Mechel’s Foreign Lenders Seek Collateral for Restructuring

  • Miner in talks with banks to alter terms of $1 billion in debt
  • Needs state banks’ consent to boost assets held as security

Mechel PJSC’s foreign lenders are seeking more collateral before agreeing to restructure $1 billion of the Russian steel and coal producer’s debt.

While a prospective deal is mostly agreed, on similar terms to an accord with Russian state lenders, foreign banks want improved security for the borrowings, Chief Financial Officer Sergey Rezontov said in an interview.

"The banks seek more assets to be pledged, which is quite fair and we will consider it,” he said in Moscow. “But we can’t do it without the consent of the state lenders, which already agreed to restructure the debt."

Mechel has been trying to alter the terms of its debt since 2014 as coal and steel prices slid. It agreed to a restructuring with Sberbank PJSC in April after deals with VTB Bank and Gazprombank last year, bringing total restructured debt to $4 billion. Lenders including ING Bank NV and Societe Generale SA hold $1 billion of debt through a pre-export loan, which gained a waiver in 2013.

Rezontov wouldn’t say what assets they were seeking as security and the press services of Rosbank, SocGen’s Russian unit, and ING Bank declined to comment.

Controlling Stakes

Russian state lenders gained collateral including combined controlling stakes in Yakutugol, owner of Mechel’s biggest new coal project, and its Chelyabinsk steel smelter, the producer’s annual report shows. The debt’s maturity was also pushed to 2022 from 2015-17 and the cost of borrowing tied to the London Interbank Offered Rate and Russian central bank key rate.

The foreign loan is secured with equipment and just over 25 percent stakes in Yakutugol and Southern Kuzbass Coal Co., according to a filing. Mechel is now only paying interest on the debt, due for repayment in 2017.

“The banks may take some legal actions as the debt is mostly overdue and to pressure Russian state banks to get consent on restructuring terms," Rezontov said. "We will do our best to mitigate these actions and find a compromise solution between our lenders.”

Mechel gained as much as 5.4 percent, the most since June 29, and was up 2.4 percent by 11:50 a.m. in Moscow trading.

Lenders’ Consent

"In theory, to get foreign lenders’ consent is easier than from state lenders as they can’t really bankrupt the Russian company, so Mechel should be fine with this restructuring," said Oleg Petropavlovskiy, an analyst at BCS Global Markets.

Mechel hopes to boost its finances by raising earnings from projects, including improving margins at Chelyabinsk by increasing output of rails and beams, he said. It will also lift production of costlier steelmaking coal at its Elga deposit to three-quarters of total output this year from two-thirds in 2015, the CFO said. The company will develop its ports and ship more coal for others.

Higher coal and steel prices this year are also helping Mechel’s finances, while restructuring debt will reduce spending on interest payments by half to 30 billion rubles ($473 million), Rezontov said.

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