Russia's Evraz seeks dollars through back door

By Natalie Harrison

NEW YORK, Oct 31 (IFR) - Evraz Canada, the North American subsidiary of the Russian steel company, is being closely watched as it looks to price a US$350m debut bond at a time when its parent and other Russian corporates are shut out of debt capital markets.

Left-lead Citigroup (NYSE: C - news) and bookrunner Goldman Sachs (NYSE: GS-PB - news) are looking to price the deal five-year non-call 2.5 senior secured issue on Friday, having announced price talk of 7.50%. The size is US$150m less than the issuer was initially targeting, and talk is roughly in line with whispers heard around 7% earlier in the week.

Books close at 1pm New York time, with pricing expected after.

The trade has grabbed the market's attention because EU and US sanctions have made it harder for Russian entities to access FX liquidity.

The deal - the proceeds of which will repay some of a US$735m intercompany loan to the group's Russian entity - is seen by some as a way to raise dollars through the back door, though Evraz (LSE: EVR.L - news) itself is not subject to sanctions.

"Russian corporates are concerned about their dollar liabilities because they do not have access to capital markets even if they do not fall under the sanctions," said Jon Brager, a senior credit analyst at Hermes Fund Management.

Russian entities have US$20.39bn-equivalent of foreign bonds due in 2015 and US$13.03bn due in 2016, according to Thomson Reuters data, and the majority of that is in US dollars.

Still, investors told IFR that they might consider buying the Canadian issue at the right price.

The Ba3 rated bond was being marketed some 140bp inside the 8.9% yield on its parent Evraz's 6.5% 2020, which has sunk to a cash price of 89 on fears that the sanctions on state-owned Russian banks and other dominant firms such as Rosneft will be extended to other entities.

One banking source said it was unlikely that Evraz would become a sanctioned entity.

"It's a private company, and the metals and mining sector has not been targeted in the same way as the oil and gas sector," said the banker.

One high-yield bond investor based in New York also said that the Canadian business is somewhat insulated by what is happening in Russia, because the bond is secured by plants in Canada.

"However, about 65% of the steel slabs it uses comes from Russia, so that could mean that the business would be impacted by sanctions," the investor said.

"To buy the bond, it's a matter of getting comfortable with whether risks are isolated to the North American steel sector."

Another banker familiar with the deal said: "It's encouraging we got the right meetings [with big fund managers]. It should be predominantly high-yield with the odd EM guy coming in, but it will be interesting to see how it shapes up."

BACK DOOR DOLLARS

Evraz Canada has number one positions in North American rail and North American LD Pipe, with market shares of 39% and 47% respectively, according to the offering memorandum.

With comp AK Steel's 8.375% 2022 bonds yielding around 8.2%, investors looking at relative value were hoping for a yield north of 8% from Evraz Canada.

"The idea is that Evraz Canada will be a standalone entity, and it's true that it has zero exposure on a direct basis to the Russian business," Brager said. "But the Russia entity is still the controlling shareholder, so there is corporate governance risk."

In its favour, Evraz Canada is more focused on speciality steel, and has higher margins than companies focused on commoditised steel products.

Brager estimated leverage at 3.5 times the company's US$245.1m adjusted Ebitda, including the US$235m shareholder loan that would be left on balance sheet after the deal.

In another effort to boost dollar funds while still retaining overall control, the group is planning an IPO of Evraz Canada and has registered a deal with the SEC. The Evraz group would retain a 51% ownership.

"There's no guarantee that the IPO will happen, but, regardless, if they raise US$300m, the intention is to upstream that money," Brager said. "It will not impact bondholders at all."

An IPO, one of the investors said, was an alternative to a sale.

Other Russian companies have chosen a different path. Severstal, for instance, announced in July it was selling two US steel plants for US$2.3bn, and withdrawing from the US market at a time of rising tension between Russia and the West and turning its focus to its domestic business. (Reporting by Natalie Harrison; Additional reporting by Sudip Roy; Editing by Matthew Davies and Marc Carnegie)