Nyrstar, which was formed in 2007 by the merging of Zinifex and Umicore’s smelting divisions, and which smelted roughly 8% of the world’s total refined zinc last year at some 1.064 million tonnes, is just months away from needing a definitive agreement from its stakeholders over its future, with a financial restructuring plan already in motion.

Negotiations will pit the company’s business partner and leading equity holder, global trading giant Trafigura (24.4%), against a group of hedge funds that specialize in turning a profit from distressed debt. Those hedge funds currently hold the bulk of Nyrstar’s 2019 and 2024 high yield bonds, sources told Fastmarkets.

Talks between the groups have already begun, one source said.

The result of the negotiations could shape the future of Nyrstar and its ownership, with a debt-for-equity swap the favored method of resolving Nyrstar’s repayment issues among analysts.

On Thursday February 6, ratings agency Moody’s downgraded Nyrstar debt to Caa3 reflecting a “high probability,” of a default. Nyrstar bonds maturing in 2019 are currently trading at €25.40 against a €100 par valuation.

Nyrstar has €984 million of live structural debt split into €340 million of high yield bonds due September 2019, €115 million of convertible bonds due 2022 and €500 million of high yield bonds due in 2024. 

“The only feasible or realistic option is for a debt-for-equity swap, because the debt Nyrstar is carrying is unsustainably high and [it needs] to find a solution,” ABN AMRO equity analyst Philip Ngotho told Fastmarkets.

“The problem is... all parties [need] to agree,” Ngotho said, adding that a deal needed to be done before the new financial year in April for Nyrstar to get a "going concern" statement from auditors - a pre-requisite for many commercial and banking agreements.

Trafigura and Nyrstar both declined to comment.

Major bondholders including hedge funds Avenue Capital Group, Marathon Asset Management and Warwick Capital Partners LLP have grouped to form a negotiating block, according to fixed-income publication Reorg. 

Avenue declined to comment, while Marathon and Warwick Capital did not respond to requests for information.

Bondholders form group
In one corner, the major bondholders have have hired lawfirm Milbank, Tweed, Hadley & McCloy and financial advisers from Moelis & Company, sources contacted by the firms told Fastmarkets.

Those holding Nyrstar bonds are in the business of buying debt at distressed levels before negotiating profitable restructuring terms.

“Bonds are very much locked up now,” one fixed-income source involved in trading Nyrstar bonds said.

“They’ve been bought massively by funds that can lead the discussions with the potential for bringing in new money and [thus] the potential to negotiate for better terms in the restructuring of equity,” the source added.

Outstanding debt dwarfs Nyrstar’s current equity value of €38.48 million, but bondholders will be looking at Nyrstar’s smelting assets in Europe, Australia and the United States as valuable given the potential upside in zinc treatment charges and prices.

Nyrstar key for Trafigura zinc and lead book
In the other corner is Trafigura, which took a $72 million writedown on its equity stake in Nyrstar when announcing 2018 results last December, but Nyrstar plays an important role in the trader’s metals book as a major offtake partner buying in concentrates and providing zinc and lead for Trafigura to market around the world.

Trafigura put itself in a stronger position than bondholders when it agreed to provide a $650 million bridging loan to Nyrstar last year, with shares in Port Pirie pledged as collateral.

“You can see that it’s a trading act - they are, in effect, trying to get better control of the current assets of the company, which makes sense because this is what they need,” Jean-Francois Lambert of Lambert Commodities and former global head of commodity and structured trade finance for HSBC Group said at the time.

Through its Maltese subsidiary Urion Holdings, Trafigura needs to maintain at least a 20% shareholding in Nyrstar for its relationship agreement signed in November 2015 to be maintained, company releases at the time show.

Nyrstar eyes turnaround
Nyrstar itself has hired turnaround specialist Alvarez & Marsal to lead a capital structure review overseen by new executive chairman Martyn Konig.

Konig was formerly chairman of the board at Nyrstar and has another role as chief investment officer for T-Wealth Management, the family office that runs investments for Trafigura’s senior management.

Nyrstar is also being represented by Freshfields Bruckhaus Deringer in talks with other stakeholders.

As of January, Nyrstar has also had a new interim chief finance officer in Roman Matej, with former incumbent Michel Abaza leaving the post after just seven months in the job.

At an extraordinary general shareholders meeting on March 14, Nyrstar will also seek to confirm corporate restructuring expert Jane Moriarty as a new independent director.

Concentrates market points to upside
Market forces should provide some upside for the company, however, with annual TCs for zinc concentrates expected to rise to around the $200 per tonne level for 2019, up from $149 per tonne in 2018.

At $210-240 per tonne, spot zinc TCs, fees paid to smelters to compensate for processing concentrates into metal, are currently at their highest in four years after new mine production hit the market late last year.

This would add around $27 million to Nyrstar’s annual income for metals processing, but more favorable market terms may be too late for the company.
“It’s an unfortunate mismatch of timing,” the bond trader said.

With the clock ticking on a deal date, it is in all parties' interests to come to an agreement but negotiations are set to be complex due to the amount of separate interests at stake.

“There’s quite a bit of money involved, and every investor - be it the banks, the bondholders or Trafigura -  all have their own interest that they want to protect,” ABN AMRO’s Ngotho said.

[This article was corrected to clarify Freshfields is representing Nyrstar, not Trafigura as previously stated.]