Mechel Bondholders Losing Chance to Use Notes as Collateral

Russian’s central bank said OAO Mechel (MTL)’s bonds have no value as collateral for now, signaling that debtholders won’t be able to use the coal and steel producer’s notes to secure loans.

The regulator zero-rated Mechel bonds for refinancing deals, setting the discount to their market value at 100 percent, according to a statement today. The rate was 0.7, according to the central bank’s website.

Russia’s largest producer of coal for steel making is in talks with lenders about covenants and debt restructuring. The yield on Mechel’s 5 billion rubles ($153 million) of junk-rated February 2021 bonds, which investors can force the company to redeem next year, surged to 243.20 percent yesterday from 28.48 percent at the end of September, data compiled by Bloomberg show. The yield fell to 160.17 percent by 5:43 p.m. in Moscow.

“Bondholders are losing the opportunity to pledge Mechel (MTLR) debt,” Maria Radchenko, a BCS Financial Group analyst, said by phone. “About $1 billion of Mechel’s bonds are held by state banks so the regulator’s decision may affect them the most.”

Shares in Mechel plunged 41 percent to a record low on the Moscow Exchange yesterday amid speculation about difficulties with debt talks, which the company and Russian banks denied. The company had net debt of $9.55 billion as of June 1.

The central bank doesn’t expect “serious problems” with lenders because of the decision, First Deputy Chairman Ksenia Yudaeva told reporters today. The decision doesn’t automatically remove Mechel from the so-called lombard list of bonds, she said.

‘No Drama’

The regulator’s decision won’t affect OAO Gazprombank as it doesn’t have Mechel bonds, First Vice President Ekaterina Trofimova said by e-mail. Mechel’s talks about debt covenants and restructuring are going well, she said yesterday. The bank is one of the coal miner’s biggest creditors.

Mechel is going through a “normal process” with its lenders, Herman Gref, head of Mechel creditor OAO Sberbank, said during a webcast presentation today. While Mechel is in an “extremely complicated” period of development, “I don’t see any drama here,” he said.

VTB Group sees no “significant risks” as it has a small holding of Mechel’s bonds, the state-run lender’s press service said by e-mail. Sberbank CIB’s press service declined to comment, as did Mechel’s spokesman, Arseniy Palagin.

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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