Debt in exchange for coal
Gazprombank (GPB) of the savings Bank buys part of the debt of “Mechel” Igor Zyuzin. Banks have already signed an agreement, according to two sources close to the deal.
Total debt of “Mechel” the savings Bank of $1.3 billion Of them Gazprombank redeems $476 million, which the company Zyuzin was supposed to return to the savings Bank till the end of the first quarter of this year. In exchange, Mechel will pay GPB shares in their raw assets: 49% in the companies “Elgaugol” (owns one of the largest fields — of the Elga, with reserves of 2.2 billion tons of coal), “Elga-road” (which owns the railroad Ulak — Elga Deposit to the Baikal-Amur mainline) and “Mechel-TRANS Vostok” (the operator of the railway line). The total value of shares 34.3 billion roubles, the transaction is expected to close no later than June 30, reported by Mechel. GBO will have the option to reverse the sale of assets within three years after five years.
In Gazprombank, Sberbank and “a Mechel” have refused comments.
Redemption “a Mechel” $476 million of debt to Sberbank was one of the conditions of the restructuring plan of the company’s debt to the Bank. Without the consent of the savings Bank also is impossible to implement the entire plan of debt restructuring “Mechel”. In addition to Sberbank, the company owed $1.8 bn GPB us $1,1 billion to VTB and $1 billion to a syndicate of banks — generally $5.1 billion from total debt of $6.2 billion restructuring Plan was approved in February after nearly two years of negotiations with major creditors. It is expected that the repayment will be rescheduled for the years 2017-2020 with an option to extend till 2022-2023.
Two years of negotiations
Negotiations with creditors on debt restructuring “Mechel” has for more than two years. In a difficult financial situation the company was in 2013. In the past few years, Mechel made major purchases and financed large projects at the expense of borrowed funds only in the Elginskoye Deposit he invested, according to its own estimates, 100 billion rubles By 2012 the company’s debt was more than $10 billion In the same year, prices for steel and coal began to fall, reaching bottom in the summer of 2013. At the end of 2013 the ratio of debt/EBITDA at the company was 11.9.
At the end of 2013 “Mechel” has begun negotiations about debt restructuring, but agreement that would suit all the creditors (the largest are Sberbank, Gazprombank and VTB), to reach could not be very long. As possible variants of rescue of the company, in addition to bankruptcy and transfer of company’s creditors, at different times proposed sale of a railway from Elga Deposit “Russian Railways”, as well as refinancing through VEB, as a result of which the latter in fact would have taken much of the debt of “Mechel” to the Bank itself.
To negotiate with creditors Igor Zyuzin was only at the beginning of this year. In February, the company announced that it has reached agreement with banks on restructuring $5.1 billion of the total $6.2 billion debt. Debt repayment will begin in 2017, and the greater part of it can be transferred to 2020-2022 years. An agreement on the deal between Gazprombank and Sberbank was a key element of the agreement: the Bank had been the most uncompromising of the largest creditors of “Mechel”. With Gazprombank and VTB Zyuzin managed to agree on the basic terms of restructuring in 2015.
The last step
After the deal between Gazprombank and Sberbank are impressed that the creditors agree on the restructuring, it is necessary to approve the plan at the shareholders meeting. Previously the company informed that it will take place on may 26.
Approval of the plan of debt restructuring “Mechel” company shareholders planned in March, but a quorum was not reached because of problems with the ADR holders. About 2/3 of the company’s free float accounts for us investors (Depositary receipts of Mechel traded on the stock exchange of new York). Chief lawyer of “Mechel” Irina Ipeeva told that the problem arose in connection with the requirement of the Central Bank to provide additional information about the ADR holders: the number and date of registration of the legal entity — holder of the securities. “We were also unable to identify the number of final beneficiaries of ADR due to the complex and multi-layered ownership structure of the receipts. Part of the securities owned by the funds on behalf of other funds which, in turn, represent the interests of third. Some chains reach ten depositories, which complicates the communication with the shareholders,” said Ipeeva.
