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Magnezit’s future is in the hands of its creditors

13 Apr '09
Oleg Kouzbit, Online News Managing Editor

Following successful payments on its first four coupons for $73.5m worth of second-series bonds, Chelyabinsk’s Magnezit group technically defaulted in early April. The company is asking its creditors for debt restructuring, but it may have to dump assets to pay them off.

Good start, poor ending

On March 31, 2009 Marchmont reported that Chelyabinsk metallurgic holding Magnezit had paid its fourth $3.2m coupon for $73.5m second-series bonds issued in April 2007.

In a complete U-turn just one week later the bleak news came that the Eastern European leader in flux production, with an estimated 69% market share in Russia, had defaulted.

From a clinker to a default

Funds from the company’s successful 2007 bond placement were injected into a $106.5m investment program. More than $40m was used to start a new clinker brick production line (click here, September 8, 2008).

Although the bonds had a four-year term, bondholders had the right to redeem the entire issue two years out--on April 3, 2009 to be exact. When creditors asked for redemption, the company was caught short, saying it “did not have enough funds at that moment to honor its commitment.”

Due to the global financial crisis, Magnezit is currently operating at only 50% of its capacity and management feels the situation in unlikely to improve in the course of the year.

Begging for mercy

To avoid being forced to liquidate assets at bargain basement prices, the company is hoping investors will accept a debt restructuring plan it has offered. Under the plan, creditors have reportedly been offered 50% redemption now and the rest by installment over the next 18 months.

Investors may agree to these new terms. Magnezit is not the first default in Russia’s debt market, and other bond holders have agreed to restructuring. If they reject the offer, however, investors can sue Magnezit.

The firm itself isn’t commenting any further on the situation.

Even if Magnezit succeeds in restructuring its debt, it still has to address an overall debt burden of $312m. Its 2008 net profit, preliminarily calculated at $7.7m, will barely make a dent in paying its current bondholders.

How times have changed--when Magnezit was issuing its bonds in 2007, management forecast a much more optimistic $38m profit margin for 2008.

Sector analysts estimated that the pre-crisis worth of Russia’s flux market was approximately $98m. In the past six months the market has sagged 50%, following the sharp drop in world metal prices.

Magnezit is counting on life-line in the form of a $36.8m Sberbank loan. However, given the current market situation the double-digit interest rate is unlikely to make Magnezit’s debt restructuring less painful. Some experts think the form will be forced to follow the footsteps of Australian miner Rio Tinto, which started dumping assets to repay its debt.

Joining the club?

Russia’s metallurgic sector is likely to see more defaults this year. In February, the Far East’s Amurmetal was the first to default on its $44m bonds and thus far the firm has failed to show investors any coherent rescue plan. Other Russian crisis-stricken giants include Evraz, TMK and ChTPZ Group.
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