Mechel non grata: Russia’s key regulator sniffs on bonds of ‘market tumble’

The Central Bank of Russia says bonds issued by the steel producer Mechel will no longer be accepted as loan collateral. The announcement shows an apparent strong note of distrust in the company that saw shares nosedive 40 percent in Wednesday trading.

“To correct the cost of Mechel’s bonds, accepted as collateral for CBR’s loans, from November 14, 2013 the adjustment coefficient will stand at zero,” the CBR statement said.

Mechel’s bonds will remain on a Lombard list of the regulator but will no longer be accepted as collateral for loans. At the moment the CBR holds an estimated $1.4bn in Mechel’s bonds, according to Forbes.

In a separate statement the CBR’s Financial Markets Service (FMS) said on Thursday it was scrutinizing Wednesday stock dealing, which pushed it to the 5 – year low and dragged Mechel’s capitalization to all-time low of $861.8 million.

"The actions of several participants in trading shares in OJSC Mechel on the open market in the period from 5:00 p.m. Moscow time on November 13, 2013 is the subject of the service's scrutiny," the FMS said.

Mechel's ordinary shares crashed more than 40% on the Moscow Exchange on Wednesday evening. Since this occurred after 5:00 p.m. Moscow time the exchange did not suspend trading in the stock. The stock collapsed when several large packages were sold by investors, Vedomosti daily says citing an employee from another bank creditor of Mechel. The massive sale followed rumors that Mechel failed to agree on covenant holidays – a sort of a break when the company is free not to follow the stipulated terms and obligations to its partners and creditors.

Russian analysts say the key concern was Mechel’s poor financial standing. Investment bankers have dubbed it a “zombie company”, as it has almost no money to pay its debts, Vedomosti daily reports. Mechel is one of the few Russian companies that instead of cutting debt since 2008 have doubled it to $9.6 billion.

At the time of the collapse Mechel said the slump was "purely speculative" in nature.

"Nothing negative is taking place at the company. A decrease in the share price of Mechel in stock markets, in our opinion, has exclusively speculative character ", a company representative said.

On Thursday Mechel stock has recovered 10 percent, 16.30 p.m., Moscow time.