Foreign creditors do not want to exchange his debts for sovereign ones

As Kommersant learned, VEB’s creditors criticized the Ministry of Finance’s idea to support the bank by exchanging its external debts for 1.2 trillion rubles. for sovereign Eurobonds. If the government accepts it, VEB faces a technical default, which Western financiers will regard as a sign of a systemic crisis in the Russian economy. They also fear that regulators in their countries may classify this operation as an attempt to issue new loans to VEB in circumvention of the sanctions regime. It was expected that the final financing format for VEB would be determined today at a meeting with Prime Minister Dmitry Medvedev, but it was postponed to early December.

Photo: Anton Belitsky, Kommersant / buy photo

A source close to the state corporation told Kommersant that the largest creditors and holders of VEB's securities criticized the plan for its reorganization proposed by the Ministry of Finance. We are talking about clearing VEB’s balance sheet of external liabilities worth 1.2 trillion rubles. by transferring them to the Ministry of Finance in exchange for a package of sovereign Eurobonds. “A number of VEB’s creditors expressed concerns that this method of reorganization is not entirely justified. Some of them even called this idea radical,” he says. In their opinion, the fact that VEB has begun negotiations on debt restructuring “will become an event of default” and creditors will have the right to present, in accordance with the terms of the cross-default, early repayment of securities for almost $21 billion.

How the authorities are looking for ways to support VEB

Another Kommersant source familiar with the situation clarified that contacts with foreign creditors have been taking place since the beginning of the week “both at the level of VEB itself and government agencies.” “They believe that this is a bad story for VEB, which already declared a default in 1991, and it will negatively affect its credit history,” he noted. Kommersant’s interlocutor refused to reveal which financier made the requests, clarifying that “mainly management companies from the US and the EU invested in VEB’s Eurobonds.”

The largest foreign holders of securities and creditors of VEB did not want to comment on the situation. Kommersant's requests to the headquarters of PIMCO, JP Morgan Chase, Bank of America Merrill Lynch and Societe General remained unanswered yesterday. VEB itself declined to comment.

VEB plans to support OFZ for 1.5 trillion rubles

Discussions about measures to improve VEB's health have been going on in the government for several months. During this time, several options were discussed. Thus, on November 13, Kommersant described in detail a scheme with the possibility of additional capitalization of VEB through the transfer of OFZ in the amount of about 1.5 trillion rubles, which did not find understanding in the Ministry of Finance. They considered that the main thing was the settlement of the state corporation’s external debts. But another measure is the gratuitous transfer by VEB of a number of assets and special projects worth 1 trillion rubles. to the treasury of the Russian Federation or a special fund - was supported by the majority of interested parties (see Kommersant on November 24). It was expected that the final meeting would be held today by Dmitry Medvedev, but it was postponed to early December, a source told Kommersant in one of the relevant departments and was confirmed by a source close to VEB. According to one of them, officials “do not yet have an agreed upon plan for the reorganization of VEB.” “It will be finalized, including taking into account the opinions of investors,” he added. The prime minister's press secretary, Natalya Timakova, was unavailable for comment yesterday.

A Kommersant source in the government speaks about the fears of creditors: “Yes, if the Ministry of Finance’s proposal is accepted, VEB’s default is inevitable, but it will be technical. The scale of the disaster is not what it seems from the outside.” At the same time, he admitted that a number of non-resident creditors expressed concerns that the replacement of VEB's commercial debt with sovereign debt is a sign of a large-scale crisis in the Russian economy as a whole. Based on these considerations, they will assess the risks of carrying out transactions with Russian banks with state participation and the Ministry of Finance, Kommersant’s interlocutor explained. In addition, in his opinion, the phased and targeted approach that the Ministry of Finance is counting on when exchanging securities will be difficult to implement, since all holders of VEB securities are first-priority creditors.

How VEB will be limited in competition

As sources told Kommersant, foreigners also fear a negative reaction from regulators in their countries to the planned financial transaction. The terms of most loan agreements do not provide for the transfer of VEB’s obligations to third parties, one of them explained to Kommersant. It will be necessary to conclude additional agreements with a significant change in the original conditions, which may be regarded by the monetary authorities of Western countries, in particular the Office of Foreign Assets Control (OFAC), as the provision of new loans in violation of the sanctions regime in force in relation to VEB. And finally, the cost of borrowing for the Ministry of Finance as a sovereign borrower is somewhat lower than for VEB, so the bank’s creditors have the risk of losing part of their income, which, in their opinion, could become an obstacle to the implementation of the scheme. “The most appropriate measure of state support for VEB, from the point of view of foreigners, seems to be its gradual capitalization by increasing public debt,” added another Kommersant interlocutor. He noted that the required level of capital established by the terms of more than 20 VEB loan agreements is $4.8 billion and it is quite possible to maintain it through regular government injections at this level. He estimated the volume of bank repayments in 2016 at $2.4 billion.

The claims of the holders can be understood, notes Region analyst Alexander Ermak. “By purchasing VEB’s obligations, they actually lent to the Russian Federation, but with a higher yield, and now the yield on the Ministry of Finance’s securities is likely to be lower,” he says. But Alfa Bank chief economist Natalia Orlova reminds us that the terms of restructuring are always a matter of negotiation and it almost never goes perfectly smoothly. “It is possible that the profitability will be comparable, and in this case I see no reason to refuse, citing other arguments,” argues Ms. Orlova. The chief economist of PF Capital, Evgeniy Nadorshin, believes that the main cause of concern for non-residents is their reluctance to stay in Russian securities. “Most likely, they expected to sell these securities soon, and there are opportunities for this in the market. Whereas now they are offered to exchange them for a longer and much less liquid security with a decent period,” says the expert. In his opinion, it will be difficult to sell these securities, because non-residents have actually left the Russian Eurobond market. “I think this is precisely the reason for the criticism of the Ministry of Finance’s option, which is actually better than the option with OFZs, which VEB had to repay to the Central Bank, that is, receive short-term financing, which is unthinkable for a development institution with its long-term projects,” sums up Mr. Nadorshin.

Elena Kiseleva, Yulia Lokshina, Denis Skorobogatko

VEB without right of transfer