Russian steel company Mechel revealed on Wednesday that WestLB had asked for early repayment of a loan because it was in breach of several financial covenants.
Although WestLB will be repaid and its request has not triggered cross-defaults on Mechel’s other loans, the highly leveraged borrower warned for the first time that it could not continue as a going concern if it was unable to refinance or restructure its debt.
Mechel, which has been in loan restructuring talks with its international lenders since the end of last year, disclosed in a filing to the US Securities and Exchange Commission this week that it had total consolidated debt of $5.4bn, and that it had breached covenants on 78.9% of that.
The group said it had remedied some of these breaches while others had yet to be resolved.
WestLB, it said, was set to be repaid $84.8m after filing its repayment request to the group’s Voskhod Chrome project in March.
This is a project owned by Oriel Resources, which Mechel bought last year using a $1.5bn bridge loan, on which it is known to have breached covenants.
Mechel said WestLB’s request stemmed from the continuing breach of a change of control provision, which had not yet been waived by lenders, as well as other financial covenants. WestLB will be repaid on June 30, it said, stressing that the request had so far not caused cross-defaults on the rest of its debt.
But Mechel added that it did not have the resources to enable it to repay the $5.149bn of loans it has maturing in 2009 if banks called for repayment.
It warned that without refinancing or restructuring its debt facilities there was substantial doubt about its ability to continue as a going concern.
Success in sight in H2
However, Mechel did stress it thought this could be done successfully, based on its negotiations with lenders so far. But the company said that a resolution was only likely to be reached in the second half of the year and in the meantime the debt restructurings continue to weigh on the company.
The steel group, previously one of the most popular Russian loan borrowers in the international markets, which tapped the loan market twice last year, is understood to have been making progress with the restructuring of its $1.5bn bridge loan from last year.
After receiving a series of extensions from lenders, with the latest deadline for restructuring talks extended to July 15, Mechel said at the end of May that the basic principles of a bridge loan refinancing for up to three and a half years had been agreed.
It is also thought to be ready to repay $500m of the deal, after it received a loan of that amount from Gazprombank.
But Mechel is also in breach of other loans, as $4.23bn of its debt is subject to covenant violations.
As well as the $1.5bn bridge loan, it has an outstanding $2bn facility from January 2008 which backed its acquisition of majority stakes in coal mining companies Elgaugol and Yakutogol.
Bookrunners on that deal were BNP Paribas, Calyon, Natixis, Royal Bank of Scotland, Société Générale and SMBC, while ABN Amro (Royal Bank of Scotland), BNP Paribas, Calyon, Commerzbank, Goldman Sachs, ING, Merrill Lynch, Ogresbank, Rabobank, RZB and UniCredit were mandated lead arrangers on the Oriel loan.
Domestic help
While Mechel did not rule out tapping the international lending markets for any additional financing it may require, it said that it was more likely to rely on domestic sources of financing.
It has already benefited from some of the bail-out funding being filtered from the Russian government to ailing borrowers through the country’s top banks.
It had a $1bn loan from Gazprombank — half of which will be used to repay part of the $1.5bn Oriel bridge deal. The Gazprombank loan is secured against 35% of the shares is Yakutugol and Southern Kuzbass Coal Company, and is repayable in quarterly instalments between 2010 and 2012.
It also has a facility from VTB totalling $501.1m and a $112.3m loan from Sberbank.
Mechel’s international lenders have maintained since restructuring talks began last year that the borrower is among one of the strategic companies that the Russian state was likely to support throughout its debt problems. Last December, Mechel received initial bail-out funds from Vnesheconombank (VEB), which at the time was responsible for helping struggling borrowers.
However, Mechel stumped lenders by not using the VEB loan it said it had secured to repay its $1.5bn bridge loan, which originally fell due on March 20 this year.
The borrower is now closer to reaching a restructuring agreement again, according to bankers close to the situation, but discussions over the past months have been fraught, as bankers complained about the lack of clarity surrounding Mechel’s intentions.
As well as Mechel’s debt restructuring, the negotiations surrounding fellow Russian miner Rusal’s $7.4bn of foreign loans have grabbed the market’s attention in the last six months, and prevented the primary loan market from picking up substantially.
"Everyone just wants these two to be over to know where they stand, and it looks like they will just weigh over the market for most of the year at this stage," one banker said.
Discussions over Rusal’s debt were recently extended again to July 28.
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