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Sberbank Gives Mechel Covenant Holidays

SID MT X MTL

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Russian mining company Mechel OAO (MTL - Analyst Report) has reached an agreement with its creditor Sberbank of Russia on covenant holidays on bilateral credit lines worth roughly RUB 44.9 billion ($1.36 billion) until the end of 2014.

The agreement benefits Mechel’s revised development strategy, which includes a gradual decrease of debt burden. It will also help Mechel to overcome the period of global market volatility. The agreement reflects on Mechel and Sberbank’s mutually beneficial and efficient partnership.

On Dec 4, 2013, Mechel had reached an agreement with its creditor VTB Bank on covenant holidays on bilateral credit lines worth $1.8 billion until the end of 2014.

Mechel has established itself as a vibrant and resilient company under all market situations. The company has the potential to undergo current asset restructuring program and for that purpose VTB is willing to extend its support such that the new step will consolidate into a mutually beneficial partnership between the two. Covenant holidays provided by VTB Bank will help Mechel in its debt optimization process.

On Nov 25, Mechel reached another agreement with its creditors on covenant holidays for its $1 billion loan until the end of 2014. The agreement was inked on behalf of a syndicate of banks, including ING Bank N.V., Societe Generale, UniCredit, Commerzbank, Raiffeissen Bank International, VTB, Caterpillar Financial Services Corporation and ICBC (London).

Mechel is a prominent player in the steel industry along with steel giant ArcelorMittal (MT - Analyst Report). The company is a leading domestic steel and coal producer with strong position in key businesses including production of specialty steel and alloys. It has the largest coal reserve base in Russia and is mainly focused on growth and cost-cutting measures.

Mechel owns and controls essential infrastructure; including ports, rolling stock and power plants; which provide access to the export markets. However, Mechel could be jeopardized because of its high debt and interest burden, and might not be able to keep up with its huge capital spending program.

Mechel’s position is doubtful as far as debt is concerned, since the debt on its books (roughly $9.3 billion as of Mar 31, 2013) is more than seven times of its market capitalization. The company has significant debt repayments (of $2.2 billion) in 2013. Higher debt results in greater interest charge. Moreover, a high leverage restricts the company’s ability to raise new debt for further financing.

Mechel currently carries a Zacks Rank #3 (Hold).

Other companies in the steel industry with a favorable Zacks Rank are Companhia Siderurgica Nacional (SID - Analyst Report) and United States Steel Corp. (X - Analyst Report). While Companhia Siderurgica holds a Zacks Rank #1 (Strong Buy), United States Steel has a Zacks Rank #2 (Buy).
 

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