Every time it looks like the situation at Kremikovtzi, Bulgaria’s largest steel mill, could not get worse, it inevitably does. Once the pride of the communist government in Sofia, it now faces the prospect of sanctions worth hundreds of millions of leva as its production has reached a new record low, reports in Bulgarian media suggest.
European Commission (EC) observers were sent to Sofia in mid-July to check on the progress made in implementing Kremikovtzi’s “viability plan”, a series of measures meant to improve the steel mill’s financial performance while cutting down on pollution levels.
What they found was that Kremikovtzi’s management had made no headway, Dnevnik daily reported on July 15, quoting a source speaking on condition of anonymity.
To free up resources to carry out the viability plan, when 71 per cent in Kremikovtzi were sold in 1999 to Finmetals Holding, the Bulgarian Government wrote off 400 million leva in debts to state-run companies. It now appears that none of the commitments made by the majority owner have been met, which means that the state aid extended in wiping out the debts in 1999 is illegal under European Union rules.
Unless there was some urgent investment made to start implementing the viability plan by the end of the year, the EC would ask Bulgaria to recover the money, Dnevnik said. But any investment has been put on hold while three groups are fighting to win control of the steelworks.
Ukrainian billionaire Konstantin Zhevago, keen to acquire processing capacities for the iron ore output of his Ferrexpo group, and ArcelorMittal, the world’s biggest steel maker, are still very much in the race. Both have tried to court labour unions by signing temporary outsourcing contracts with the steel mill, but neither one appears to be carried out. Monthly production set to hit an all-time low of 10 000 tons out of a maximum capacity of 150 000 tons, Dnevnik said, quoting two independent sources.
Both Vorskla Steel, believed to have close links to Zhevago, and ArcelorMittal have recently stepped up their campaigns to persuade Bulgarian politicians and public opinion that they were best-suited to turn Kremikovtzi around. A Bulgarian court is expected to declare the steel mill bankrupt by July 29, an outcome that both steel conglomerates are waiting for, but one that holders of the bonds Kremikovtzi issued in 2006, the last party in the three-way struggle for control of the mill, are unwilling to accept.
A committee of hedge funds, who own a combined 51 per cent of the 325 million euro bond issue, have recently withdrawn their support for ArcelorMittal after the Luxembourg-based steel company decided it would rather pay only half the nominal value of the bonds, as opposed to 79 per cent, as it has earlier agreed in principle with the bondholders. Instead, the committee now plans to take over the management of Kremikovtzi, promising to inject 100 million euro to boost cash flow and pledging to secure a further 150 million euro to start work on the viability plan. In the medium-term, the committee would convert all the steel mill’s debt into equity and sell Kremikovtzi to a strategic investor.
The key to Kremikovtzi’s future, however, lies with the Government. For all the protestations of Economy and Energy Minister Petar Dimitrov that the Cabinet is only one of the participants in a market process, the ministry owns the companies to which the steel mill is so heavily indebted – gas supplier Bulgargaz, the National Electricity Company and Bulgarian state railways BDZ.
Zhevago appears to hold the slight edge in as much as Vorskla Steel has vowed to keep the current payroll unchanged, while ArcelorMittal is well-known for the job cuts that are the cornerstone of its cost-cutting method. Popular as that may prove with politicians, the Ukrainian appears unwilling to pay anywhere close to the amount bondholders are demanding for their bonds.
The court decision later this month will likely mark only the latest stage in the Kremikovtzi ownership saga. Given the constant criticism of the lack of efficiency in Bulgaria’s judiciary, a protracted court battle is not entirely impossible. In the meantime, with no investment immediately forthcoming, Kremikovtzi is left facing the prospect of ending up further in debt than it already is and its appeal to investors diminishing by the day.
