Billionaire Akhmetov's DTEK to Borrow for Purchases

By Yuriy Humber

Oct. 3 (Bloomberg) -- Donbass Fuel & Energy Co., Ukraine's largest non-state coal and power producer, plans to borrow to fund acquisition opportunities, even amid ``crazy'' interest rates, Chief Financial Officer Yuriy Ryzhenkov said.

The Kiev-based company, also known as DTEK and controlled by the nation's richest man Rinat Akhmetov, is targeting companies worth between $50 million and $500 million in Ukraine's coal and electricity industries and coal assets in Russia, Ryzhenkov said in a Moscow interview.

DTEK, formed in 2002, wants to further bolster businesses that have helped it boost net income more than fivefold to $236 million in the last four years. Buying more coal mines and power plants may be more expensive than ever for the company as banks hoard cash, concerned that financial institutions will collapse.

``You might say that rates are pretty crazy at the moment, but at the same time the projects that we have have very high IRRs,'' Ryzhenkov said yesterday, in a reference to internal rates of return. ``It's still worth doing them now rather than waiting for financial markets to improve.''

The cost of borrowing in dollars for three months, reflected in the London interbank offered rate, climbed 6 basis points to 4.21 percent yesterday, the highest since January, according to the British Bankers' Association. Libor is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.

Ukraine Assets

Germany's E.ON AG and Electricite de France SA may act as partners in power plant acquisitions in Ukraine as the country auctions state assets, Ryzhenkov said. E.ON spokesman Mirko Kahre and EDF spokeswoman Carole Trivi declined to comment.

The global financial crisis and next year's presidential elections in Ukraine spurred President Viktor Yushchenko on Oct. 1 to lift a ban on auctioning more state enterprises in an attempt to improve the budget.

The state's need for cash could lead to the sale of power generators in the first six months of next year, and coal mining enterprises later in 2009 or 2010, Ryzhenkov said. State-owned coal operations first need to be incorporated, which would take at least six months, he said.

``DTEK knows all the mines and what to expect, so they have lots of advantages in coal mine auctions,'' Andriy Bespyatov, an analyst at Dragon Capital, said by phone from Kiev today. He said auctions probably won't take place until the political situation in Ukraine became more stable.

Bond-Sale Challenge

Ukraine's government said in March it plans to reap at least 8.92 billion hryvnia ($1.75 billion) from asset sales to cover a budget deficit this year. Disputes among state agencies have already delayed the disposals for a decade.

The financing that DTEK is considering, including dollar- denominated bonds, will also be a challenge this year because investors are ignoring new bond sales, said Mikhail Galkin, head of fixed-income research at MDM Bank in Moscow.

``When investment-grade names trade at 12 to 13 percent, and Ukraine sovereign bonds approaches those levels, no market- based deal appears to be possible,'' Galkin said. A bond sale ``window'' may not appear until the end of the year, he said.

The extra yield investors demand on developing-nation bonds over Treasuries increased 14 basis points to 4.45 percentage points, the highest level since 2004, JPMorgan Chase & Co.'s EMBI+ Index shows.

DTEK fully owns three power plants, which use 9 million of the 17 million metric tons of coal it produces each year. The company also has a 47 percent stake in state-run utility Dniproenergo, which also consumes about 9 million tons.

``If you look at both companies, we're not fully self- sufficient in coal,'' Ryzhenkov said, adding that DTEK sells as much as 3 million tons annually to steelmakers.

New coal resources may come from Russia as well as Ukraine. DTEK is looking at fields in the Rostov region, which neighbors Ukraine, and in the Kemerovo area of Siberia, Ryzhenkov said.

To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net