Bonds issued by Russian steel firm Evraz rallied this week after it offered attractive terms to investors that it is asking to approve covenant changes.


Evraz wants to change a net debt to ebitda maintenance covenant on $750m of bonds maturing in 2015. The company would default if it were to breach the covenant.

It also wants to change the financial incurrence test on nearly $3bn of bonds maturing in 2013, 2015 and 2018, by which time the company must maintain a debt to ebitda ratio of three to one. If Evraz were to breach this covenant it would not go into default, but it would not be able to issue any further debt.

It is offering a payment of 3% of the principal to bondholders who agree to the changes by November 27. Investors who miss that deadline but consent by December 3 will receive a 2% payment.

Evraz requires just over half of investors to vote, and three quarters of voters to approve.

The offering was attractively priced, said one DCM banker away from the transaction.

"The offer is on the generous side," he said. "The way the market has rallied on the news tells you something. It looks like they built in a bit extra just to be on the safe side."

Evraz issued the 2015 bonds, which have an 8.25% coupon, in November 2005. They were sold with a maintenance covenant to reassure investors in one of the company’s first issues, said Milena Ianeva, EEMEA corporate credit analyst at Barclays Capital. "The 2015s are the oldest issue," said Ianeva. "It came when Evraz was not a well-established issuer, and so investors wanted a little more protection from risk."

Those bonds, as well as the company’s $1.3bn 8.875% issue maturing in 2013 and its $700m, 9.5% issue maturing in 2018, have an incurrence covenant to limit leverage.

Severstal, another Russian steel company, is also expected to launch a similar operation, said Ianeva. "Some people are expecting it to also seek to change its covenants," she said. "It has a maintenance covenant in its 2014s. They’re probably not going to breach it in quarter three, but they might do in quarter four."