By John Helmer in Moscow

Severstal announced Monday that the Russian state savings bank Sberbank has granted it a three-year $300 million credit line. Quoting the chief financial officer, Sergei Kuznetsov, the steelmaker said: “These credit facilities will allow the Company to further strengthen its liquidity and extend maturity profile. Sberbank facility is a reliable long-term source of capital which will be used to finance ongoing needs and replace some of our maturing obligations.” There was no disclosure of the interest rate, the security pledged, or the loan covenants imposed by Sberbank.

Severstal’s financial reports to date indicate that atotal of about $1.9 billion in debt matures this year, and must either be repaid or refinanced. In February already, the group repaid $325 million in Eurobond obligations; and must repay another $480 million by year’s end. In 2010 Severstal will have another $900 million in debt repayments. Then between 2010 and 2013, about $4 billion in debt will reportedly fall due.

Although Severstal, the third-ranked Russian steelmaker, has indicated confidence it has enough cash on hand, and current cashflow, to handle this year’s repayments, the Eurobond loan agreements which Severstal signed are putting pressure on Mordashov to remove losses from his current balance-sheet by selling loss-making North American steelmills. At the same time, the loan covenants imposed by loans outstanding and Eurobonds sharply curtail the company’s refinancing and restructuring options.

Severstal’s shares dropped 7.5% in Moscow trading after the new loan announcement on a day when the RTS index as a whole fell 4.4%. The next day, it recovered by 2.3%.

The company has not yet announced the sale of its Allenport , Pennsylvania, cold-rolling mill — the first asset disposal to be reported among those major Russian steelmakers who invested heavily abroad during the boom. The Allenport plant is part of the Wheeling-Pittsburgh group of mills, which Alexei Mordashov bought last year for $775 million. A Pittsburgh newspaper has quoted William Kingston, owner of North American Trading, as saying he has bought the plant from Severstal North America with a commitment to invest $400 million over the next five years.

Renaissance Capital analyst Boris Krasnojenov tried to put a positive spin on Severstal’s new Sberbank financing. “In our view, the fact that Severstal obtained access to long-term financing with a state-run bank is positive. The company has demonstrated the ability to refinance short-term obligations with long-term credit facilities. However, the benefit largely depends on the cost of debt….Generally, Severstal has preferred using long-term debt financing rather than using its own cash in the current environment. The company has to repay $412mn in debt burden until the end of the year and refinance another $812mn of short-term credit facilities.”

An Alfa Bank report by steel analyst Barry Ehrlich is more equivocal. “The steelmaker obtained necessary funding for liquidity and refinancing purposes, but it increased its already large total debt, which amounted to $7.52 bln at the end of 1Q09.”

In parallel, the market has been discounting fifth-ranked steelmaker Mechel on news that it is facing additional debt refinancing pressure from its banks, whose call-in of a $2 billion loan late last year was reported by Deutsche Bank and CRU Steel News last week. In Monday trading in Moscow, Mechel’s share price dropped 11%. On Tuesday, it rose 9.4%.

A report from Deutsche Bank last week warned investor clients that “the most worrying thing is that even after restructuring the USD 1.5bn Oriel bridge (USD 500m to be paid in 3Q09, followed by a one-year moratorium for principal payment) and the USD 2bn Yakutugol PXF loan, Mechel still has to pay USD 913m in short-term debt in 3Q09 and USD 710m in 4Q09. Add to that USD 723m in capex, over USD 300m in dividends and the likelihood of a negative free cash flow for FY09 and one can get a full picture of Mechel’s liquidity challenges.”

Alexander Tolkach, the investment relations spokesman for Mechel, was asked to say what loan covenants had applied in the $2 billion loan, and when the company had breached them, thereby triggering the bank demand to refinance the loan. The money had been drawn originally for a five-year term in 2007 to finance Mechel’s acquisition of coalmine assets in the Russian fareast. Tolkach was also asked to clarify what public disclosures Mechel had made to shareholders regarding the call-in of this loan.

According toTolkach, “all this information was given to the public during our conference calls to disclose 9m2008 and FY 2008 results. As for the covenants, so far the only breached covenant is debt to equity [ratio], and we got it waved from the banks, so we have no foreclosed debt.”

The public announcements of the company do not specifically refer to the $2 billion financing; this originated with ABN AMRO, BNP Paribas, Calyon, Natixis, Sumitomo Mitsui Banking Corporation Europe Limited, Société Générale Corporate & Investment Banking, and Commerzbank Aktiengesellschaft.

In its June 3 financial-year presentation, Mechel referred to “existing debt covenants in most of the facilities with foreign banks: Net Debt / Equity – 1:1 – 1.15:1; Net Debt / EBITDA – 3:1; EBITDA Interest Coverage – 4:1.” The $2 billion was not identified.

Tolkach also provided CRU Steel News with a prepared statement on Mechel’s debt position, intimating that the company, rather than the banks, had initiated loan renegotiations. “As of the end of 2008 the Total Debt of the Group stood at USD5.4 bln and the Group had cash of USD 255 mln in its accounts, which gave the Net Debt of USD 5.1 bln. The original structure of the debt is shown on the slides 15-16. The bulk of the debt was formed by the USD 2bln 5 year pre-export facility, raised in 2007 to finance the acquisition of Yakutugol and Elgaugol and a USD 1,5 bln 1-year bridge facility raised in March 2008 to finance the acquisition of Oriel Resources.”

“In the 4th quarter of 2008 due to the fact that most of the debt and equity capital markets closed we approached the banks in the bridge facility for refinancing of the loan over a long term. At the same time due to rapidly changing situation in the debt markets we saw that the new terms of the available debt instruments required certain amendments or waivers in the existing ones. As a result, we entered into negotiations with respect to both USD 2 bln and bridge facility, as well as a number of smaller loans to amend the terms of the existing facilities and refinance the bridge facility. Due to prolonged negotiations the term of bridge facility was extended by 2 months. In late May we finally reached a principle agreement with representatives of both syndicates on the terms of restructuring of these facilities and extended the bridge facility by another 2 months till mid-July 2009 in order to document the new terms and conditions. They do not affect the tenor for the USD 2 bln syndicate and provide for a refinancing of USD 1 bln of the original bridge facility over 3.5 years with 1 year grace period. The other USD 500 mln will be prepaid out of the funds provided under the USD 1 bln 3-year loan extended to the Group by Gazprombank in 1 quarter 2009.”

“However, since as of today the refinancing and amendment agreements have not been signed, we decided to reclassify the loan agreements, which are subject to adopting the agreed amendments into short-term facilities according to SFAS No 78 “Classification of Obligations that are callable by creditors” and EITF No. 86-30 “Classifications of obligations when a violation is waived by the creditor”. We plan to put these amendments and refinancing to effect before the expiration of the 2 month extension.”(Emphasis added.)

by John Helmer - Wednesday, June 17th, 2009