If Estar defaults on the loan - which falls due at the end of September - some analysts believe it could lead to renewed pressure on Mechel's debt covenants, less than six months after they were renegotiated for the second time in as many years.
"If the loan is not repaid we will enforce the security, which is the pledge of shares of essentially all Estar assets ... consequently technically that will be tantamount to an increase of debt," Mechel Chief Financial Officer Stanislav Ploschenko said in e-mailed comments.
Mechel, controlled by tycoon Igor Zyuzin, last renegotiated its debt covenants in April, widening the net debt to EBITDA ratio allowances.
The move only partly allayed market concerns about its total debt position, which stood at $9.9 billion at year end 2011. The shares have shed 75 percent of their value over the past 12 months, now valuing the company at $3.3 billion.
"(Mechel's debt) is still a big problem. The company has made bold statements on debt resolution ... now we need to see the first signs (of improvement)," Raiffeisen Centrobank analyst Iryna Trygub-Kainz said.
The latest cause for concern is Mechel's relationship with its Estar unit, through which it bought Ukraine's Donetsk Electrometallurgical steelmaking plant for $537 million in December last year.
FIXED ASSETS
A fall in Ukrainian crude steel production forced Mechel to lend it $945 million, using Estar's fixed assets including steel mills as collateral.
The loan matures in September 2012 and if it defaults Mechel will gain Estar's assets, but also its $1 billion debt, which could then appear on the company's balance sheet.
Some analysts said that while debt may increase as a result of a default on the Estar loan, banks would have taken this into account when renegotiating the covenants earlier this year.
"They already negotiated the covenants assuming they (Mechel) may get this debt," said Renaissance Capital analyst Boris Krasnojenov," adding he thought the renegotiation was generous enough for the company to service its debt for some years.
Analysts will be looking for an update on Mechel's debt position when it reports first-quarter results on Wednesday.
Mechel CFO Ploschenko confirmed that a default on the loan would mean Estar's assets would have to be incorporated in its accounts. "Having entered in possession of Estar, we will according to U.S. GAAP (accounting standards) consolidate the assets," he said.
"If the eventuality is that we have to consolidate Estar ... our first and foremost task will be to bring the situation back to normal, meaning to reduce debt by selling part of the assets," he added.
Mechel's financial situation has already been weakened after plans to launch a $2 billion initial public offering of part of its lucrative mining unit foundered due to volatile markets.
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