* Mechel may issue convertible bonds
* Mechel to use proceeds to pay off a part of its debt
* Some scenarios assume partial dilution of current owners
* Shares down 4 percent, underperforming sector index
(Adds details, quotes, context)
By Polina Devitt and Oksana Kobzeva
STAVROPOL/MOSCOW, Russia, June 19 Russia is
considering a $5 billion bail-out of Mechel, the
country's largest producer of steelmaking coal, a government
official said on Thursday, a rescue deal that could reduce the
stake of controlling shareholder businessman Igor Zyuzin.
The loss-making coal to steel group, hit by weak prices for
its products, has been selling businesses to try to shore up its
finances. With debts of $8.6 billion, Mechel has already gone
through several debt restructurings with creditor banks, which
now account for two-thirds of its debt.
Economy Minister Alexei Ulyukayev said the government was
considering implementing a 180-billion roubles ($5.2 billion)
scheme that would involve a convertible bond, which could be
purchased by state development bank Vnesheconombank, or VEB.
"The main thing being discussed is a bridge loan and then,
the transfer of rights to demand collateral to VEB. It is
possible that these rights will come through ... convertible
bonds," Ulyukayev told journalists.
Ulyukayev did not give a size for the bridge loan.
Three state banks Sberbank, VTB and
Gazprombank may provide Mechel with a 35-billion rouble ($1
billion) bridge loan before it issues the bonds, according to
banking sources familiar with the matter.
Mechel, whose 2013 core earnings were lower than loan
interest payments, declined to comment.
The plan would allow Mechel, which employs 70,000 staff, to
pay off part of its debt to Sberbank, VTB and Gazprombank,
Ulyukayev, also a board member at VEB, said. He said the
situation had been discussed with First Deputy Prime Minister
Igor Shuvalov on Wednesday.
It will be discussed with Prime Minister Dmitry Medvedev in
a week, Vedomosti newspaper reported, citing sources.
Two banking sources said the decision may come in two or
All the banks declined to comment.
The scheme would also help the banks to reduce bad debt
provisions at a time when Russia's economy is slowing partly due
to Western sanctions over Russian action in Ukraine.
If the scheme goes ahead it could be the first corporate
restructuring in which a controlling shareholder's stake is
diluted. Zyuzin currently owns 67.4 percent of Mechel.
Russia supported the country's big businesses during the
2008-2009 financial crisis without reducing their owners'
When asked if Zyuzin's stake would decline, Ulyukayev said:
"This will be bonds. And it is a separate issue to talk about
whether the right to convert them will be used."
Some banks in the group of creditors are seeking Zyuzin's
removal, Vedomosti and Kommersant newspapers reported on
Thursday, citing sources.
One banking source said that in some scenarios for the bond
issue, an additional share issue could also be required.
This could mean a dilution of the existing owners' stakes if
they approve this at a shareholder meeting and do not use their
pre-emptive right to buy the issue, he added.
Zyuzin and his companies had pledged 42 percent of Mechel's
shares as collateral for loans, according to the company's
Further complicating the situation, a Cyprus court has
frozen the assets of three offshore entities through which
Zyuzin owns the stake, Interfax news agency reported in early
Mechel shares were down 3.9 percent in Moscow by 1005 GMT,
underperforming local metals and mining index, which
added 1.6 percent. The company's current market value is less
than $1 billion.
($1 = 34.5218 Russian Roubles)
(Reporting by Polina Devitt, Oksana Kobzeva and Svetlana
Burmistrova; Writing by Polina Devitt and Lidia Kelly; Editing
by Elizabeth Piper and Jane Merriman)