Why Mechel OAO's Shares Collapsed Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of metals maker Mechel OAO (NYSE: MTL  ) dropped 23.4% today on fears over the company's debt.

So what: It was reported today that Mechel has been in discussions with creditors to put a covenant holiday in place so the company doesn't default on debts. This may come with debt restructuring and management expects discussions to be complete by the end of November.  

Now what: Debt covenants are put in place by debt holders to make sure companies maintain a certain level of cash flow or profitability to pay them back. Breaching these covenants can lead to default and bring a company into bankruptcy. That's not imminent but it's a bigger concern today than it was yesterday. Buying a company in such trouble is playing with fire, which is why I'm leaving shares alone today.

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