VSŽ steelworks in Košice has been in a financial fog since defaulting on a $35 million syndicated loan last year. But the future may be getting brighter.photo: TASR
The financial skies may finally be clearing for eastern Slovak steel maker VSŽ, which on July 7-8 held talks in London with US Steel and appeared close to a deal on a capital entry by the American firm. And as VSŽ President Gabriel Eichler boarded the plane to meet his US Steel counterpart, Paul Wilhelm, another piece of good news was delivered - the Slovak government is close to arranging a standstill agreement for VSŽ to keep its creditors at bay and allow the US Steel deal to go ahead.
The London talks represent a victory of sorts for Eichler, a former Bank of America executive who was brought in last December to help VSŽ get back on track after defaulting on a $35 million syndicated loan the month before. Eichler was elected to a six-month term, during which he sold off non-core businesses owned by VSŽ and improved transparency at the firm.
The impending deal also vindicates the cabinet, which has taken a close interest in guiding VSŽ back to health. The steelmaker accounted for 10% of Slovak exports and 7% of the country's GDP in 1998.
While neither US Steel nor VSŽ would comment on the terms of the deal being discussed, company officials conceded that the American giant was really the only foreign investor in the running for a capital entry into VSŽ.
"Although we haven't closed our door to other foreign investors, we must say that US Steel has shown the greatest interest so far in becoming a strategic investor in VSŽ," said VSŽ spokesman Jozef Marko in an interview with The Slovak Spectator on July 7. Marko added that US Steel representatives had been present at VSŽ's Košice headquarters for months, performing due diligence under an exclusive right to purchase arrangement.
"US Steel has shown the greatest credibility as a potential strategic investor for VSŽ", agreed Finance Ministry spokesman Peter Švec.
Miroslav Nosáľ, an equity research analyst with Merrill Lynch in London, said he expected that the US Steel capital entry would leave it the majority shareholder in VSŽ. "If we compare the current value of VSŽ equity with the amount of money US Steel is likely to inject, we can expect that they will wind up with a majority stake," he said.
Standstill a prerequisite
It is no coincidence that the US Steel negotiations followed hard on the heels of news of a prospective standstill agreement. Finance Minister Brigita Schmögnerová said at a press conference on July 6 that an agreement between VSŽ and its nine creditor banks was ready for signing. The agreement will allow the VSŽ to take another $50 million loan from its creditor group to restructure its debt portfolio and start repaying the defaulted $35 million Merrill Lynch credit.
According to Nosáľ, the standstill agreement will serve yet another purpose - it will give US Steel a guarantee that VSŽ's assets and liabilities will not change between the conclusion of the due diligence process and the capital entry.
"A standstill agreement requires that banks don't send the company into bankruptcy, and also that the assets base of the company is not significantly changed," explained Nosáľ. "This helps US Steel, because if you do due diligence and the assets and liabilities change afterwards, you have to do due diligence again. So the standstill agreement is a kind of moratorium on change."
Beyond speculation as to these fundamental relationships, however, very little is known about when a strategic investor will enter VSŽ, and under what conditions. "The whole process should be finished before the end of this year," said Eichler during his last press conference on June 16.
Nosáľ, for his part, said that VSŽ's short-term financial outlook was poor enough to make a capital entry by a foreign investor a time-sensitive event. "This company definitely needs a strategic partner, even though the long-term outlook for steel products is quite good and even though the firm's core business is very healthy and can recover quickly," he said.
VSŽ's May and June 1999 totals of 300,000 tonnes of production sold are equal to the firm's best sales months in the past, but according to Marko, "VSŽ's debts have to be restructured and the entrance of a strategic investor has to be resolved" if the production increase, which VSŽ is financing from its own sources, is to be sustainable.
A helping hand
The state's involvement in negotiations between VSŽ and its creditors has increased in the last seven months. On June 6, Finance Minister Schmögnerová was empowered by the cabinet to sign an agreement between the government and VSŽ's foreign creditors. This contract, which was to precede the standstill agreement between VSŽ and its foreign creditors, was the prerequisite to a capital flow into the company.
"This agreement between the government and foreign creditors, which is ready for signing, stipulates that the government will act in accordance with foreign creditors," said Švec. The government agreement was necessary, he said, to reassure foreign creditors that the Slovak state - VSŽ's biggest creditor - will not try to recover its debts ahead of time. "Creditors will have a guarantee that in the future their fresh investments won't be used for revolving old loans but for the economic development of VSŽ," he said.
Another sign of the government's close interest in VSŽ was the establishment of a special investigation team whose brief was to find evidence of financial crimes committed at VSŽ during the previous management of Alexander Rezeš, a former Transport Minister during the government of Vladimír Mečiar and now one of the most affluent men in the country. Between 1996 and 1997 the value of his property increased by almost 200 million Slovak crowns, including a luxurious villa in Spain worth almost 100 million Slovak crowns.
Both Marko and Nosáľ said they didn't think the timing of the US Steel negotiations had been influenced by the government's steps to combat corruption at VSŽ. "I don't think that the results of the current investigations could influence a future strategic investor in deciding whether or not to enter VSŽ", said Marko. According to him, the new VSŽ management has no connection with the previous management and is accepted by both the government and bank institutions." These two things must really be differentiated," he said.
