The date is November 12 2009. It has been 15 months and six days since the Sofia City Court declared Kremikovtzi steel mill insolvent. Over that period, US car maker General Motors saw its cash reserves run out, applied for state aid, got it and went through the purgatory of bankruptcy, emerging from it with a healthier balance sheet. The Bulgarian steelworks IS still at the threshold of that purgatory and all signs point towards it remaining there for several more months.

The opponents
Kremikovtzi has two options ahead – a recovery plan or the sale of its assets. For now, the latter appears more likely, because one of the two major creditors of the company, the holders of Kremikovtzi corporate bonds, have already decided against converting what is owed to them into shares, as the recovery plan suggests.

Bulgarian officials – Economy Minister Traicho Traikov and Environment Minister Nona Karadjova – have also publicly opposed the recovery plan. Deputy Prime Minister and Finance Minister Simeon Dyankov is yet to make his position known, but several months earlier he was talking about liquidation.

On November 12 Dyankov was due to say whether he agreed that Kremikovtzi’s overdue taxes and social security contributions should be rescheduled. The Finance Minister’s refusal, and his silence can be interpreted as such, dooms the recovery plan drafted by receiver Tsvetan Bankov.

The amounts owed are huge – between 400 million leva and 1.1 billion leva. The uncertainty stems from the fact that a large part of the amount, including state aid given by Bulgaria, is being contested in court.

The Finance Ministry has not officially agreed to rescheduling the payment of the overdue taxes, which would have paved the way for the court to declare Kremikovtzi bankrupt, without shareholders having to meet and vote on the issue. In such an instance, if there was no recovery plan, the only possible solution is the liquidation of assets.

According to sources familiar with the issue, Dyankov made new demands before issuing his statement. This was also the reason why efforts are in place to push the deadline for the Ministry’s answer to the recovery plan back by two months, giving time for Dyankov’s demands to be met. If that happens, the new deadline would probably be January 12, offering the receiver and the plan’s supporters more time to come up with strong arguments in favour of the recovery plan.

Two scenarios
The recovery plan envisions all court-approved creditors becoming shareholders. The court ruled that 944 million leva worth of debt, out of Kremikovtzi’s total of 1.9 billion, can be converted into new shares. With the largest private creditor, the bondholders, refusing to participate in the conversion of debt into equity, the Bulgarian state could become the majority shareholder, in which case it would have to provide the steel mill with working capital and the fund needed for environmental upgrades.
It is in theory possible that the bondholders would back the recovery plan without converting their bonds into shares, sources familiar with the situation said. For this, they would have to meet and vote on such a proposal, as they have before when they decided to refuse the conversion.

One of the benefits of the recovery plan is that it would not result in more redundancies and social unrest, while Kremikovtzi would remain on the global map of the steel industry.
The drawbacks, however, are not insignificant – there is no guarantee that the massive cash injection for environmental upgrades would happen, nor that future sales would be profitable. Furthermore, the track record of such undertakings in Bulgaria shows that what is written in recovery plans is not necessarily what happens. Examples are the bankrupt Plama refinery and fertiliser maker Himko, but there is also the example of a successful recovery in Stomana Industry.

Should Kremikovtzi be declared bankrupt, it would have to shut down all production facilities, which are working far from capacity as it is. The receiver will have to schedule a date for the assets’ auction and use the proceeds to settle Kremikovtzi’s debt as much as possible. Usually, in such instances, there is an attempt to sell the assets in their entirety, but it is possible that no bidders would show any interest. At the second attempt, the asking price is cut by 20 per cent and if there is no interest again, the price can go down further.

Kremikovtzi owns its production equipment, scrap metal, vehicles, more than 1200ha of land and holiday homes, valued at between 632 million leva and 837 million leva as of September 2009.

The sale of assets has one major advantage – it can be done quickly and transparently. The new owner can decide whether to continue making steel, but only after securing a permit from the Environment Ministry, which would no longer be under pressure to issue one. The new owner could also go in another direction and develop warehouses in the area. It is hard to compare, however, under which scenario creditors will receive most of the debt they are due.

Kapital weekly, issue 45