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By John Helmer, Moscow

Alfa Bank, owned by Mikhail Fridman, has issued an unexpected loan repayment demand from Mechel, controlled by Igor Zyuzin (left), for $150 million. That’s chicken-feed in Mechel’s debt pile of almost $10 billion. But with dozens of trade creditors in the arbitrazh courts demanding their invoices be paid; a collapsing share price; and nothing of value left to mortgage or to meet margin calls, Zyuzin is on the edge of bankruptcy. So why has Fridman issued his ultimatum? Since two out of every three dollars Zyuzin owes are under state bank control, Fridman’s notice appears to be a call on the banks, and on the government behind, to get rid of Zyuzin altogether and redistribute Mechel’s steelmaking and coal-mining assets. It isn’t likely Fridman, who abandoned the mining and metal lines of business after the 2008 crisis, is acting alone.

The Alfa Bank demand was issued during a meeting last Thursday, March 13, with government ministers and bankers to discuss Mechel’s financial position. Mechel and Alfa sources confirm that the meeting, chaired by Finance Minister Anton Siluanov, was told that Mechel was in violation of its loan covenants and that Alfa demanded pre-payment within 24 hours.

The six state bank lenders to Mechel are Sberbank, VTB, Vnesheconombank (VEB), Gazprombank, Transcredit Bank, and Eurasia Development Bank. Altogether, Mechel says that between 58% and 62% of $9.4 billion in currently estimated indebtedness is held by the state bank group.

The foreign bank lenders, listed in Mechel’s Form 20F filings to the US Securities and Exchange Commission (SEC), are Unicredit, Raffeisen, ING, BNP Paribas, HSBC, Nordea, Société Générale, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Natixis. None of them will acknowledge their individual exposures except for Nordea. It claims it has sold out of the Mechel loan syndicate. An estimated 22% of Mechel’s obligations are held by the syndicate. The remainder is owed to bond-holders, mostly Russians guaranteed [1] by the state budget.

Mechel’s last detailed disclosure of its bank obligations was on page F-58 of the auditor’s notes to the financial report [2] for 2012, filed to the SEC on April 16, 2013. The Alfa loan of $150 million is identified as having originated in 2011.

avdeevTwo other Russian commercial banks are also reported to have outstanding loans to Mechel. Uralsib Bank extended a loan of $145 million in 2011; that was down to $50 million by the end of 2012. It also held a second loan balance of €46.4 million ($64.5 million). In March and April of 2013, Mechel’s report discloses, it borrowed $55 million and $33 million from Credit Bank of Moscow, which is owned by Roman Avdeev (right). These one-year credits fall due this month and next.

The Alfa loan for $150 million has now been confirmed by Alfa as due for repayment by July. Collateral for the loan is a 65% stake in the Beloretsk Metallurgical Plant and 25% in Mechel’s Pacific coal port, Posiet. Beloretsk produces a variety of steel hardware — steel ropes, spring wire, reinforcement strands, high-strength wire, bearing wire and micro wire. According to Mechel’s latest production report [3], for the 12 months of 2013, output of such hardware fell 13% compared to 2012 to 852,000 tonnes.

In a presentation to investors last October, Mechel reported [4] that revenues and profitability were falling at the hardware division. The average sale price for products from Beloretsk was $912 per tonne in the first quarter of 2013. That was down almost 2% from the previous quarter, and down 2.2% on the first quarter of 2012.

On December 23 Mechel announced that, with debts totalling $9.4 billion, it had successfully negotiated extensions of time for repayment from the state banks – Sberbank, VTB, and Gazprombank. A company announcement added that “new levels of financial covenants ratios [were] negotiated (including testing holiday until December 2014).”

Alfa said yesterday that it “is in talks with Mechel. We are trying to resolve the problems associated with the breaking of covenants. However, if agreement cannot be achieved, Alfa Bank reserves the right to recover the debt, without the waiting periods prescribed in the [loan] contract.” Alfa refused to disclose what covenants have been broken.

