Russian aluminum company staggers under debt woes

MOSCOW: Indebted billionaire Oleg Deripaska, once Russia's richest man, is struggling for financial survival as his aluminum maker UC Rusal heads into grueling talks with creditors over billions of dollars in debt. The embattled company, one of the largest aluminum producers in the world, has until early May to reach a deal with foreign lenders to restructure $7.4 billion in loans. It owes nearly $7 billion to domestic banks. Analysts say Rusal, the heart of Deripaska's business holdings, is now worth less than its total debts — a stunning reversal in fortune. "Rusal is essentially bankrupt," said Michael Kavanagh, a metals analyst at Moscow-based Uralsib bank. "If they sold all their assets now, maybe they would just about cover their debts." A victim of the global economic crisis, Rusal has been knocked sideways by a slump in aluminum prices that have reached a seven-year low and a freeze of international credit markets. Typical of many Russian oligarchs, Deripaska borrowed heavily when credit was easy to obtain, offering shares as collateral. But plunging stock prices and the seizing up of credit revealed the extent of the oligarch's enormous borrowings. He ceded stakes in Canada's Magna, the automotive component maker, and German construction firm Hochtief to creditors. If Rusal can't reach agreement with its creditors, that would in theory pave the way for the 70 foreign lenders — that include ABN Amro, Citigroup and BNP Paribas — to seize equity in the company. In that event, Deripaska would see his controlling stake drop to under 50 percent from 53.8 percent now. Rusal said the fears were exaggerated. It is actively discussing terms with its lenders and there are no discussions about converting debt into equity, the company said. But Rusal nevertheless has a struggle on its hands. Even if it agrees to terms with creditors, it will need to slash costs and improve its efficiency. The company will be forced, said Kavanagh, "to become lean and mean and fit." "Rusal is not going to cease to exist," he added. The valuation placed on the company by a recent deal with one Russian creditor indicates foreign creditors would not even get a blocking stake if they seized the collateral. A deal with billionaire Mikhail Prokhorov last weekend to boost his Rusal stake from 14 percent to 18.5 percent in lieu of $2 billion he was owed could set the tone for talks with creditors. The deal valued the closely held company at $36 billion, a figure analysts said was "staggering" in light of plunging metal prices and the company's cash-flow difficulties. If used as a benchmark valuation, foreign banks could receive just 17 percent equity in Rusal, Uralsib said. "It's a way of preventing any other debtholder from thinking, 'let's take a slug of this business'," said Rob Edwards, a metals analyst at Renaissance Capital investment bank, which is 50 percent owned by Prokhorov. Rusal has fallen far. When it was mulling an IPO a year ago, analysts valued the company at roughly $30 billion. If the entire company traded right now, Edwards said Rusal's equity value would be closer to $8 billion. Nevertheless, Rusal said it is confident it will reach a resolution with lenders. "The recent agreements that Rusal has reached on its debt restructuring highlight the long-term support that exists for the company among the international banks and the Russian financial community," Rusal said in a statement. Creditors may have little option but to restructure. While the Kremlin has already shown willingness to shield Deripaska's assets from foreign creditors, extending it a $4.5 billion bailout last autumn to repay lenders, First Deputy Prime Minister Igor Shuvalov said last Friday the state has little appetite for lending more money to oligarchs who have overextended themselves. He added the government was open to creditors' requests to swap debt for equity. Deripaska emerged with Russian Aluminum — which later formed part of Rusal — from Russia's cutthroat aluminum wars of the 1990s. Last year, Forbes magazine estimated his wealth at $28 billion — based on an enviable array of assets not only in Russia, but in Europe and North America, too. Forbes now estimates his wealth at $3.8 billion. His vast business empire includes construction firms that play a vital role in preparing facilities for Sochi's Winter Olympics in 2014. He has stakes in GAZ, the beleaguered car manufacturer that owns troubled British van maker LDV, and Austrian building giant Strabag. He also owns a 25 percent stake in mining giant Norilsk Nickel and reportedly acquired a little under 5 percent in U.S. carmaker General Motors two years ago. Analysts are skeptical that creditors really want a stake. If creditors seized the stake, it could take years for the company to recover its value and for lenders to get their money back. "It's a game of who blinks first," said Edwards. "I don't think that's what they (the banks) want — they want to be paid."