Deripaska May Lose Rusal Control on $14 Billion Debt

March 23 (Bloomberg) -- Oleg Deripaska, the billionaire aluminum magnate who was once Russia’s richest man, may lose control of his United Co. Rusal as it buckles under $14 billion of debt and plunging metal prices. Lenders will meet this week to consider consolidating loans and swapping them for equity, said a banker familiar with the situation who declined to be identified because the talks are private. Rusal said it isn’t considering a swap. The company has until early May to renegotiate $7.4 billion owed to more than 70 foreign banks including ABN Amro Holding NV, Citigroup Inc., BNP Paribas SA and Merrill Lynch & Co. “At this stage, Deripaska’s stake is likely to fall below 50 percent,” said Michael Kavanagh, an analyst with UralSib Financial Corp. in Moscow. “Unless there are signs of an aluminum recovery, I can’t see how Rusal can be saved without using equity.” Deripaska, 41, has lost 88 percent of his fortune in the past year, according to Forbes magazine, as Russian stock prices collapsed and the price of aluminum fell to a seven-year low. Russia’s government won’t step in to help pay the debt of its largest aluminum producer, First Deputy Prime Minister Igor Shuvalov said last week. Rusal isn’t counting on financial help from the government and plans to reorganize its borrowings and cut costs, the Moscow-based company said in an e-mail. ‘Not Considering’ Swap “We’re not considering or discussing with banks the conversion of debt for equity,” Rusal spokeswoman Vera Kurochkina said by phone today. Sergei Babichenko, a spokesman for Deripaska, declined to comment on whether Deripaska may reduce his stake in Rusal Yesterday, though, Deripaska agreed to trim his position in Rusal to 53.8 percent from 56.8 percent to restructure $2.8 billion of debt owed to billionaire Mikhail Prokhorov. About $2 billion of that total will be converted into Rusal shares. Deripaska borrowed to modernize Rusal’s aging Russian smelters and expand into Guinea, Ukraine and Nigeria. Last year, seeking to create a diversified metals producer rivaling Australia’s BHP Billiton Ltd., Rusal took out a $4.5 billion loan to help fund the purchase of 25 percent of OAO GMK Norilsk Nickel from Prokhorov. Prokhorov has an option to sell the new shares in Rusal back to the company also for $2 billion, Vedomosti said today, citing unidentified people close to the company. The option can be triggered if Rusal defaults, fails to restructure bank loans or doesn’t carry out an initial public offering by 2013, the newspaper said. Norilsk Shares Norilsk jumped to the highest since Nov. 14 on Prokhorov’s swap, rising as much as 11 percent to 2,597 rubles on the Micex Stock Exchange. The shares closed up 6.4 percent at 2,480.04 in Moscow. Rusal sought to expand its output as global aluminum demand grew. The lightweight metal used in cars and beverage cans traded at a record high of $3,380 a metric ton in London in July. It has since tumbled 56 percent as global demand for raw materials collapsed. State-owned lender Vnesheconombank, or VEB, gave Rusal a one-year bailout in October. Shuvalov said the facility shouldn’t be rolled over. “He’s done some exceptional things, but he’s had the markets on his side,” said James Beadle, an investment strategist with Moscow-based Pilgrim Asset Management. “This is the worst crisis he’s ever faced.” Raised in the Krasnodar region in Russia’s south, Deripaska started trading while at college in Moscow. He later worked with commodity trader Trans-World Group, owned by investors including Michael Cherney, and was managing an aluminum smelter in Siberia at the age of 26. Aluminum Wars In the mid-1990s, several groups vied for control of Russia’s aluminum industry, and unsolved murders accompanied the struggle, spawning the label “aluminum wars.” Deripaska survived and pooled his assets in 2000 with billionaire Roman Abramovich’s aluminum operations. Abramovich was later bought out and a merger with rival billionaire Viktor Vekselberg’s OAO Sual Group and assets from Swiss trader Glencore International AG has left Deripaska with 53.8 percent of Rusal. Deripaska was ranked as Russia’s richest man in 2008, with his wealth estimated by Forbes at $28 billion. Yesterday’s deal with Prokhorov, who replaced Deripaska as Russia’s richest man, values Rusal at $44 billion. UralSib says it’s worth $15 billion excluding debt, compared with $30 billion before commodity prices fell. Debt Servicing Closely held Rusal doesn’t publish its profit. Revenue in the first half of 2008 was $8 billion on sales of 2.2 million tons of aluminum. ING Groep NV estimates that earnings before interest, tax, depreciation and amortization may drop 64 percent to $2.1 billion this year. Rusal and other aluminum makers have slashed output amid a global supply surplus. Alcoa Inc., the largest U.S. producer, last week forecast a second-straight quarterly loss. Servicing Rusal’s debt may require at least $1.5 billion a year, said Alexander Pukhaev, an analyst at VTB Capital in Moscow. Rusal must also repay the government bailout loan. “Deripaska wants to retain equity control, but this is looking almost unfeasible given the kind of money he needs to raise,” said Mikhail Stiskin, an analyst with Troika Dialog in Moscow. “While outright bankruptcy is surely not an option, the shareholder structure may undergo significant changes.” Banks’ Interest Should Rusal’s lenders gain stakes in the company, it may be only a stop-gap measure while they try to find a buyer. The banks lack the expertise or desire to run Rusal, said Timothy McCutcheon, a partner with DBM Capital Partners in Moscow. The aluminum producer’s assets include six smelters in Siberia, which borders China and Mongolia. “No bank in their right mind would seek a Siberian factory,” McCutcheon said. Rusal should look to investors from China or the Middle East for cash, following the example of Rio Tinto Group, said Cary Pinkowski, a former investment banker at Canaccord Capital and now head of Kola Mining Corp., a nickel and gold miner in Russia. “The Chinese would also be a buyer of the metal.”