By John Helmer in Moscow
Russian state development bank Vnesheconombank (VEB), chaired by Prime Minister Vladimir Putin, is reported to have approved a US$1.8 billion loan for steel and mining giant Evraz Group, whose major shareholders include Roman Abramovich, following a board session of the board last Friday.
Evraz sources decline to confirm the loan, reported by a Moscow newspaper. VEB issues no confirmations of its loans.
The group had announced earlier, on November 13, that it had secured a loan of 10 billion rubles (US$360 million) from the Russian state-controlled VTB bank to cover tax payment obligations of two of its domestic mills, Nizhny Tagil and Zabsib.
Details of how VEB will secure the new loan against US assets in the Evraz Group, such as Oregon Steel Mills (Oregon and Colorado), Claymont Steel (Delaware), and the IPSCO pipemaking units in Canada – Regina, Surrey, Red Deer, Camrose, and Calgary – have not been disclosed by the bank, and Evraz refuses to say.
Evraz’s principal shareholders are the Millhouse holding of Roman Abramovich – familiar in the West as owner of Chelsea Football Club – and Eugene Shvidler, and Alexander Abramov. Their purchase of North American assets has created heavy short-term debts for the group, requiring repayments this year of $2.2 billion and next year of about $2.1 billion.
Of Russia’s richest men, Abramovich is reportedly the friendliest with Putin. Buying foreign assets, with little or no connection to Russian operations, guards against the possibility that the Russian assets might be re-nationalized. The VEB loan to Evraz is in effect a subsidy to loss-making US and Canadian steelmills, and the share value this represents to Evraz stockholders.
Evraz is the most heavily invested of the Russian steelmakers in North America, and the most heavily indebted. Moscow market speculation that, as sale revenues contract, Evraz will have difficulty meeting its loan obligations and hanging on to its American empire, has led to a 94% collapse of the Evraz share price in three months, the worst performance of the listed Russian steelmakers.
On Friday, as news of the VEB bailout reached the market, the share price recovered 15.4% on the day in London, to reach $4.50. Market capitalization at that price is $1.6 billion – too little, in the judgement of most market analysts, to support an international bank refinancing. The stock strengthened further to $7.30 on Tuesday. A Moscow market report from UralSib Bank described Evraz’s position as close to bankruptcy. Rather than obliging Abramovich himself to pay for his costly North American folly, or sacrifice it, VEB has been told to keep the safe-haven business safe from forfeit.
As of September 30, Evraz had gross debts of $10.2 billion, including $4.1 billion of short-term debt set to mature within 12 months. The company’s cash position at the time was $623 million. Its earnings before interest, tax, depreciation and amortization (Ebitda) for the third quarter were $2.3 billion; down 2% on the second quarter. Industry analysts expect Ebitda to dwindle to little more than $1 billion in the fourth quarter, and to shrink even further in the first quarter of 2009.
“We doubt that Evraz will be able to repay all its significant short-term debt of $4.1 billion from operating cash flow next year,” reported Michael Kavanagh, a steel analyst at UralSib Bank.
Russian government officials and state bankers are unwilling to explain why they are bailing out Russian corporations which have leveraged their domestic steelmaking assets so heavily that they cannot meet their domestic tax bills in order to buy into North America and elsewhere.
Not a single voice has been raised in the State Duma, the Lower House of the Russian parliament, which considered the bailout financing last week, to ask why Abramovich’s stake in Evraz is being rescued by public funds and guarantees.
Dmitry Valshansy, deputy head of staff of the Communist Party in parliament, told Asia Times Online: “I haven’t heard any discussions [on the floor of parliament or the party-room] about VEB, and how they distribute their funds.”
Pavel Razlomov, spokesman for Vladimir Zhirinovsky’s Liberal Democratic Party of Russia, said: “Vladimir Zhirinovsky didn’t make statements on the VEB loan to Evraz.”
The majority party in the Duma is United Russia, which is headed by Putin. The chief of staff at the Duma Committee on Economic Policy, Denis Bugrai, a United Russia appointee, told Asia Times Online: “We are actively discussing the crisis here in the Duma, and the ways for the government to help domestic companies to survive. I think Evraz is a very big company and important for the Russian market. Personally, I think it was important to bail out Evraz, as it is vital producer in Russia.”
Just how valuable Abramovich’s safe havens are was revealed in a 134-page ruling by the British High Court in November, dismissing a claim that he is a tax resident of Britain. According to the court document, in addition to his ownership of Chelsea, which is reported as his principal purpose for visiting the UK, Abramovich owns four villas in Britain, three of which he left to his former wife and their children. He is also the owner of two ski chalets in Colorado; a Caribbean villa in St Barts; a house in Sardinia; several yachts; and a chalet in France. To move between these assets, Abramovich operates specially modified private jet aircraft, helicopters and yachts, reportedly on lease terms.
Evraz’s debts maturing by December 31 of this year comprise a bridge loan of $800 million for the IPSCO acquisition; $201 million in part-payment of a $3.2 billion syndicated loan; term loans of $925 million; and revolving credits of $276 million. In August of 2009, a eurobond must be repaid at $300 million. By the year’s end, another $805 million instalment on the syndicated loan will fall due; plus term loans of $244 million and revolving credits of $719 million.
According to Marat Gabitov of Unicredit Aton: “If the company were to operate at 50% capacity for the next four years, with prices 15%-20% above today’s levels for both years and improving 3% year-on-year thereafter, the company would need two more years of refinancing to achieve a comfortable debt level. Under a ‘soft-landing’ scenario, which assumes 2009 and 2010 forecast prices at levels of the beginning of 2007, and rising slightly beyond, with operating capacity of 70% for both years, Evraz could comfortably manage its debt burden starting from next year.”
Other Russian steelmakers reported to be in line for VEB financing include Severstal, owned by Alexei Mordashov, who is also heavily exposed in the US.