December 30, 2009, 01:43 / Business

All large metallurgical companies had to survive the crisis

The outgoing year will be remembered by most metallurgical companies for debt restructuring and the struggle for survival. UC Rusal had the hardest time of all, owing $16.8 billion to creditors. But all the large holdings coped with the problems Yulia Fedorinova

State banks also lent to metallurgists - VTB , Gazprombank , Sberbank , Krasnozhenov recalls. At first, rates reached 18% per annum in rubles, but in the fall they were reduced to at least 14%. And by the middle of the year, metallurgists began to borrow on the market. In the summer, Evraz Group placed bonds convertible into shares (for $600 million) and GDRs (for $300 million, of which $200 million were purchased by the main shareholders). In the fall, metallurgical companies, one after another, began to issue ruble bonds: NLMK , Evraz Group, Magnitka, Severstal , TMK , Mechel did this .

“If we were ranking the most difficult years, then 2009 would be in 2nd place after the 1998 crisis,” says a NLMK representative. At that time, most companies had not yet built up their business. But metallurgists greeted the outgoing year bleakly: the demand for steel products fell by more than half, the plants worked at half capacity. Things were no better in non-ferrous metallurgy. Nickel prices dropped to the level of profitability of Norilsk Nickel (below $10,000 per 1 ton), and aluminum quotes no longer allowed UC Rusal to make a profit: with a metal price of $1,300 per 1 ton, the cost of its production was almost $1,900 per 1 ton. In front of many There was another problem - debts (see figure) accumulated due to the active purchase of assets in previous years. UC Rusal found itself in the most difficult situation. Oleg Deripaska's company owed $14 billion to banks, and another $2.7 billion to co-owner Mikhail Prokhorov.

How they fought

Everyone had roughly the same recipe for dealing with the crisis: optimize the business and “cut the fat,” says Renaissance Capital analyst Boris Krasnozhenov. For example, UC Rusal in February decided to reduce the production of alumina by 3.45 million tons (minus 30% of capacity), aluminum by 500,000 tons (-11%). And steel producers managed to sharply reduce costs: in the third quarter, NLMK spent $199 on the production of 1 ton of slabs - 50% less than Chinese and European manufacturers. Finally, those who have foreign assets tried to save at their expense: Norilsk Nickel mothballed mines in Australia, Severstal mothballed part of its North American plants.

But the main thing is that all large companies were able to restructure debts and change the terms of loans: Mechel, Evraz Group, Severstal, Metalloinvest, UC Rusal, etc. This could not have happened without the help of the state. At the end of 2008, Evraz Group and UC Rusal refinanced the short-term debt of Western banks at VEB, receiving $1.8 billion and $4.5 billion, respectively. True, Deripaska recently assured that he did not ask for government help. “I only help government organizations and don’t ask them for anything,” he said in an interview with Spain’s El Pais.

UC Rusal: walked the blade

The issue of survival for UC Rusal this year was the restructuring of a gigantic debt - it was necessary to come to an agreement with about 80 banks. The main owner of UC Rusal, Oleg Deripaska, also attended the negotiations (became the general director of the company). Most of the time was spent organizing the negotiation process, recalls Oleg Mukhamedshin, director of UC Rusal for capital markets (he answered Vedomosti’s questions through the press service): back in December 2008, the company proposed creating a coordination committee of the largest Western creditors (the company owes them $7.4 billion). It included representatives of eight banks that control more than 50% of the company's debt. Then the work was structured like this: the company came to an agreement with the committee (at least 25-30 bankers and lawyers participated in each meeting), after which the decision was discussed by all Western creditors (there are 70 of them), says Mukhamedshin. As soon as the vast majority of banks agreed to one condition or another, the committee returned to UC Rusal and negotiations continued, he recalls. In general terms, it was possible to agree on the terms of the restructuring in the summer, and then the protracted process of approval of the document by banks began, and UC Rusal signed the long-awaited agreement only on December 3.

It was easier with Russian creditors, Mukhamedshin admits: “There were fewer of them, and they know the company well.” The holding owes VTB $691 million, Sberbank – $722 million, Gazprombank – $455 million and 140 million euros and another $4.5 billion to VEB, the banks that organized the UC Rusal IPO (scheduled for January) disclosed in their reports. Their number also included Alfa Bank. He was the only one who did not agree to the restructuring, and in September he filed for bankruptcy of two subsidiaries of UC Rusal - Suala and Rusal-Krasnoyarsk. With the consent of other banks, the holding was forced to repay Alfa’s $85.9 million debt on the same day. “This delayed the overall restructuring process; many documents with foreign banks had to be re-signed,” notes one of UC Rusal’s creditors.

Before the restructuring, the weighted average rate of UC Rusal was about 6% per annum, or LIBOR + 4.85%, Mukhamedshin said. On the new loan from Western banks, the rate is LIBOR + 7% (5.25% capitalized), by 2013 it should drop to LIBOR + 3.5%. The banks have pledged up to 10% of the shares of the company's largest plants: Rusal-Bratsk and Rusal-Krasnoyarsk.

The cost of VTB loans is the Central Bank refinancing rate plus 0.5–3%, Gazprombank – 8.5–9.5%, Sberbank – 8–10%, disclosed the banks preparing the IPO. VEB (loan extended for a year) – LIBOR + 5% (2% capitalized). And Prokhorov agreed to convert $1.8 billion of debt into shares (his stake in the company will increase from 14% to 19.2%).

