Russia's Mechel secures $5bn debt restructuring with shareholders

Russia's Mechel secures $5bn debt restructuring with shareholders
Mechel has over 20 production assets and employs 67,000 people.
By bne IntelliNews May 31, 2016

After months of wrangling and escalating threats by its creditors, Russian miner and steel producer Mechel has won approval of its shareholders for restructuring its $5.1bn debt to Gazprombank, Sberbank, VTB and a syndicate of international banks.

The decision, announced by Mechel on May 30 but taken at an extraordinary shareholders' meeting four days earlier, staves off likely insolvency for Mechel, which was regarded as a poster boy for the "new Russia" when it debuted on the New York Stock Exchange in 2004. Senior government officials indicated as recently as last September that bankruptcy was inevitable.

"We are very grateful to our minority shareholders who voted for the restructuring of the debt," said the company's General Director Oleg Korzhov. "We have received many letters and phone calls with words of support. We thank everyone who did not stay away!"

Approval of the restructuring required the consent of 50% of the minority shareholders. At the previous meeting, Mechel shareholders failed to gain a quorum to green light the restructuring.

Mechel's total debts stand at $6.2bn, of which $5.1bn, or 80%, is owed to Gazprombank ($1.793bn), Sberbank ($1.267bn), VTB ($1.068bn) and a syndicate of international banks ($1.004bn).

The deal kept the equity of the company intact, despite previous attempts of Sberbank and VTB to push the owners of the company to convert some of the debt into shares. Instead, Mechel managed to shed assets, selling a minority stake in troubled Elga mine to Gazprombank and using the proceeds to cover the debt to Sberbank.

Back from the brink

Employing 67,000 people, Mechel is a leading global mining and steel company and is currently the most debt-laden in the sector. It was established in 2003 and comprises over 20 companies that produce coal, iron ore, steel, rolled product, ferroalloys, heat and electricity.

The shareholder vote can not only save the company from the bankruptcy axe but possibly also ease sporadic tensions between its main shareholder Igor Zyuzin and President Vladimir Putin, who as prime minister in 2008 threatened to "send a doctor and clean up" Mechel. With memories still fresh of the state's dismemberment of the Yukos oil company, this caused the company's stock to crash until Putin later relented and said Zyuzin was working well to fix the problem.

However, in September 2015, as Mechel's debts rocketed towards $9bn, the writing on the wall seemed indelible. Saying that he saw "no way out", Economy Minister Alexei Ulyukayev stated that "if the company is bankrupt, we should legally acknowledge it".

There ensued a series of fraught negotiations with creditors who were ready to play hardball and show that Mechel was not too big to fail if that's what it took to straighten the books. In December 2015, Sberbank head Herman Gref said the lender would initiate the bankruptcy of Mechel at the beginning of 2016 if the sides failed to reach the agreement on restructuring.

"Now we and Gazprombank agreed on the conditions under which we can go for restructuring. If we can't come to agreement with Mechel then early next year we will be ready to go to the very end, bankruptcy and so on," Gref said. And in a warning to Zyuzin, he added: "I don't see the point in saving Mechel's owners. It is a healthy company and it can be effective with qualified management."

The adoption of the restructuring plan follows an eventual deal with Sberbank in April, when Mechel effectively finalised the restructuring of $4.1bn or 66% of its total debt. The state-controlled bank agreed to postpone for one year payment of RUB30bn ($452mn) and $427mn of Mechel's debt, which was due in the first quarter of 2016.

Share conversion fight

One of the main irritants was Mechel's refusal to convert more shares in favour of the banks. In 2014, VTB demanded the conversion of some $3bn of the company's then $8.7bn debt into shares. This would reportedly have reduced the Zyuzin family's shareholding from 67% to 10%.

But Mechel rejected the plan in favour of selling assets, compelling VTB to look to the courts to reclaim its debt. As the amount of its debt threatened the balances of the creditor banks, the head of the state-controlled VTB Andrei Kostin vowed to press charges against the miner.

Zyuzin and his family now control 55% of the company, although the drop in his share was not because of conversion. Vedomosti reported on May 13 that Zyuzin is fighting to reclaim 12.3% that were reportedly mismanaged by depository UFS Capital. This led to its licence being revoked by the central bank and Mechel initiating legal proceedings to recover the shares.

Another boost to Mechel's survival came from the argument from Putin's economic advisor Andrei Belousov that bankrupting Mechel would damage Sberbank, VTB, and Gazprombank even more as they do not have sufficient reserves for covering its debt and would have to be recapitalised. Mechel went on to agree some restructuring with its creditors, but there was still no strategic plan on how to reduce the debt burden until the latest shareholders' meeting.