Ever since 2008 when it borrowed heavily to buy a one-quarter share in the Arctic metals conglomerate Norilsk Nickel, Russia’s vast aluminium concern Rusal has been caught in a squeeze of debt payments and low aluminium prices.
A total $10.8bn in net debt remains its largest headache. Compared to earnings of $915m on an ebitda basis in 2012, debt ratios are “exceptionally high by all matrices”, according to Vladimir Zhukov, head of equity research at HSBC Bank’s Moscow offices.
According to the original plan hammered out at the time of the Norilsk purchase, servicing this debt was to be accomplished via dividend payments from Norilsk. Events intervened, however. Firstly, aluminium prices have fallen a third since April 2008, and Rusal’s cash flow has fallen with them.
Secondly, Interros, the Russian industrial group run by oligarch Vladimir Potanin, which owns 28 per cent of Norilsk and vies with Rusal for control of the prize asset, sought to choke off dividend payments, a key source of income to Rusal. With no intervention, Rusal would have been forced to sell out sooner or later.
The fight over Norilsk’s dividend policy – Rusal’s lifeline to service its huge debt – was finally solved with the intervention by the Kremlin late last year, after Rusal chairman Oleg Deripaska appeared ready to take the matter to a London court.
While Mr Deripaska denies the Kremlin was involved, few analysts doubt that President Vladimir Putin and Prime Minister Dmitry Medvedev had a hand in hammering out a deal between Mr Deripaska and Mr Potanin, which should give Rusal a lifeline of dividend payments. They also brought in a third investor in the form of Roman Abramovich, whose company Millhouse took a 6 per cent stake and three board seats as part of an awkward attempt to engineer peace among Norilsk shareholders.
If aluminium prices stay where they are, then there is not much free cash left to pay down the debts
While the plan puzzled analysts, who questioned whether Mr Abramovich’s presence on the board would help matters, it seems to have worked, at least for the time being.
Rusal had finally won some breathing room. It estimates that gross dividends next year of $835m will more than cover debt service, which was $610m in 2012.
Yet analysts emphasise that this only solves the problem of debt service, however. Paying down the debt will not be feasible, barring a large increase in aluminium prices.
“If aluminium prices stay where they are, then there is not much free cash left to pay down the debts,” says Mr Zhukov.
Even if prices do continue to climb higher, as HSBC and other banks project they will, “they’ll still have to refinance, but they’ll have a bit more flexibility”, says Mr Zhukov. In the meantime, Rusal remains vulnerable to a deterioration in credit markets, as happened in 2008, when, amid the global financial crisis, the Russian state was forced to step in to prevent Rusal from entering bankruptcy.
Rusal’s debt maturity profile is now the most important indicator watched by analysts – in 2016, the company will face some $6.7bn in debt repayments, principally to Russia’s Sberbank, a loan collateralised by Norilsk shares. Rolling over or refinancing this debt will be vital for Rusal, and Mr Deripaska has been in talks with a number of banks – including foreign institutions.
Rusal’s debt levels mean that over the long term, the future of the company, more so than for most of Russia’s large oligarch-led businesses, rests in the Kremlin’s hands. Mr Deripaska has thus far been able to trade on his solid political relationships, which helped him out of a tight spot in 2008.
But in Russia’s notoriously fickle political climate, fate has not been kind to many oligarchs, and Mr Deripaska will have to continue playing a deft game of politics to ensure Rusal’s future.