Mechel Signs Deal With VEB to Get $2.5 Billion Project Financing

OAO Mechel, Russia’s biggest coking-coal producer, will get as much as $2.5 billion in loans from state development bank Vnesheconombank as OAO Alfa Bank demands early repayment of debt.

Mechel and its units signed agreements for $2.08 billion and $418 million lines of project financing for developing the first phase of the Elga coal complex, the company said today in a statement. Mechel plans to use $150 million to pay back a bridge loan it took in October from the bank, known as VEB.

Mechel had net debt of about $9.4 billion at the end of last year after coal prices collapsed. The company’s market capitalization fell 47 percent to the lowest ever this year as tensions with Ukraine led to a rout in Russian shares.

“VEB’s financing may signal that the government agreed to give time to Mechel and will keep providing the state support, at least for a while, helping to avoid bankruptcy,” George Buzhenitsa, a Deutsche Bank AG analyst, said by phone today.

VEB will take as collateral 49 percent of the OOO Elgaugol unit, which runs the Elga project, as well as some of its property, Mechel said. The bank will also acquire 0.01% of Elgaugol, with an option for Mechel to repurchase later.

Billionaire Mikhail Fridman’s Alfa Bank is demanding Mechel pay down a $150 million loan as the company has breached the covenants, the parties said today, confirming an earlier report in Vedomosti.

Should Mechel fail to win Alfa Bank’s permission to pay back the debt in June and July, it will fulfill its obligations and pay the debt earlier, Arseniy Palagin, Mechel’s spokesman said by e-mail today. Palagin declined to comment on where the company plans to get the funds for the repayment.

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