Nick Allen in Berlin -

Russian mining and steel giant Mechel clinched a $1.8bn loan restructuring deal with VTB Bank in June, but it remains mired in debt as the bankruptcy axe hovers. At this stage, the agreement may be but a Band-Aid on deeper wounds that refuse to heal, seven years after then prime minister Vladimir Putin’s ominous pledge to “send a doctor and clean up” Mechel, with memories still fresh of the ugly dismemberment of the Yukos oil company. 

Since then, Mechel's rapid expansion with borrowed billions amid periodic admonishments and bankruptcy growls – and unexpected praise – from the Kremlin and Russian government sent the company's stock value and survival prospects yo-yoing largely beyond prediction. 

In September, as Mechel's debts rocketed towards $9bn, the writing on the wall finally seemed indelible. Saying that he now saw “no way out”, Economy Minister Alexei Ulyukayev stated that: “if the company is bankrupt, we should legally acknowledge it”.

But against the odds, the bizarre 'Mechel Show' since seems to have wangled itself at least a season or two more. The agreement with VTB, announced earlier in June and awaiting signature, allows the company with 70,000 employees to restructure another $1.8bn of its actually diminishing and reasonably reworked debt.

In addition to the sum owed to VTB, Mechel owes $2.3bn to Gazprombank under a now also restructured loan, and $1.3bn to Sberbank, which so far rejected the company's restructuring proposals. In March, Industry Minister Denis Manturov said Mechel had cut its debt to $6.4bn from $8.6bn, mainly through selling assets. Vedomosti reported that VTB demanded additional security in addition to the 37.% stake it currently holds in Mechel Mining, worth RUB108bn ($1.95bn) according to the company’s own estimate. Large stakes in its constituent companies, such as 25% in the Yuzhny Kuzbass coal and coke producer and 20% of the Chelyabinsk Metallurgical Plant, are held by Mechel's other creditors.

Analysts watching and waiting

The story is being closely watched and is a huge embarrassment for the Kremlin. Mechel was a poster boy for the "new Russia" when it debuted on the New York Stock Exchange in November 2004, one of the very first Russian companies to list its shares overseas. The IPO was a resounding success, raising $335mn at the time for the company. But the stock has been crushed since, falling from the $21 per ADR during the IPO to $1.22 as of June 12.

The losses Mechel must have racked up for portfolio investors must be part of the reason the Russia-based contingent of investment analysts has been so tight-lipped about the VTB agreement. The obvious reluctance of some in the government to admit defeat and declare the company bust is another. With so many of the biggest state-owned banks on the hook with Mechel debt, clearly the whole story has become highliy politicised. And with Mechel’s fortunes U-turning so rapidly in the past, sometimes on a harsh or conciliatory word from the top, informed forecasts have erred more towards crude crystal-ball peering.

“The debt restructuring deal with VTB does not solve the problem,” wrote BKS analysts Kirill Chuyko and Oleg Petropavlovskii, who are among the few audible voices on the topic. It offers only partial, short-term relief and does not influence Mechel's long-term risks, they commented on June 9, adding only that, “the company’s basic business model remains highly unstable due to unfavourable market conditions for coal and steel and a stronger ruble than 3-4 months ago”.

Mechel's latest disastrous financial results won't help. The company on April 28 reported a US GAAP net loss of $4.3bn in 2014, growing by 48% on year. In the fourth quarter alone, net loss soared 5.4-fold from the quarter before to $3.1bn. Revenues in 2014 declined by 25% to $6.4bn, and Ebitda slipped by 3% to $709mn. 

Unsurprisingly, VTB’s own analysts painted a brighter picture after the restructuring was agreed. “In the years-old story about Mechel’s struggle with its creditors for its future, at last there is not just a glimmer but a ray of sunshine,” wrote Stanislav Kleshchev, head of the VTB 24 analysis department. Noting that the stock only initially rose 6% after the announcement, with realistic prospects to go higher, Kleshchev said that, “for the speculators now forming the vast majority [of players] on the domestic market, Mechel shares are a pretty good bet for a long position”.   

Established 12 years ago and headquartered in Moscow, Mechel operates in 11 regions of Russia, comprising producers of coal, iron ore, steel and rolled steel products, as well as electric power. The company was founded and headed by Igor Zyuzin, who before the new debt deal controlled 67% of the stock with his family. Zyuzin is no favourite of Putin, who without naming the company stressed in talks with VTB management in September that the government would not bail out such “borrowers”. "They [borrowers] should all understand and keep in mind that according to market laws they will have to deal themselves with all issues arising not because of some political events, but due to their own business and financial activities. They must remember that,” came the unambiguous message from the top.

