By John Helmer in Moscow
The two well-known controlling shareholders of the Evraz steel group, Russia’s largest steelmaker, are to pay at least $400 million into the cash reserve of the company to help reduce its current debts, and avoid a breach of bankers’ covenants governing Evraz’s loan position. Through an announcement yesterday by Evraz, Lanebrook — the Cyprus-registered vehicle through which Abramovich and Abramov hold an estimated 78% of Evraz’s shares — has undertaken to subscribe to the group’s public offering of $600 million in convertible bonds and $300 million in shares. The Lanebrook group will subscribe $200 million for the bonds, and $200 million for the shares. The balance will be sought from the market in an offering that is being managed by Goldman Sachs, Morgan Stanley, and Deutsche Bank.
The bonds, with a coupon of 7.25 % annual interest, mature in 2014, but they can be converted before then into the company’s general depositary receipts (each comprising three shares). This conversion will be allowable sixty days from placement at $21.12, 28% above the placement price. That price, according to Moscow brokerage reports on Thursday morning, was $16.50 per share, about 10% below the Tuesday closing price. By the end of Russian trading on Wednesday, Evraz’s share price had dropped 11.4%.
Until now, no Russian proprietor of a major steel company has paid out of pocket for the company’s debt obligations. The stock markets have failed to see the generosity in Lanebrook motive, however, interpreting in the move a dilution of minority shareholders, and pressure on the minorities to sell back to the controlling shareholders at a discount to the market price. Industry reports in Moscow have suggested that behind the Lanebrook facade, Abramovich and his Millhouse partners hold 36% of Evraz; Abramov’s stake amounts to 24%; chief operating officer Alexander Frolov, 12%; the Privat group of Ukraine, 10%; with a remaining freefloat of the London-listed stock at more than 17%.
Barry Ehrlich, steel analyst for Alfa Bank, reported the sentiment that the move “creates short-term share overhang and an arbitrage opportunity between the convertible bond and current equity.” But he conceded that the debt relief that is achieved is positive for the company. “Once the placement is completed, the company will have completely covered its refinancing needs over the coming three-year period, under our current forecast scenario. This could be a share-supportive development in the midterm as it removes most of remaining bankruptcy risk, although it does give away some of the longer-term upside through further share dilution if the stock.”
Analysts report that Evraz’s loan covenants fix an allowable ratio of net debt to earnings (Ebitda) of 3. But on present counting, the company’s debt to Ebitda is at 3.2. By raising the $900 million this week, the net debt would be lowered, and the danger of a breach of the 3 level eliminated. Moscow brokerage reports estimate that the share dilution from the move will be between 10% and 12%.
Uralsib Bank reported to clients today that “we would expect some short-term negative reaction to the news, given the effect of dilution and the fact that the terms of the convertible bonds look favorable enough to encourage existing Evraz investors to switch into the new instrument.” The move by the Evraz owners may induce other heavily indebted Russian steel proprietors, facing loan covenant breaches, to follow suit.
In a separate report issued on July 8, Evraz reported extension of loan payment terms from the two Russian state banks, VEB with $1.8 billion due in November, and VTB with $321 million due in October. The company’s net debt as of June 30 was $7.8 billion, $400 million lower than the level reported on March 31.