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Vallourec Memo 121020

Vallourec. A Gem With Hidden Asset Value & Break-Up Potential In Restructuring Or A Perennially Cash Burning Business? Solo Financials For VBR, VSB, Mineração & Florestal Explored. (Gradually) Start Buying Vallourec SUNs At c. 58 & Credit Facilities At c. 62
PUBLISHED: 12 October 2020
PAGES: 178
SUBMARKET: Top Reports, Top Reports, Vallourec,


Why Read?

  • Understand the potential break-up value of Vallourec Group, driven by the value of Vallourec’s Brazilian business comprising Vallourec Mineracao (owning the Pao Branco iron ore mine), Vallourec Florestal (owning forest assets and with potential to sell carbon credits) and the remainder of VBR / VSB pro forma for disposals of Mineracao and Florestal
  • Understand how much EBITDA upside could result from Mineracao selling its iron ore production internationally at the market price net of freight costs (rather than internally to VSB and externally within Brazil) and what the impact would be for VSB
  • Understand the potential value of Florestal’s carbon credits
  • Understand how Vallourec is likely to emerge from a French restructuring process and the competing interests across senior unsecured credit facilities lenders, senior unsecured notes (SUNs) and shareholders – debt for debt plus equity swap, sale plan or debt term out for 10 years? Scenario probabilities and recovery rates
  • Understand Vallourec’s cost position within premium OCTG relative to competitors. Understand how successfully Vallourec’s low cost production in Brazil and China has been able to serve international demand via exports

What’s New?

  • Analysis of solo financials of: key Brazilian entities – Mineracao, Florestal, VBR, VSB; France – Vallourec Oil & Gas France, Vallourec Tubes France, Vallourec Bearing Tubes, Vallourec Umbilicals; Germany – Vallourec Deutschland GmbH; UK – Vallourec Oil & Gas UK Ltd. Adj EBITDA contributions from each entity
  • Unit economics of Mineracao’s iron ore production – cash production cost per tonne; sales price per tonne (internally to VSB and externally within Brazil; extent of discount to market iron ore price net of international freight costs); comparison of production costs and reserve / resource life against iron ore majors
  • Restructuring analysis – how we expect Vallourec’s credit facilities and SUNs to be restructured (under any of mandat at hoc, conciliation, expedited safeguard or reorganisation proceedings) and recovery rate estimates
  • Financial projections and DCF valuation

Questions Answered

  • How much iron ore does Mineracao sell internally to VSB vs externally within Brazil?
  • Would VBR be worth more in a break-up, selling off Mineracao and thereby capturing the potential EBITDA uplift from selling more iron ore externally internationally?
  • How many carbon credits would Florestal be able to sell internationally and what is the value of these?
  • What rules do firms have to comply with regarding their carbon emissions allowances and buying carbon credits to offset their emissions?
  • How much could carbon credits prices increase?
  • Could mandat at hoc / conciliation proceedings see credit facilities gain sole security over Mineracao, Florestal and other valuable subsidiaries or would any security be shared with SUNs?
  • Would Vallourec’s creditors be able to force a debt-for-equity swap under the Macron Law in French reorganisation proceedings?
  • How concerned should Vallourec’s creditors be about a potential 10 year term out of debt if Vallourec ends up in reorganisation proceedings?
  • Is either a sale plan or expedited safeguard proceedings likely to generate a near term break-up of the Group?
  • What would Vallourec’s debt be worth if termed out for the maximum 10 years?
  • How much has OCTG industry overcapacity and price competition impacted Vallourec’s EBITDA?
  • How much did Vallourec and Sumitomo invest to construct the Jeceaba mill in Brazil and to what extent does Vallourec’s PPE provide some recovery support?
  • What do the SUNs indentures permit in terms of secured debt issuance at subsidiaries?

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