* 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 (Reuters) - 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 three weeks.
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’ controlling stakes.
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 filings.
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 June.
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)