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By John Helmer in Moscow

The casebook of the great modern neurologist, Oliver Sacks, contains the extraordinary case of Dr Tony Cicoria, who was struck by a bolt of lightning, and left for the rest of his life with an insatiable desire for classical music. Uncontrollably, he heard a piano playing in his head, and would try to write it down. This was difficult, because he had paid little attention to music for most of his life, and had forgotten how to notate it.

The usual brain scans have all been tried, but noone, not even Dr. Sacks, knows how the near-fatal bolt of electricity has caused such an inspiration.

About the recently disclosed sale, purchase and loan agreement between Mikhail Prokhorov, part-owner of Norilsk Nickel, and Oleg Deripaska, controlling shareholder of United Company Rusal, something like the mysterious bolt of electricity must have struck, because of the strange and unprecedented inspiration that has followed.

From the confidential record of the still largely secret deal, Mineweb has described how Prokhorov has agreed to sell his stake in Norilsk Nickel for $14.732 billion. This compares with the $15.7 billion price, which Prokhorov has offered to former partner and co-shareholder of Norilsk Nickel, Vladimir Potanin, by a deadline of December 21, and all cash. The full story is at:

The document is something of a bolt out of the blue, for it reveals Prokhorov’s brain doing two things he has never done before – heavily discounting the value of his assets, and lending $2.7 billion in cash on no fixed terms, and no security for repayment. This is either a stupendous act of generosity, for which there is no precedent in Prokhorov’s business history to date. Or else it is payment of a debt Prokhorov owes someone else, not Deripaska, for act of kindness noone has ever extended to Prokhorov before.

According to the document, Deripaska can buy Prokhorov’s stake in Norilsk Nickel for an 11% shareholding in Rusal; and $4.438 billion in cash. But that’s not all.

A purported cash balance of $2.7 billion is described as a deferred payment obligation. What is far from clear is whether there is a loan agreement between Prokhorov and Deripaska for the money; how repayment is secured, if at all; and what the duration and cost of the loan are. Since the agreement record doesn’t reveal these details, the question is now being asked by those who have seen the record: What if $2.7 billion, 18% of the transaction value, is not intended for payment by Prokhorov to Deripaska as the final destination, but to others, who are instrumental to the deal; who are understood, but not identified?

Dmitry Razumov is Prokhorov’s financial strategist at their Onexim holding in Moscow. When called at his office, and asked the questions, Razumov said through his secretary that he would not respond.

As Mineweb has reported, it is not so easy for Deripaska and Rusal to borrow large sums of new cash. It has been reported that Rusal has been negotiating with a London syndicate of banks to finance the acquisition. Four banks have been identified as syndicate leaders – ABN Amro, BNP Paribas, Credit Suisse, and Merrill Lynch. They are not confirming what has been agreed with Rusal. City sources say that the four are busy trying to line up a dozen more banks, so as to reduce the amount and risk exposure for themselves to the proposed debt. But the $2.7 billion provision has not gone unnoticed by the banks, where it represents a potentially serious transaction risk for the bankers.

Rusal’s operating data suggest that there ought to be plenty of cash to spare.. Rusal says it is producing about 4 million tonnes of aluminium per annum. Priced at $2,400 per tonne, minus cost of production estimated at $680/tonne, Rusal should be generating gross annual profit of $6.5 billion. Bauxite, alumina and alloy sales are extra. Rusal has yet to divulge a public balance-sheet or audited accounting to confirm the numbers. But unless they are being siphoned off to finance Deripaska’s non-metal assets, grouped in the Basic Element holding, where the cash is going is a mystery. So is the answer to question — why the money isn’t available for Rusal to stump up the $2.7 billion Deripaska says he can’t afford to pay Prokhorov right now.

What appears to be clearer is that Rusal’s bankers have been uncomfortable lending the company more than $2 billion in a single tranche or transaction.

Rusal’s’s current operating debt is estimated at $7.8 billion. Add to that the de facto cost of the Michael Cherney (Chernoy) case, and Rusal’s obligations are approaching $14 billion. Bankers to the IPO discussed setting aside a contingency fund, so that Rusal could be certain – and new shareholders relieved — of covering Cherney’s claims, in the event his High Court proceedings either deliver him a win, or press Deripaska into an out of court settlement. The initial contingency fund was fixed at $1 billion; it is closer to $6 billion now, especially since Deripaska and Prokhorov agreed to value Rusal at just over $50 billion.

That valuation, 60% higher than the IPO target for Rusal a few weeks ago, has also created a new opportunity for Cherney. If Deripaska and Prokhorov implement their deal, and 25% plus one share of Norilsk Nickel passes into Deripaska’s and Rusal’s hands, then Cherney is certain to add a claim against the new asset to his lawsuit, creating a liability for Norilsk Nickel it didn’t imagine it would face before.

