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Mechel, Sberbank Pen Agreement

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Russian mining company Mechel OAO has entered into agreements with its creditor Sberbank of Russia to restructure part of its debt to the bank (RUB 25.5 billion or $773 million). The agreements extend the obligation of Mechel to Sberbank by 5 years, with a grace period until the first quarter of 2015.

The conditions of restructuring will guarantee refinancing of Mechel’s existing debt to Sberbank for a total of RUB 25.5 billion. The restructuring activities will be executed only on Mechel’s short-term debt, which were maturing within Dec 2013 to Dec 2014. As Mechel’s existing debt is being restructured, its total debt portfolio will not increase.

This agreement, together with the earlier declared approval of covenant holidays by Sberbank on bilateral credit lines worth roughly RUB 44.9 billion ($1.36 billion) until the end of 2014 on Dec 9, 2013, will enable Mechel to stabilize its financial situation.

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 the success of Mechel and Sberbank’s mutually beneficial and efficient partnership.

Mechel is a prominent player in the steel industry along with steel giant ArcelorMittal (MT - Free 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, high debt and interest burden may affect Mechel, and it might not be able to support its huge capital spending program.

Mechel’s debt position is threatened by uncertainties, since the debt on its books (roughly $9.3 billion as of Mar 31, 2013) is more than seven times its market capitalization. The company made significant debt repayments ($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 - Free Report) and United States Steel Corp. (X - Free Report) . While Companhia Siderurgica holds a Zacks Rank #1 (Strong Buy), United States Steel has a Zacks Rank #2 (Buy).

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