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Rating Action:

Moody's changes PDR of Mechel to Ca-PD/LD on suspension of debt payments

15 Dec 2014

London, 15 December 2014 -- Moody's Investors Service has today assigned a limited default (LD) designation to Mechel OAO's Ca-PD probability of default rating (PDR). Concurrently, Moody's has affirmed the PDR rating. There are no changes to Mechel's other ratings, including its Caa3 corporate family rating. The outlook remains negative.

"Our decision to assign a limited default designation to Mechel's PDR, follows the company's announcement that it had suspended principal and cut interest payments on its debt obligations in the third quarter," says Denis Perevezentsev, a Moody's Vice President -- Senior Analyst and lead analyst for the issuer. "The Arbitrage Court of Moscow's recent ruling, which acknowledged interest payment default by Mechel on at least one of its credit facilities, confirms the company's statement."

RATINGS RATIONALE

The change in Mechel's PDR to Ca-PD/LD follows the company's announcement that it had suspended principal payments to financial institutions and cut interest payments. Mechel's decision is further corroborated by the Arbitrage Court of Moscow's decision, which on 5 December 2014 established interest payment default of RUB3.0 billion (approximately $55 million at current exchange rate) by Mechel on one of its credit facilities with Bank VTB, JSC (Baa3, negative). The decision was published on 11 December 2014.

The suspension of principal and/or interest payments falls under Moody's definition of default.

The company has agreed upon a restructuring agreement with Gazprombank (Ba1 negative), the terms of which has not been made publicly available, and is currently in negotiation with Sberbank (Baa2 negative) and Bank VTB, JSC. Debt owed to the latter three, which are state-controlled banks, comprises 68% of Mechel's debt portfolio as of 1 December 2014 and therefore consensual restructuring with these three banks is of pivotal importance for Mechel to remain a going concern.

On the positive side, Moody's noted a degree of improvement in Mechel's performance in the third quarter. Although Mechel's absolute debt levels decreased to $7 billion as of 1 December 2014 from $9 billion as of 31 December 2013, mainly as a result of sharp rouble devaluation as 53% of Mechel's debt is denominated in roubles, this level of debt is unlikely to be sustainable. A wider restructuring of Mechel's debt may be necessary considering its substantial maturities of $2.07 billion and $2.17 billion due in 2015 and 2016, respectively, while cash level as of 30 September 2014 amounted to only $72 million.

RATING OUTLOOK

The negative outlook reflects the potential for further downward pressure to be exerted on Mechel's Caa3 corporate family rating if (1) the company fails to complete the consensual restructuring plan with its lenders, possibly resulting in bankruptcy; or (2) actual debt restructuring results in a substantial loss, particularly in the form of severe write-downs on the principal for lenders.

WHAT COULD CHANGE THE RATING -- DOWN/UP

Negative pressure on the Caa3 corporate family rating would result from Mechel's inability to complete a consensual restructuring, which would probably leave no other alternative than bankruptcy.

Upward pressure on the rating is currently unlikely. However, Moody's would consider an upgrade of the rating if the company manages to complete its restructuring. This would lead to a more sustainable capital structure with a reduced debt burden and better liquidity cushion. Positive rating pressure would also require signs of a gradual recovery in the reference markets for the company, especially the currently depressed coal prices.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Mechel OAO is a vertically integrated mining and metals group. Its business comprises three segments: mining, steel and power. The group produces coal, iron ore, ferrosilicon, as well as long (rebar, wire rod, structural shapes, etc), and carbon flat-rolled steel products, engineered steel, hardware and other high value added steel products. Mechel's products are sold domestically and internationally, with approximately 71% of mining segment sales and 18% of steel segment sales (2013) made outside of Russia. The group's subsidiaries are located in Russia, Ukraine, Lithuania, and the US. Mechel owns three trade ports and a transport operator.

In 2013, Mechel reported revenue of $8.6 billion (a 19% decrease year-over-year) and EBITDA of $0.7 billion (a 50% decrease year-over-year). Mechel is majority owned by its Chairman of the Board of Directors Mr. Igor Zyuzin, who controls 67.4% of the voting shares. After its initial public offering in 2004, 32.6% of the company's shares are in free float.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Denis Perevezentsev
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
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Moody's changes PDR of Mechel to Ca-PD/LD on suspension of debt payments
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