United Financial Group (UFG), an investment bank in Moscow, today downgraded its recommendation of shares in Russian automaker OAO GAZ to 'sell', following reports of OAO Siberian Aluminium (Sibal) claiming to hold a critical stake of 25% plus one share in the car and light-truck producer.

"The newswires reported yesterday that Sibal… has refused to enter into a debt-for-equity swap with the EBRD," Julia Zhdanova, UFG auto analyst, said in a report. "However, we expect to see a series of talks between the EBRD and Sibal in the near future. Meanwhile, GAZ's future continues to be clouded by the ongoing public relations war between the parties."

If Sibal owns over 25% of GAZ, it would control enough stock to veto strategic votes at the automaker's shareholder meetings, including decisions on debt-equity swaps with EBRD and Avtobank. (Observers said today Sibal may be exaggerating the size of its stake in GAZ. Read related story here.)

EBRD, the automaker's biggest creditor, also could declare GAZ bankrupt for defaulting on the loan. "There is an increasing belief in the market that the EBRD may be ready to start bankruptcy proceedings against GAZ," Zhdanova wrote. "The company (said) it believes that such a scenario is imminent. However, we believe this statement should be viewed with caution, since this would also be the best-case scenario for GAZ management, which is currently trying to retain control of the plant. The EBRD would prefer to get cash from the new shareholder."

UFG sees two scenarios to resolve uncertainty over GAZ's debt and ownership.

One is Sibal repays the loans, then becomes the automaker's largest shareholder. "It is unclear whether this would be a positive development for GAZ,… we believe corporate governance risks would prevail," she said.

The other is EBRD initiates bankruptcy proceedings - to take control of GAZ, then to swap the debt for equity to become the major shareholder. "In this case, the company would end up with the EBRD as a strategic shareholder, free of debt and in a good position to turn its fortunes around."

GAZ, whose name in Russian is Gorkovsky Avtomobilny Zavod, is the second-largest producer of vehicles in the ex-USSR, behind Lada-maker AO AvtoVAZ. It is based 400km east of Moscow in Nizhny Novgorod, Russia's third-largest city (re-named Gorky 1932-1991).

Read a feature about takeover threats to GAZ here.

Contact Ryan James Tutak, associate editor of just-auto.com for Eastern Europe:
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