Interview with the CEO of Mechel on its debt restructuring!

Interview with the CEO of Mechel on its debt restructuring!

 

 

Mechel is ready for various scenarios in its debt restructuring programme but the scheme with VEB’s bonds mostly appeals to the company. VEB will postpone the repayments for 10-15 years, the CEO of Mechel O. Korzhov says. In his interview with RBC he spoke about the banks that don’t participate in the negotiations on therestructuring, the assets the company is ready to sell and whether the creditors ask I. Zyuzin to quit.

Question (Q): The Government has decided not to make the company bankrupt and the most probable variant is the emission of euro bonds. What consequences for Mechel this might lead to?

Answer (A): For Mechel this is the most appealing variant for a number of reasons. First, it will allow us to restructure the part of the debt we have to pay in 2014, 2015 and 2016. The issue of these bonds will allow us to postpone the payment of a significant part of the debt: $8.3 bln and now the restructuring of another 180 bln roubles goes on. It will postpone a significant part of our debt for 10-15 years.

Second, in the framework of this restructuring we will be able to significantly cut the payment of interest on the bank loans that will give us an opportunity to have some free cash flow. We save the vertically integrated company that keeps working and making money, from the operational profit.

Q: Have you thought about any other variants of salvation?

A: We have been cooperating with banks and financial institutions and the Government for a few months. Within that time many variants of settling the current situation have been considered. The variant of the granting Government warranties to Mechel was discussed. We considered the possibility of selling the railroad which we constructed to the Elginsky deposit (assessment cost of the infrastructure is about $2 bln). We studied the variants of selling a part of the “Elgaugol” project. But the variant of issue of the convertible bonds was considered the priority one, it suits to all.

Q: We remember the covenant holidays. If the most probable scenario is realized, will it help Mechel to execute the covenants?

A: We don’t plan to reconsider our covenant holidays. The covenants are the financial obligations of Mechel which we have to execute and plan to execute. Unfortunately, a number of factors influence the execution of covenants and as a consequence on the financial and economic situation of the company, and the coal market plays an important role there. We hope and believe there won’t be a worse situation in the market. It should improve in the mid-term perspective. It will give us an opportunity to execute the covenant obligations. Today we don’t plan to change the covenant obligations and plan to follow the restrictions and agreements that we have with the banks.

Q: Earlier banks-creditors insisted on the change of the management and consequently the firing of I. Zyuzin. Have the banks changed their positions or they still insist on the management change?

A: The issue was not discussed in such a form with the banks and the Government. The structure of Mechel comprises about 30 large enterprises and evidently the management is very complicated. I think today the management team deals with it successfully.

In our negotiations with banks and the Government the additional functions of the company’s financial control were discussed. I think it is fair. It is about the restructuring, about a large debt from the part of banks with the Government participation. So it is quite evident that there should be certain functions of financial control – how we spend money.

Q: What measures of financial control will be applied?

A: Evidently at the meeting of the Board we will approve the budget, will submit our plans on the production and economic activity to the banks, save, approve and agree our investment program which today with the completion of reconstruction of our 3 objects is almost reduced to zero. We will agree these plans with the financial control.

I can’t see anything bad in it. All the coal sales are done at the market prices. Everything connected with the sales in Russia is done at the market prices (we occupy a large part in the construction sector).

Speaking about the expenditure I will give you a few numbers. “Mechel Yakutugol” is the 6th on the prime cost of production among all the world leaders, South Kuzbass – 15th, Elgaugol – after reaching the project capacity the 7th. We have cut all the managerial, non-production and non-commercial expenditure. Today our prime cost is the minimum which is necessary.

Q: What is the further strategy of the company’s development? What possible direction of business will you focus on? Probably the Elginsky deposit will help?

A: In the mining sector we consider the enterprise “Elgaugol” the point of growth. With the launch and reaching the projected capacity of the Elginsky deposit Mechel will be the 3rd in the world on the production and coking coal realization and concentrate production. The stake of coking concentrate which Mechel sells to China today is 70.5%.

In the metallurgical segment we are a company that runs business in 3 directions. The first – with the launch of the universal rail and structural steel mill we will have a good position in the rail products sales segment. The second – the construction assortment where we will be able to produce 500-600 thousand tons of rolled products. It will significantly strengthen our positions in the construction market. The third direction of business is metalware.

Q: Will the funds issued by creditors fully go to the settlement of the debt or some part will be left and will need to be restricted and how?

A: A significant part of funds that will be issued will go for the restructuring of the bank debt. Speaking about the rest obligations, as the restructuring doesn’t concerns the entire loan portfolio, we have 2 variants.

The first variant – we hope in the process of negotiations held with VTB, Gazprombank and Sberbank, banks-creditors that are not referred to this restructuring, will also join this process and we will also restructure the debts at other banks.

The 2nd variant is not that convenient for us but anyway real - we keep settling the debts at other banks from our circulation funds. In H1 2014 we managed to settle about $0.5 bln from our own circulation funds.

The third variant – one of the sources of settlement is the funds from the sale of assets.

Q: Do you make certain forecasts by the debt burden? How will it fall this year, next year?

A: It is difficult to make a certain plan as much depends on the market environment. What we want to do now is to restructure the debt and postpone the payment for 10-15 years. In this case the amount of the debt won’t change.

Speaking about the debt reduction, there are a few factors: whether we will be able to sell assets, at what prices, if all the money from their sale is directed for the settlement of the debt. If coal prices change, we will have the additional revenue, we will be able to settle loans. These are the two main directions that will determine the amount of our debt in a year-two.

Q: You mentioned the sale of assets. What assets do you plan to sell and what is their price?

A: 2 years ago the Board approved the sale of the assets which today we consider the non-profile assets. A part of assets have been sold out by this program. “Yuzhuralnickel”, Moscow coke and gas plant, the Bratsk ferroalloys plant, Bluestone, our sales and service bases in Europe are put up for sale. We are ready to consider the offers on their sale.

Q: What is the situation in the company? They say the company doesn’t pay taxes, salaries

A: We had a few days’ delay in the payment of salaries at the peak time of the debt settlement before the bank and the body of the loan. We paid our employees within a month. Speaking about taxes, we execute our obligations.

 

 

 

 

http://top.rbc.ru/economics/07/07/2014/934779.shtml

Translated by Galiya Musabekova

Oil and Gas, Metals and Mining, News from Russia and neighbouring countries
12 Northfields Prospect; London, - SW18 1PE; United Kingdom
E 51° 27.454518" S 0° 14.101236"

Theme by Danetsoft and Danang Probo Sayekti inspired by Maksimer