One of the covenants is that by September 2013, UC Rusal must repay $4 billion of debt ($2 billion by September 2011). If the company does not do this, then 4.25% of the company's shares may go to the banks. Also, UC Rusal must raise $2.4 billion from the sale of shares (including IPO) by December 2013.

The prospects for UC Rusal are quite good, according to employees of several creditor banks. Aluminum prices began to recover in the spring, and since the beginning of the year, the metal has risen in price by 1.7 times to $2,200 per 1 ton. At the same time, the company has reduced production costs by almost 1.5 times: to approximately $1,400 per 1 ton of aluminum. And although in the first half of the year it received a negative EBITDA of $160 million and a net loss of $720 million, for the entire 2009 Bank of China (one of the organizers of the company’s IPO) predicts a net profit of $505 million, and in 2010 - already $1. 04 billion. However, the forecasts of other banks are more modest: Macquarie Group this year expects the company's revenue to be $7.77 billion, negative EBITDA of $897 million and a net loss of $2.2 billion; Renaissance Capital - revenue of $8.3 billion, EBITDA - $159 million and a net loss of $950 million. But already in 2010, things will get better for UC Rusal: Macquarie Group predicts revenue of $12.23 billion, EBITDA - $2.36 billion, net profit – $293 million; Renaissance Capital names $11.38 billion, $2.285 billion and $1.843 billion.

Prepared for the worst

In general, 2009 turned out to be much better than forecasts, notes a NLMK representative. There are several large players in Russia and it was easier for them to survive than, for example, for the Chinese (there are more than 70 companies), Krasnozhenov recalls. Demand for steel began to recover, and by mid-summer everyone was already working at almost 100% capacity. “In the third quarter, we were even able to exceed the sales volume of pre-crisis September - October 2008,” recalls a NLMK representative. And prices for steel and non-ferrous metals began to rise (see charts). Thus, from the beginning of the year to November, hot-rolled sheets rose in price by 35-40% to $583 per 1 ton, cold-rolled sheets - by 25% to $693 per 1 ton. As a result, by the end of September, Evraz had about $1 billion in free cash and was able to repay the VEB loan by $800 million. Severstal has accumulated about $3 billion (the company announced that in 2010 it will pay off $1 billion of debt). At the end of nine months, Magnitka did not even have a net loss; NLMK should also show a net profit at the end of the year. Only small companies went bankrupt. A striking example is the metallurgical plants of the Estar group.

In non-ferrous metallurgy, things were going even better: the cost of nickel reached $18,630 per 1 ton (almost doubling). Thanks to this, Norilsk Nickel's EBITDA for the year will be $4.12 billion, net profit will be $1.6 billion, UBS predicts. The company had $2.32 billion in cash at the end of the half.

This year, metallurgists did not go without making purchases. Magnitka in the fall bought an additional 41.3% stake in the Belon coal holding for $309 million (now it has 82.6% of the company), and Mechel in the spring made the largest foreign deal in its history, purchasing the American coal Bluestone Coal for $436 million and 15% of its preferred shares. In addition, Magnitka launched the largest investment project in recent years - Stan-5000. “We understood that it was the new, scarce types of products that would allow us to more confidently survive difficult times and ensure high profitability in the future,” says MMK Vice President Rafkat Takhautdinov.

2010: high hopes

2010 should be a year of growth. EBITDA of steel companies will increase by 80–100% compared to 2009, Uralsib analysts believe. This is the level of 2007–2008. Thus, Renaissance Capital forecasts EBITDA for NLMK for 2010 at $3.3 billion (in 2008 it was $3.36 billion), Magnitka at $2.79 billion (in 2008 it was $2.204 billion), Mechel – $1.9 billion ($2 billion in 2008). Norilsk Nickel's EBITDA, according to Uralsib's forecast, in 2010 will be at $6.28 billion (in 2008 it was $5.8 billion).

The main reason for such forecasts is the expectation of rising prices. Magnitogorsk management stated that steel prices in 2010 could rise by 20%. “Next year we expect an increase in production volumes of about 25% to 11.2 million tons of commercial metal products,” says Takhautdinov. Uralsib predicts growth of 20–25% (the average price of hot-rolled steel will be $590 per 1 ton, long steel – $475 per 1 ton), for copper – 25% (up to $6,000 per 1 ton), for nickel – 12% (up to $16,500 per 1 ton). But prices for aluminum may remain at current levels: RBC Capital Markets predicts the average cost of metal in the new year at $2,200 per ton. However, this will not prevent UC Rusal from practically doubling EBITDA in 2010, says an employee of the bank preparing the company’s IPO.

But the crisis nevertheless made adjustments to the strategies of metallurgists. Many will not start paying dividends soon: UC Rusal and Evraz Group have restrictions on payments included in new loan agreements. Expansion abroad has also been temporarily suspended, says a top manager of one of the metallurgical holdings. But 2010 could be the year of placement of shares, thinks Morgan Stanley analyst Dmitry Kolomytsyn. Everyone who planned to do this before the crisis, who has debts, will probably try to attract money from the market in this way, he thinks. Thus, Metalloinvest (debt – $5.4 billion) returned to consider the issue of an IPO, employees of several banks said (the company does not comment on this). And Mechel can list shares of its mining subsidiary Mechel Mining on the stock exchange, says a banker working with the company.