From ailing patient…

The company’s fortunes have pinballed wildly through the years, but an ignominious fate looked sealed from the day in July 2008 when Putin railed against Mechel's management with the doctor comment and more at a meeting of metal and coal mining chiefs.

Zyuzin was conspicuously absent, having gone to hospital for cardio-vascular treatment. It was perhaps a wise place to be that day: Putin lambasted his company for exporting coal far cheaper than it sold it on the domestic market in what was evidently a transfer pricing scheme (read: tax avoidance) of the type Putin warned the oligarchs off in 2000. He then also gave instructions to the federal anti-monopoly committee and prosecutor’s office to look into Mechel, with ensuing rumblings about its tax history. 

This was the first time Putin had so intently criticised a single company since Mikhail Khodorkovsky’s ill-fated Yukos oil major in 2004, and the effect was spectacular. Not only did Mechel’s ADRs in New York plummet immediately by 37%, but the shock waves buffeted the Russian market, causing panicked selling of Gazprom, Sberbank and other securities, and knocking almost $60bn off the stock market's capitalisation.

…To Mechel ma belle

The company lived to smelt again and even embarked on a dizzying shopping spree during the 2008-2009 global economic slump, using domestic and foreign loans to snap up discounted assets, sending its debts soaring.

But if Putin had wanted to “send the doctor” again, the Mechel head extraordinarily came out of their next meeting in June 2010 smelling of roses. Mindful of the damage his comments had caused the whole Russian market two years earlier, Putin instead resorted to praise. “I remember my outburst against Mechel and can only regret that it led to a more than 20% decline in the company’s market capitalisation. I want to thank Igor Zyuzin – he did everything we spoke about, and he has conducted himelf in the best, fairest way,” Putin said. He then popped the feel-good bubble around the table with an explicit warning to metal producers that further improper pricing policy in the sector risked an iron-fisted response.

The remarks immediately added 6.6% to Mechel’s shares and almost returned them to their July 2008 value. From there on, the company's stock climbed to an all-time high of RUB989.95 ($32.5) per share in January 2011, before its debt-driven descent to the next verbal hammering by Ulyukayev and Putin last September. Today, it stands at a lowly RUB70 ($1.2) per share.  

New dance to VTB’s tune

Mechel compounded its predicament in recent months by refusing to meet VTB’s request to convert some $3bn of its $8.7bn debt into shares. This would reportedly have reduced the Zyuzin family's shareholding from 67% to 10%. Mechel rejected the plan in favour of selling assets, finally compelling VTB to look to the courts to reclaim its debt. "Unfortunately we have no other option but to take legal action by filing a claim, because the plan suggested by Mechel does not suit us," VTB CEO Andrei Kostin said in March after the bank said it was filing a bankruptcy lawsuit. With its inevitable demise looming, Mechel began to comply with VTB's demands.

Under an agreement reached in April, Kostin told a recent banking conference in St Petersburg that Mechel must meet a number of conditions, including paying some RUB4bn ($71.4mn) in debt arrears and providing additional collateral and guarantees. This will allow restructuring of the amortization of Mechel's main debt in 2015-16 and VTB would postpone payment obligations until 2018-19, he said.

Mechel's shares traded up almost 9% on the Moscow exchange in the days following the comments. But while the situation seems to have been resolved for now, VTB can file a bankruptcy petition at any time while the debt exceeds RUB300,000 (around $5,500). "If Mechel meets these conditions, we plan to sign an agreement on debt restructuring by the end of June or early July," Kostin said. "If not, then we will return to the legal action that we have postponed but not cancelled."

Wallflower at the profit party 

Amid its floundering, Mechel could not make the most of the bonanza some of its metal and mining peers enjoyed during the ruble depreciation of the past year, where having operating costs in rubles allowed them to rake in hefty export revenues, even after costly currency conversion.

For example, Norilsk Nickel, despite taking an almost $1.6bn hit on forex transactions, saw its operating profit double and net income almost triple in 2014. Rusal also had a relatively good year, with operating profit increasing by more than $1bn, which at least helped it offset greater losses in 2013.

Now that the ruble has broadly stabilised against the dollar, it seems unlikely that there will be further benefits for the mining and metals industry on the scale observed in 2014. For Mechel, however, the biggest party may be just making it to the New Year.