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Mandated lead arrangers and underwriters ABN Amro, BNP Paribas, Calyon, Commerzbank, Natixis, SMBC and Société Générale successfully closed Russian metals and mining company Mechel’s debut syndicated acquisition refinancing package at US$2bn in December 2007.

Despite the deal being the first of its kind for the borrower and launched in difficult market conditions, it was one of the largest and fastest deals to close in the market last year, with general syndication taking less than two and a half months.

The facility comprises a five-year US$1.7bn classical pre-export facility priced at 150 basis points and a three-year US$300mn corporate term loan priced at 225bp. It refinances Mechel’s acquisition of two mining firms, Yakutugol and Elgaugol, and a section of road and railway in eastern Russia. The funds are financing the acquisition of 75% less one share of Yakutugol and 68.86% of Elgaugol.

The security package includes an assignment over the chain of commercial contracts, a pledge over an offshore collection account and coverage ratios.

With the term loan, the facility is guaranteed and secured by a first ranking pledge over 50% (minus one share) of Yakutagol.

Dean Grech, director, metals and mining, structured commodity finance at ABN Amro, comments: “The considerable time pressure was due to the need for Mechel to have certainty of funds before auction. Despite all these challenges we were able to provide committed finance and assist Mechel in winning the auction.

“It was also a deal that required innovative structuring, was pre-funded by the MLAs in a very short timeframe from the auction, and was syndicated in a similarly short timeframe. The deal was launched during the height of the liquidity crisis which provided considerable uncertainty.”

While keen interest resulted in significant oversubscription, Mechel elected not to increase the size of the facility, resulting in a scale-back of some commitments of the 21-strong group of banks.

Mathieu Postel, managing director of the metals and minerals, mining and structured finance desk in the commodity finance department at MLA/bookrunner Natixis, comments: “Mechel’s new industrial profile coupled with the strong structure of the transaction meant that this deal attracted a lot of interest in the market.

“In an environment where raw material prices are on the rise and in which China has become a net importer of coal, this facility assists in maintaining Mechel’s vertical integration model and in enlargening its mining base.

Banks were invited to participate in the transaction on a take-and-hold basis for tickets of US$25mn, US$50mn and US$100mn.

Commerzbank joined the senior group as co-mandated lead arranger. General syndication subsequently closed with 14 banks joining the mandated lead arrangers at lead arranger, arranger and co-arranger levels.

“The main attraction was that this acquisition makes a lot of sense for the group’s strategy and Mechel is a new name on the syndication market,” says Natixis’s Postel.

Mechel is a low-cost fully integrated mining and steel company focused on several commodities, such as coal, iron ore, nickel, as well as steel products and heat and electric power. Focusing on three segments – mining, steel and power – enables Mechel’s steel business to be 100% self-sufficient in coking coal, 80% in iron ore and 50% in electricity.

By having three distinct commodity sectors, Mechel’s company structure provided lenders with a chance to create a unique financing structure.

Although the facility is funding the acquisition of coke deposits, repayment is not sourced only from coke, but also from nickel and steel. This diversification of commodity receivables ensured the deal stood out in the market.

The deal structure also had to accommodate numerous limitations imposed by Russian law due to the fact that many of the borrower’s subsidiaries were not fully owned.

The success of the deal’s structure has established acquisition pre-export facilities as an effective method of raising medium-term debt to fund acquisitions.

Grech observes: “It shows that many corporates are returning to or staying with structured commodity financing products as an effective means of raising large amounts of funds and that banks have a favourable disposition to providing finance in this manner in contrast to other forms of capital raising in the current market conditions.”

Looking to the future of the Russian market and pre-export financing, Philippe Landry, managing director, structured commodity finance, metals and minerals at Société Générale, adds:

“With market conditions more challenging due to the liquidity crunch, the high level of pre-export financing in Russia shows the flexibility of the pre-export finance tool for meeting the needs of commodities producers and banks.

“Banks, on the one hand, have a larger capacity to extend more funding under pre-export finance structures which under Basel II rules require a lower amount of capital allocation than unsecured financing.

“On the other hand in this period of high commodities prices, the availability of pre-export finance to Russian companies continues to be significant to address the needs arising from the huge number of projects, developments and acquisition opportunities under consideration in the metals and mining sector.”

 

Deal Information:

Borrower:

 

Mechel
Amount: US$2bn
Mandated lead arrangers: ABN Amro; BNP Paribas; Calyon; Commerzbank; Natixis; SMBC; Société Générale
Tenor: 3-5 years
Law firm: Linklaters CIS
Date signed: December 2007