Severstal seeking sale of NorthAm assets to raise liquidity despite severe downturn in steel industry

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Severstal, the listed Russian steelmaker, is quietly shopping its North American business to potential buyers as it faces substantial debt repayments over the next few years, according to sources familiar with the situation. The company was said to be having discussions with a limited number of parties through financial advisor Lazard.

Severstal declined to comment.

Severstal’s monetization efforts come at a surprising time, as the steel industry continues to see weak demand from end user markets. ”When you see the end users like auto and homebuilding continue to show a fairly long bottom cycle, it gives a very dim outlook for the steel industry,” said one sector banker.

Other than its SeverCorr mini-mill operation in Columbus Mississippi, Severstal’s North American assets are considered nothing spectacular, and the company is likely to struggle to find an entity willing to take on the entire portfolio in the current climate, sources agreed.

Severstal reported a total of USD 1.868bn in contractual debt maturities for 2009 that either have to be repaid or refinanced. It already repaid USD 325m in Eurobonds in February and has to repay another USD 480m in notes during the course of the year, which will be done though the company’s own cash flows, the source said. The company had a total of USD 2.653bn of cash and cash equivalents as of 31 December, 2008.

In 2010 Severstal will have another USD 900m in debt repayments, but the biggest challenge comes after 2010 though to 2013 when the company is facing over USD 4bn in maturities.

While liquidity pressures are not immediate, Severstal is still eager to exit North America by year end, said the source. North American business was the biggest contributor to the group’s USD 1.8bn loss through significant impairment charges coming from acquisitions of Sparrow Point and WCI Steel in 2008.

With a rising level of unpaid receivables and pressure on working capital, Severstal needs to raise capital levels, he said. ”Cutting CAPEX and layoffs are not going to help as much when demand continues to fall.”

Two sources claimed that Severstal has been talking to steel companies from Brazil, as well as Nucor, ArcelorMittal and Essar. Yet despite exploratory discussions, given the fact that most steelmakers are slowing supply and focusing on being well capitalized for an extended downturn, garnering a sale of the assets will prove to be a challenging task, sources said.

Even if Severstal can find a buyer for SeverCorr, there is still uncertainty around whether it could achieve an acceptable price, added one of the sources. Also, if Severstal sold SeverCorr independently, it would be left with a portfolio of less attractive assets, hindering its negotiating position for any future divestiture, he said.

However, if there is any interest in SeverCorr or any other of Severstal’s assets, CSN of Brazil may be a leading contender, one source said. The steel major had been considering acquisitions in North America before the cycle took a downturn and at one point was even considering acquiring American steel giant Nucor, he added. CSN was not available for comment.

SeverCorr plans to produce 3m tonnes by 2010. Depending on prices assumed, it could garner anywhere from USD 1bn to 1.75bn in the event of a sale, said a banker familiar with the operations. Although he doubted the likelihood of any suitors stepping forward in the current environment.

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