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Abramovich’s Evraz Dodges Bonds for Project Loans: Russia Credit

July 05, 2012

Evraz Plc (EVR), the steelmaker part-owned by billionaire Roman Abramovich, is shunning the bond market in favor of project financing to avoid adding to debt that exceeds limits initially set by creditors.

Evraz is in talks with OAO Gazprombank to borrow $150 million for the Mezhegey coal project and is tapping lenders for $150 million more, Chief Financial Officer Giacomo Baizini said by telephone July 3. While project financing is costlier than regular loans, it isn’t included on the balance sheet, Baizini said. Evraz paid an average 6.96 percent on long-term dollar loans, according to its 2011 report published on its website.

Creditors agreed to lift Evraz’s debt ceiling on July 2 after a 19 percent plunge in prices of steel exported out of Russia from March’s peak eroded profit, probably pushing its $7.4 billion of debt above the limit of three times full-year earnings. The yield on Evraz’s ruble bonds puttable in 2015 rose the same day to a record 11.38 percent, widening the premium investors demand to hold the securities over won debt due in 2015 of Posco, South Korea’s largest steelmaker, by 206 basis points since the second quarter to 741 basis points.

“In theory, Evraz should face higher borrowing costs because of the higher leverage ratio,” Alexey Fadyushin, a Moscow-based analyst with Fitch Ratings, said by telephone on July 3. “However, the company isn’t desperate to sell new debt in 2012. Project finance is the right strategy for mining projects in the current market.”

Lower Earnings

Globally, project finance loan costs have fallen to 268 basis points, or 2.68 percentage points, more than benchmark interbank rates so far this year compared to 284 basis points for the same period in 2011, according to data compiled by Bloomberg.

Russia’s largest steelmaker by output will probably report a 23 percent decline in earnings before interest, taxes, depreciation and amortization this year to $2.2 billion, according to the median estimate of 11 analysts compiled by Bloomberg. Prices for steel exported from Russia fell to a two- year low of $550 a metric ton this week, according to Metal Bulletin.

Lower earnings may push the net-debt-to-Ebitda ratio to 3.4 by year-end from an estimated 2.6 at the end of the first quarter, Igor Lebedinets, an analyst at VTB Capital in Moscow wrote in a report to investors dated July 3. As of March 31, Evraz’s ratio was less than that for OAO Mechel, a steel and coal producer, OAO TMK, Russia’s biggest pipemaker, and OAO Magnitogorsk Iron & Steel, Russian billionaire Victor Rashnikov’s steelmaker, he said.

“Evraz has committed to keep debt flat this year and its repayment schedule requires minimal outflows of less than $250 million by year-end,” Lebedinets said.

Credit Lines

London-based Evraz has enough cash and undrawn credit lines to get through the next peak in debt repayments in March and April when $1 billion is due, Evraz’s CFO Baizini said. The company may return to bonds once the markets have improved, he said. Lenders agreed to allow Evraz to increase its net-debt-to- Ebitda ratio to 3.5 in exchange for a “non-significant” amendment fee, he said.

“In my opinion, amendment of covenants should not increase our borrowing costs,” Baizini said. “It sends a positive signal to investors that potential problems are removed.”

The yield on Evraz’s 2017 dollar bonds was little changed at 7.721 percent today and is down from as high as 8.502 percent in May. Russia’s dollar bonds due in 2020 rose, cutting the yield two basis points to 3.646 percent. Ruble notes due August 2016 fell, the yield rising 31 basis points to 8.08 percent. The yield on Russia’s ruble Eurobond due in 2018 dropped five basis points to 6.433 percent.

Ruble Weakens

The ruble depreciated 0.4 percent to 32.4949 per dollar at 11:16 in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 33.0320 per dollar in three months.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was unchanged at 210 basis points, up from this year’s low of 160 on March 19, according to data compiled by Bloomberg.

Russia is rated Baa1 by Moody’s Investors Service, the third-lowest investment grade. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries gained five basis points to 288, according to JPMorgan EMBIG indexes. The difference compares with 201 for debt of similarly-rated Mexico and 208 for Brazil, which is rated one step lower at Baa2 by Moody’s.

Earnings Outlook

Evraz’s Ebitda may rise by about 10 percent next year to as much as $2.5 billion as Europe’s economy recovers, steel prices rise and profitability improves at Evraz plants in Russia, included at a reconstructed rail mill, Andrey Nikolaev, an analyst with Standard & Poor’s, said by telephone from Moscow.

The steelmaker is seeking to double coal production and increase volumes of iron-ore to Ebitda 73 percent to $5 billion by 2016, according to a presentation on the company’s website.

Evraz remains one of the “most solid” borrowers in Russia’s metals sector, said Dmitry Trenin, chief trader at Otkritie Capital which has Evraz bonds in its portfolio.

“Covenant changes are unlikely to affect sentiment of bondholders,” he said.

To contact the editor responsible for this story: Gavin Serkin at

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