“Mechel” against creditors
$4 billion for business development
In 2006, after the release from the shareholders of the Chelyabinsk steel works (JSC Mechel) Vladimir Ioriha, General Director of JSC “Mechel” Igor Zyuzin, the owner of the remaining 71.6% of shares of the company, began to expand the business by borrowed funds. As wrote Forbes, he invested borrowed funds for costly investment projects: construction of rail and structural steel mill at Chelyabinsk metallurgical plant, the development of the Elga Deposit’s coking coal and the construction of a railroad from ELGI to the Baikal‑Amur mainline. Just invested about $4 billion In particular, in 2006 the company spent on the purchase of new assets of $156 million and 4% of its shares in 2007 to $2.47 billion (a large portion for the purchase of “Yakutugol” and “Elgauglja”), in 2008 — $2.1 billion
After the fall in the prices of coal and steel products the company was in a quandary: by the end of 2013 the debt of Mechel was $9 billion, and to pay interest on the loans company had to spend $742 million.
Creditors Of “Mechel”
Main creditors of “Mechel” — VTB, Gazprombank and Sberbank. At the end of 2013 the banks agreed Covenant at the annual holidays for the company. In particular, VTB went to the restructuring of $440 million of the company’s debt, which “Mechel” had to pay off in 2014. Sberbank has agreed to restructure the debt at $774 million: the liability of the company was extended for five years, and starting date of repayment was deferred until the first quarter of 2015. Restructured $1 billion of debt and Gazprombank. Another creditor, Alfa-Bank demanded to repay a $150 million Loan to the Bank was repaid.
In turn, VTB and Sberbank made the demand about necessity of state support of enterprise. Otherwise, the creditors threatened to bankrupt the company.
The attempts of state
In the spring of 2014 we developed two variants of support of “Mechel”. The first was to ransom the Russian Railways “Mechel” of the railroad Ulak — Elga. Another option proposed creditor banks to refinance all the loans of Mechel via the web. To do this, Mechel needs to issue convertible bonds 180 billion rubles, which will redeem VEB, taking the necessary amount from VTB, Gazprombank and Sberbank. However, this model was deemed unprofitable for the Bank. The first option of state support was not implemented.
New requirements banks
After the failed state enterprise banks Zyuzin has put forward an ultimatum, offering the following options. The first option is supposed to convert $3 billion of the $5.5 billion of debt at 75% of shares of Mechel and Zyuzin was supposed to be 10% and a buyback option for the same $3 billion plus 15% of that amount for each year of the option. The second option was to Zyuzin sale of its stake for $5 — $1 for each company (SPV), owning shares in “Mechel”. And the last option is to start the mechanism of bankruptcy.
Zyuzin didn’t like any of the lenders of the proposed options. As a result, the negotiations with the bankers ceased, and he Zyuzin wrote a letter to Vladimir Putin in which have actually accused lenders of raiding and called the question of the fate of the enterprise is unacceptable.
In the fall of 2014 the largest creditor of “Mechel” Gazprombank refused to bankrupt the company. Position VTB also began to change. VTB has put forward the condition that he withdraws all lawsuits against Mechel and restructures the debt if the company will repay all overdue payments — RUB 3 bn.
For the longest time the negotiations were going on with the head of Sberbank German Gref. However, in February 2016, it became known that “Mechel” has reached agreements on debt restructuring with all creditors. Under the agreement, the start date of repayment is postponed to 2017, and for the most part loans it can be postponed to 2020. The restructured debt will be $5.1 billion (80% of the total debt).
Under the terms of the restructuring the maturity of the debt extended to 2022: in 2016 the company should pay only $551 million, and the remainder is stretched to six years.
All debt owed to Gazprombank and VTB, which “Mechel” managed to agree on the terms of restructuring in 2015, to be converted into rubles. In the end, the ruble-denominated share of debt will grow from 35 to 60%. Interest rates are tied to LIBOR and key Central Bank rate. Ruble interest payments will be paid based on the rate of 8.75% per annum. Banks agree to write off a large portion of assessed fines and penalties.
With Sberbank has been previously agreed fixed payments in 2016 and 2017 ($551 million and $106 million respectively instead of more than $1 billion over two years). $500 mln debt to Sberbank in 2016 Mechel planned to repay by selling assets, in particular shares “Elgauglja”. When the conditions of the grace period of repayment of the debt shall be four years. On ruble loans will be the key rate of the Central Bank plus 1.5% (but not less than 8.75 per cent), for U.S. dollar three — month LIBOR plus 7%.