The syndicate managing the abortive Rusal IPO earlier this year was JP Morgan-Cazenove, Morgan Stanley, Goldman Sachs, Credit Suisse, Deutsche Bank, and UBS. Only Credit Suisse appears to be in both syndicates. Last June, Rusal announced the biggest financing it had managed to date — $2 billion by ABN Amro, Barclays Capital, BNP Paribas, Calyon, Citi, ING, Natexis and Societe Generale. This was precisely and tightly secured against Rusal’s aluminium sales. Having already set Rusal’s borrowing limit on these terms so recently, under what conditions would some of the same banks contemplate lending more than double this sum of money to Deripaska for the Prokhorov transaction?

The banks managing Rusal’s IPO insisted on a letter — one of the lead bankers told Mineweb – a signed letter from the Russian government, confirming that, if and when the share sale occurred and Rusal were listed on the London Stock Exchange, the government would not hit Rusal with significant tax claims, or any other form of pressure to renationalize. The idea of the letter was promising when Mikhail Fradkov was prime minister; in October he was replaced by Victor Zubkov; next March he will be replaced by Vladimir Putin. No such letter has been forthcoming.

None of the banks appears to know, or want to say much, about Prokhorov’s $2.7 billion deferred payment, or loan to Deripaska — if that is what it is. BNP Paribas said its head of Russia, Laurent Couraudon, was unavailable. Credit Suisse declined to respond to questions, requesting they be sent by fax, but refused to identify the name of an addressee for the fax. ABN Amro told Mineweb its spokesman was away. Merrill Lynch, which also declined to respond, has been reluctant to expose itself to Russian risk, since it opened its new Moscow office. It is sensitive to the US regulatory risks it runs in lending to Deripaska, with the terms of a loan transaction involving the Russian government, as the Rusal-Norilsk Nickel deal appears to do.

The pending UK High Court litigation by Cherney (Chernoy) – which contains surprising new evidence in fresh filings — makes clear to City bankers that noone can afford to rely on unsecured promises by Deripaska to repay his debts. In Cherney’s case, the evidence in court already is of an agreement for deferred payment for a sum equal to 20% of the market value of Rusal, less a down payment of $250 million. After Cherney’s generosity in 2001, it is unimaginable now that Prokhorov would extend similar terms to Deripaska; or to anyone else for that matter.

Mineweb has also reported the apparent difficulties Deripaska would have to borrow against unlisted Rusal shares; aluminium already pledged to secure Rusal’s debt; or other assets in his Basic Element holding, that cover Deripaska’s recent acquisitions in Europe and Canada, not to mention the investment pledges he has made:

What do the proposed lenders to Deripaska for the Norilsk Nickel purchase know about the small print of the private transaction – especially the terms on which Deripaska and Prokhorov may have assured them that there will be no Kremlin intervention to take a control stake in Norilsk Nickel, at substantial discount, later on? If Deripaska is offering to secure his borrowing with Prokhorov’s Norilsk Nickel shares, and the banks realize the sub-market discounting Deripaska and Prokhorov have already agreed, how much further downwards do the banks expect the share value to sink, and at what share price do they figure it is safe for them to lend?

It will take a lightning bolt out of the Kremlin to illuminate the answers to these questions.

Media reports from the London market claim that the banks believe that whoever takes Prokhorov’s stake will move for control. Prokhorov has made this significantly cheaper for Deripaska to attempt than Potanin. But is the $2.7 billion an 18% sweetener for a state buyout to follow? That may be normal practice in Russia perhaps, but it is the equivalent of an electric shock in the London or New York market.

The awkwardness of this question is compounded by resounding silence from the Kremlin, and from the government, on which outcome, and which proprietor, have secured the political nod. No deal of this size between three oligarchs has ever been attempted before – and none without a clear direction from President Vladimir Putin. This was obvious when Rusal and SUAL were both seeking the Kremlin’s permission to list, and sell their shares independently on the London marklet. Putin told Victor Vekselberg that he would not be allowed to do that; he told Deripaska he could. In aggregate value, the biggest resource deal between oligarchs and the state has been the Yukos transfer to Rosneft. The biggest single asset deal was Gazprom’s buyout of Sibneft from Roman Abramovich for $13 billion.

Yet, the only signal to date that the government is even considering what to do was a muffled one. On December 8, speaking for the state controlled VTB bank, chief executive Andrei Kostin said VTB might partly finance Potanin for the $15.7 billion acquisition price. “We do not have $15 billion but we can give them a loan,” Kostin said.

If the Kremlin is backing VTB to favour Potanin, it is near-certain the Kremlin is now considering at what value the deal should come in – at Prokhorov’s offer of $15.7 billion, or Deripaska’s proffer of $12 billion (that’s $14.7 billion less $2.7 billion). Norilsk Nickel has been busy lately cancelling treasury shares, reducing debt, and freeing more cash, borrowing, and pledging capacity – but for whose benefit?

In a note for the market, MDM Bank cautioned last week that “as VTB does not want to lend the entire sum, Potanin still has to find another source to fund the deal. The jury is still out on whether he will be able to raise the necessary money.” Inadvertently, MDM picked the jury metaphor, for there are aspects of this deal that have yet to come before the jury.

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