The downgrade decision was motivated by the actual failure to settle the tremendous debt of the holding's parent company Mechel OAO reaching 8 billion US dollars, the net debt to EBITDA multiple being more than 11x (as of April 1, 2014). The said failure is proven by the numerous legal actions brought by the group's principal lenders against the parent company and subsidiaries including Southern Kuzbass Coal Company OAO.

The adverse market conditions have aggravated the debt burden issue for Southern Kuzbass CC whose debt exceeded RUB 73 billion as of July 1, 2014. The lower selling prices and the narrower demand for the company's products causes major losses cutting into its market capitalization and challenging its abilities to meet the debt obligations on the short-term horizon.

Besides, the effective debt settlement issue is still on the agenda and has fairly vague prospects of being ultimately solved, given that Southern Kuzbass CC is financially challenged.

That said, AK&M Rating Agency has reasons to expect the Company to improve its performance benefiting from the recent upward trend in the global demand for coal products. As estimated by Russia's Ministry of Energy, exports of coal from Russia for the 8-month period in 2014 increased by 12.4% against the same period in 2013. This increase offers certain opportunities to boost cash flows so as to repay some of the current debt and to strengthen the Company's financial profile.

Southern Kuzbass Coal Company OAO is one of the key structural units of Mechel Mining OAO, Mechel Group's coal mining holding. Southern Kuzbass CC is one of the leading coal producers in the region (the Kuznetsk Basin) and in Russia. In 2013, it accounted for about 3.7% of all the total coal output in the Russian Federation. More than 60% of its final products are metallurgical coals which are most in-demand in the domestic and foreign markets. Apart from the coal mining capacities, Southern Kuzbass CC has coal processing (preparation) enterprises. About 50% of its products are exported. As of July 1, 2014, the Company's assets totaled RUB 106.0 billion, liabilities reached RUB 73.1 billion, while equity capital amounted to RUB 15.9 billion.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's creditworthiness and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.
AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC Analysis, Consulting and Marketing Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.

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