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By John Helmer in Moscow

The board of Vnesheconombank (VEB), the state bailout bank chaired by Prime Minister Vladimir Putin, agreed yesterday to extend for a year a $1.8 billion loan to the Evraz group, controlled by Roman Abramovich’s Millhouse holding.

The loan was first issued in mid-November 2008, and is the largest single government financing for the Russian steel sector since the global crisis began a year ago. It was sought to enable Evraz to repay foreign bank loans, which had been raised to pay for Evraz’s expansion abroad, primarily for purchase of steelmills in North America. At the time of last year’s VEB rescue, Evraz was the third most heavily indebted Russian company, with a total of $9.9 billion in net foreign debt outstanding. Only the two state-owned energy companies, Rosneft and Gazprom, were more heavily indebted abroad than Evraz.

Its short-term (6-12 month) debt at the time of the VEB loan was $4.2 billion; $2.1 billion was due and payable by December 31. Although it is a state institution funded by public money, VEB does not issue transaction or audited financial reports, not even in open form to the Russian parliament. Nor has VEB disclosed the terms by which it has secured loans to borrowers.

Press reports of the rollover announcement this week cite the chief executive of VEB, Vladimir Dmitriev, as implying that some of VEB’s bailout loan terms have been changed; some have remained the same. Dmitriev hasn’t said which category Evraz falls into. In June, four months before the board met this week, Dmitriev had announced VEB’s intention to make the rollover. Moscow bank analysts differ in their reports of what VEB has demanded for collateral on the Evraz loan. One report suggests that it is secured by export proceeds from Evraz’s three Russian mills. Alfa Bank reports today that the VEB rollover is secured by a pledge of all Evraz’s shares in Evraz Canada, and of its West Siberian Metrallurgical Combine (Zapsib). Both are right.

The collateral issue — pledging profitable Russian steelmill assets and earnings to secure foreign bank debts on loss-making haven assets bought by Abramovich and his associates abroad — is politically double-edged and super-sensitive. Were Evraz to default, the Russian government would be obliged to put state budget funds to Abramovich’s benefit. Alternatively, if Abramovich walked away, the Kremlin might become the new proprietor of steelmills in North America. Evraz investment relations spokesman Sergei Lavrinenko has refused to respond to questions on the collateral.

However, at page 35 of a 44-page report issued by Evraz in May, the company revealed to holders of its foreign listed shares, that the VEB loan “is granted in 5 tranches of U.S.$201.3 million each to partially refinance the company’s principal installments falling due in 2008 and 2009 under the US$3,214 million syndicated loan borrowed in November 2007. The loan is secured with pledge of 99.999993 % of ZSMK shares and assignment of receivables under certain ZSMK and NTMK export contracts, and bears interest at 12-month LIBOR plus a margin of 5% per annum. Each tranche is repayable on the first anniversary of its respective disbursement date, with the final repayment in December 2010. On December 10, 2008, Evraz Group S.A. entered into a U.S.$800 million loan with VEB. The full facility amount was utilised on December 12, 2008. The facility is secured with pledge of 100% of shares in Evraz Inc. NA Canada, all movable and immovable property of Evraz Inc. NA Canada, as well as suretyships provided by NTMK and ZSMK, and bears interest at 12-month LIBOR plus a margin of 5% per annum. The facility is repayable in one instalment in December 2009. It was utilised to refinance the two U.S.$400 million bridge facilities arranged in June 2008 for the acquisition of the IPSCO Tubulars business from SSAB.”

In short — Abramovich avoids having to put his capital, holding equity, or private assets directly at risk, while export revenues from two of Evraz’s domestic mills, Zapsib and Nizhny Tagil (NTMK), have been pledged, plus almost all of Zapsib’s shares. Because the US government might be upset at the prospect of a Kremlin takeover, the small print of Evraz’s disclosure to shareholders reveals that its Colorado and Oregon-based mills are pledged to two US institutions in case of loan default. The Evraz report says: “On August 14, 2008, Evraz Inc. N.A. (formerly Evraz Oregon Steel Mills Inc.), obtained a US$725 million syndicated loan. The transaction includes a US$550 million five-year asset based revolving credit facility and a US$175 million five-year term loan facility. The facilities bear interest at the floating rate of LIBOR plus 2.5% p.a. and LIBOR plus 3.25% p.a. respectively and are secured with pledge of various assets of Evraz Inc. NA and its subsidiaries. The revolving credit facility was jointly led by RBS Greenwich Capital and GE Capital with RBS Business Capital and GE as co-collateral agents.”

Here is the May report listing of Evraz’s assets: “nine steel plants: NTMK, ZapSib, NKMK, Evraz Vitkovice Steel, Rocky Mountain Steel and Claymont Steel (both are parts of Evraz Inc North America), Evraz Inc NA Canada (former IPSCO Canada, acquired in June 2008), Dnepropetrovsky Metallurgical Zavod (DMZ, acquired in December 2007) and Highveld Steel and Vanadium Corporation (acquisition completed in April 2007); Highveld is also a leading vanadium producer; steel rolling mills: Evraz Palini e Bertoli, Oregon Steel Portland and Camrose Pipe Corporation (both are parts of Evraz Inc North America); five iron ore mining and processing facilities: KGOK, VGOK and Evrazruda in Russia, Sukha Balka in Ukraine and Mapochs Mine in the South Africa; coal mining assets: Yuzhkuzbassugol (acquired in June 2007) and Mine 12; one of the world’s leading producers of vanadium alloys and chemicals for the steel, chemical, and titanium industries: Strategic Mineral Corporation (Stratcor); together with various trading and logistical assets.”

Industry analysts noted that Evraz has managed to lower its debt aggregate to $8.5 billion by June 30. “The fact that loan extension does not result in an interest rate increase is positive for the stock as VEB’s decision is not going to drive up Evraz’s debt service payments,” reported Renaissance Capital’s share promoter, Boris Krasnojenov, this morning. “Evraz has approximately an $8.5bn gross debt burden as at 30 June, which may require $650-700mn in interest payments per annum. The loan extension on VEB’s credit lines is also supportive for possible company negotiations on changing covenants with foreign creditors in 2H09.”

When the first reports appeared last November of Evraz’s borrowing from VEB, the company’s share price fell 25% on the first day. The news of the 12-month extension on Thursday caused a smaller positive pickup of 5%, probably because of Dmitriev’s announcement in June. By this morning, Evraz has gained 74% in market capitalization since the rollover was first signalled. That adds up to roughly $4 billion; Abramovich’s holding has picked up almost $1.7 billion of that gain.

Meanwhile, last Friday in a UK High Court proceeding in London, there was testimony that Abramovich had made a present of the motor-yacht Olympia to Vladimir Putin, when the latter was president; and that discussions of “the management of the yacht” were held in Geneva with the chief executive of the state tanker company, Sovcomflot. The Dutch yacht builder Feadship confirms building the 57-metre long vessel in 2002 to a Dutch design, with interiors by Mark Hampton. No value has been put on the vessel, although by 2005, it was reported to be worth $60 million. Until the London courtroom testimony, a yachting and luxury goods publication had been speculating that “it makes perfect sense that Abramovich, who owns several yachts on the list of the world’s top 100 yachts, might want to share his love of boats with the powerful Putin.”

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