Mechel’s SEC file reports “the most significant restrictive debt covenants” in effect with the banks as of December 31, 2012. These were shareholder (Zyuzin) equity of not less than $4 billion; the ratio of net borrowings to earnings (Ebitda) of not more than 5.5 to 1; total net borrowings not to exceed $11 billion; and the ratio of earnings to net interest expense of not less than 2.65 to 1. The current covenant breaches appear to be the value of Zyuzin’s equity at about $480 million; borrowings to earnings at about 7 to 1; and earnings to interest of 1.85 to 1.

Mechel spokesman Arseny Palagin says: “We are in talks with Alfa Bank regarding its demand for an early repayment of the 150-million-dollar loan. Mechel OAO is a conscientious borrower and services all its loans, including those by Alfa Bank, in a timely and prompt way. If the company is unable to reach an agreement on repaying this debt as scheduled in the credit agreement (June-July 2014), Mechel will meet all its obligations to Alfa Bank and repay the loan early, as per the bank’s demand. Mechel is holding talks with various financial institutions, including Vnesheconombank [VEB], on refinancing its current obligations.” VEB is also state-owned and is the lender of last resort for Russia’s most indebted metals businesses.

The bank, steel company and government officials agreed to postpone the loan call for a week.

Uralsib Bank’s Deputy Chairman, Alexei Gonus, said that Mechel “fulfills all obligations to the Bank in a timely manner. There are no problems with the servicing and repayment of the debt.” Credit Bank of Moscow refused to clarify the terms of its loans to Mechel, or to say when they are due for repayment.

The day after Alfa made its payment demand, Mechel announced it had signed fresh credit-line agreements with VEB for a combined $2.5 billion in financing to complete the ElgaUgol (“Elga Coal”) Complex in the fareast Sakha republic, bringing its production capacity to 11.7 million tonnes per annum, and lifting the capacity of the Ulak-Elga railway serving the mineworks. The new money, Mechel’s announcement said [5], also repays a bridge loan of $150 million granted by VEB in October of 2013. Securing the VEB loan is a 49.1% shareholding in ElgaUgol.

There has also been pressure on Mechel in the stock market, where its New York-listed share price has tumbled 29% since the start of the year, losing $300 million off its market capitalization. It is currently worth just $724 million.

lisinIndustry sources suspect that Vladimir Lisin (right), owner of the Novolipetsk Metallurgical Combine (NLMK) may be pushing for the breakup of Zyuzin’s group, and separate sales of its coal-mining and steel assets. A month ago, Lisin was asked if he wants to buy Mechel. He said: “The field of participants of the Russian steel market will change. The bankruptcy mechanism will have to be used.” He has also made guarded comments implying that Zyuzin is not the most efficient manager for Mechel. As for NLMK’s interest in a takeover, Lisin has said: “This is a theoretical question.” A source close to Alfa declined to say if the bank is acting with Lisin to pressure Zyuzin.

Russian investment analysts specializing in the metals sector were asked to say, if they were in Lisin’s position, what Mechel assets might be worth a takeover move. Dinnur Galikhanov of Aton said: “At the moment, it all depends on price. It seems unlikely that [NLMK] will find something very interesting for themselves in the assets of Mechel. They do not need coal, because they believe that for coal in Russia it is currently more profitable to buy on the open market. What might be interesting for Lisin, though not in terms of NLMK, is the transport component of Mechel for Lisin’s transportation group. This is the Mecheltrans assets and two ports [Posiet, Vanino] in the Far East. Lisin has long been building his transportation holding UCL [Universal Cargo Logistics] , so for him buying Mecheltrans and access to these ports would be very interesting.” For more on Zyuzin’s ports, read this [6].

Andrei Shenk of InvestCafe said he is sceptical that a takeover of Mechel is under way. “If I was in the place of Lisin, I would not engage in the acquisition of assets, because in general this is not the most promising direction now. Right now the existing assets of Mechel, including mining, would not be so interesting to NLMK, because NLMK’s assets are more profitable and the consolidation [of Mechel with NLMK] would be worse for NLMK’s results. I think the only thing now of interest would would be [the coal] deposits, but Mechel will receive state support [to develop these], and Lisin understands this. As for the transport assets of Mechel, virtually none is necessary for NLMK. One of the major Mechel transport assets is the port of Vanino. This is needed for Mechel to develop its [Sakha] coal fields, but for NLMK a Far East port is unnecessary for them. It did not take part in the competition for the purchase of the port.”