RUXX Research Alert -- Metalloinvest Might Be in Danger of Default

NEW YORK, NY--(Marketwire - August 13, 2009) - RUXX Index, which tracks Russian stocks, has put Metalloinvest, the Russian metals and mining giant, on the default watch list, citing high credit burden and drastic decline in steel prices.

Metalloinvest is a Russian steel and ore producer controlled by Alisher Usmanov, who also owns FC Arsenal and has recently purchased minority stake of the leading US social networking site Facebook. According to RUXX analysts, revenues of Metalloinvest as those of other Russian mining companies, will drop 50% in 2009. Besides declining revenues, Metalloinvest has a high debt burden from loans made by Russian State bank Sberbank. Analysts estimate that combined debt of Metalloinvest exceeds $5.2 billion. According to sources close to the company's leadership, Metalloinvest's subsidiaries are planning to take on another loan from Sberbank, valued at $1.2 billion. The loan will be directed to servicing Metalloinvest's existing debt and operational expenses. However, the state of the company's finances imply that in approximately 6-months it might not be able to service its debt and might be in technical default, unless prices of steel and ore recover.

"Metalloinvest is basically a sound company with high potential," says Michael Thomspon, senior analyst for RUXX Index. "However, in the current economic situation high debt burden might limit the company's growth opportunities and even put it in risk of default. In 2008, Metalloinvest and affiliated companies paid 22 billion rubles in dividends instead of directing some of this money to cover part of its debts."

According to the financial projections for 2010-2011, Metalloinvest's Debt/EBITDA ratio will average 4.4/1. Debt/EBITDA ratio is a metric used by credit rating agencies to access the probability of defaulting on issued debt. 4.4/1 ratio is substantially higher than the investors' comfort zone.

Metalloinvest has also entered a joint venture with State-owned meta-holding Rostekhnologii to develop Udokan, one of the largest Russian copper mines. According to BFM, Russia's premier business newswire, the company had problems with payment of the $500 million license fee and will have to secure yet another round of financing for development of the mine. "Metalloinvest has very strong connection with the Russian government, which helps to survive the crisis, but it also needs to be profitable. It is highly likely that, unless the metals and mining sector shows quick recovery, Metalloinvest will be facing default. It has been also reported that Metalloinvest might allow Nomura, one of the world's largest investment banks, to take partial control over Udokan, which Russian government considers 'a strategic asset.' That can create additional political risk for Metalloinvest and make the possibility of default even higher," says Michael Thompson.

RUXX is an an index tracking Russian companies and debt notes listed on US and UK exchanges. It is calculated by Dow Jones.