OAO Mechel (MTL:US), a Russian steel and coal producer, may end up taking control of as many as nine steel mills if Estar Group doesn’t repay a $945 million bank loan by the end of September.
In 2009 and 2010, Mechel (MTLR) entered into a commercial agreement with 11 Estar steel mills which “were subjected to bankruptcy procedures and other demands from their creditors,” according to a regulatory filing today. Mechel agreed to supply raw materials to the mills and sell their products. Last year, Mechel acquired two of them, Invicta Merchant Bar in the U.K. and the Donetsk Electrometallurgical Plant in Ukraine.
In November, Estar restructured $945 million of debt owed to Mechel into a bank loan guaranteed by the mining company, the filing showed. Should Estar fail to repay its loan by Sept. 30 and the bank forecloses on the collateral, Mechel “will be entitled to enforce the pledge of shares in major related metallurgical plants,” the filing states.
Estar Group was formed in 2005 by Russian entrepreneur Vadim Varshavsky and his partners. It purchased second-tier steel and pipe mills in Russia and started building mini-mills at home and abroad. The company, which borrowed extensively to fund expansion, faced problems after the financial crisis broke in 2008 and its Russian mills filed for bankruptcy protection a year later.
Estar has seven small steel mills in Russia with capacity to produce 2.7 million tons of rolled steel, Mechel said. Mechel produced 6.12 million tons of steel last year. Estar also owns steel mills in Egypt and the U.K., a Swiss trading company as well as as one coal mine and a power station in Russia. Mechel representatives are present in the management and board of directors of Estar’s companies.
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