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By John Helmer in Moscow

Igor Zyuzin, the controlling shareholder of the Mechel steel and coal-mining group has disclosed to the US Securities and Exchange Commission (SEC) that he has pledged as security about 158 million of his shares in the group, in order to secure bank loans now under negotiation. Mechel is the Russian leader ion stainless steel production, and one of the world’s largest coking-coal miners.

The purpose of the pledges is reported to the SEC as “in connection with certain financings.”

Since Mechel has on issue about 416 million shares, Zyuzin’s pledge represents just under 38% of the total issue. It is not quite clear what proportion this represents of his own control stake in Mechel. According to the SEC filing, as well as Moscow brokerage reports, Zyuzin was obliged to give up a 3.1% stake in the company when convertible bondholders were repaid 12.9 million shares worth $150 million in a transaction of three months ago. Following that transfer, Zyuzin reportedly held 66.8% of the Mechel share issue, or 278 million shares. The latest SEC disclosure means that Zyuzin has lost direct control of 57% of his shareholding.

This is an outcome that industry and company sources have consistently suggested that Zyuzin himself had been trying to avoid in his negotiations with the Russian state-controlled banks, as well as with the commercial lending sydicates, with which Mechel has been discussing terms for the refinancing and repayment of more than $3.5 billion in overdue loans.

The SEC filing, lodged on June 19, reveals that Zyuzin’s control stake in Mechel was held through four Cyprus-incorporated, limited-liability companies — Calridge, Dalewave, Beallasis, and Armolink. The filing says: “Caldridge is a limited company organized under the laws of Cyprus whose principal business is to make private investments and act a holding company for Mr. Zyuzin.” See the SEC report here.

Barry Ehrlich, Alfa Bank’s steel analyst, reports today that the SEC disclosure “should not have come as a surprise to investors, but apparently it has. Many Russian oligarchs have pledged their personal holdings to secure financing, and Mr. Zyuzin was unlikely to be an exception. We believe that most of Zyuzin’s 70%+ holdings had been pledged last year but there is no way to confirm this. What has most likely happened is that this disclosure has reminded investors of what they had forgotten – that Mechel’s situation is highly precarious and the firm’s stock price has the potential to fall to 0. We believe investors have been incorrectly pricing Mechel stock. In effect, the market has been completely pricing out the possibility of a liquidity shortfall or insolvency. The firm faces a substantial refinancing gap: after it secures an extension of $1 bln of the $1.5 bln Oriel Resources loan, we estimate a further $500 mln refinancing requirement this year and $1 bln next year.”

In Monday trading in Moscow, the Mechel share price dropped 13.6%. It continued downwards in New York trading — Mechel is listed on the New York Stock Exchange — and was 17.3% down on the day at $7.68. That amounts to a loss of market capitalization of the company of almost $700 million on the day. If the share price and company value continue to fall, this is likely to trigger further securitization pledges from Zyuzin’s shareholding, for want of other assets that are not already pledged.

Ehrlich reports “the liquidity risk for Mechel is far higher than for Evraz due to 1) the lack of unencumbered assets to pledge, 2) a higher refinancing requirement relative to the firm’s balance sheet and market capitalization, 3) an inferior relationship with the Russian government, and 4) much lower investor confidence and trust in the firm making it that much harder to raise refinance. In addition, while Evraz has been proactive in engaging the market and addressing its liquidity issues (examples: early recipient of VEB loan while Mechel refused VEB financing, asset disposals, frank and open dialogue with investors), Mechel has not been, in our opinion.”

George Buzhenitsa, steel analyst for Unicredit Securities in Moscow, reported to investment clients today that “the details of the shareholder structure could again trigger speculation about the company’s future.” He said the share price outlook is “negative…given [Mechel’s] weak fundamentals and corporate risks”.

Troika Dialog, a Moscow investment bank nowunder the indirect control of the Industrial and Commercial Bank of China (ICBC), has been much more optimistic towards Mechel. Troika reports claim that increased Chinese demand for imports of Russian coking coal “could lead to a major re-rating of all coal equities. In that case,” reported analyst Sergei Donskoy on May 29, “Mechel’s share price could rise even higher.” Between then and yesterday’s crash, Mechel’s share price rose 7%.

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