Moody's Downgrades Mechel's Ratings - Analyst Blog

Mechel OAO's MTL corporate family rating CFR has been downgraded by Moody's Investors Service – the rating unit of Moody's Corporation MCO – to Caa1. The rating agency has also lowered its probability of default rating (PDR) to Caa1-PD. Moody's downgraded the company's rating based on weak coal market and  poor liquidity.

Mechel's current financial situation remains weak. In March 2014, Alfa-Bank requested early repayment of its $150 million loan and the company agreed to repay the amounts due in five installments by Apr 25, 2014. The company's maturity profile remains tight with 2015 and 2016 maturities of $2.5 billion and $2.5 billion, respectively, as of Dec 6, 2013. Moody stated that if Mechel fails to repay any of the upcoming loan maturities, it might lead to cross-default provisions on the company's loans with other banks.

However, Mechel also had some positive developments. The company disposed of several of its ferroalloys assets in Dec 2013 and used the proceeds of $425 million to repay its short-term debts. In Dec 2013, the company signed an extension of its $1 billion syndicate loan, with a new one year repayment grace period and maturity until Dec 2016.

Mechel entered into agreements with its creditor Sberbank of Russia to restructure part of its debt to the bank (RUB 25.5 billion or $773 million). The agreements extend the obligation of Mechel to Sberbank by 5 years, with a grace period until the first quarter of 2015.

The conditions of restructuring will guarantee refinancing of Mechel's existing debt to Sberbank for a total of RUB 25.5 billion. Through these transactions, Mechel was able to reduce its net debt from $9.4 billion as of Dec 6, 2013, to around $8.8 billion as of mid-March 2014.

The Caa1 and Caa1-PD ratings signify Mechel's highly leveraged balance sheet. The company's profitability is determined by the coking coal prices which remained weak and with spot prices falling to $120/ton in March 2014, Moody's considered a downgrade of the company as it believed that this will keep the company leveraged.

Mechel currently retains a Zacks Rank #2 (Buy).

Other companies in the steel and related industries with favorable Zacks Rank are NN Inc. NNBR and Norsk Hydro ASA (NHYDY). While NN retains a Zacks Rank #1 (Strong Buy), Norsk Hydro holds a Zacks Rank #2 (Buy).