured the new lending against fixed assets of the zinc producer, potentially hurting the chance of bondholders recovering money in the event of a default.
The company’s bond due in September 2019 fell 6c on the euro to 48c, according to data compiled by Bloomberg. The shares had the opposite reaction, jumping 20c to 98 euro cents in Brussels trading.
Some key points on the deal:
1) Trafigura is tightening its grip on Nyrstar.
Trafigura is closely entwined with Nyrstar -- it’s the biggest shareholder and has a key zinc supply deal with the company. Today’s rescue package further strengthens the relationship.
With its 11th hour rescue, Trafigura is helping to ensure that Nyrstar can keep the metal flowing under its supply deal. In the event of a default, it may also have a claim to key assets, giving it a leg up on other creditors.
"What is material in my view is that Trafigura gets additional collateral over Nyrstar assets,” said Stijn Demeester, an analyst at ING Bank. “That puts them alongside junior bondholders, and the reaction of the bond market this morning is more representative of how we should interpret this news."
2) The shares will still likely get wiped out.
Even though the shares rebounded today, analysts were unanimous in saying that they’ll eventually be worthless and Nyrstar is still on the path to a debt restructuring.
3) Nyrstar was in a cash squeeze.
In the statement today, the company hinted it was in desperate need of Trafigura’s money. The zinc producer said its liquidity position has worsened since the end of the third quarter, restricting the cash needed to fund its day-to-day operations.
3) Here’s how the deal works:
Trafigura extended additional working capital to Nyrstar from November 30 and will make $220-million of financing available to cover the company in the next nine days. The $650-million facility is secured against fixed assets, inventories and shares in subsidiaries.
4) It’s expensive money.
The main part of the new larger facility will cost Libor plus 5%. That compares with Libor plus 4% for a previous $250-million capital facility that Trafigura had granted Nyrstar.