Option for Russian borrowers to issue "replacements" for Eurobonds might be extended to 2023

MOSCOW. Oct 7 (Interfax) - Russian borrowers with outstanding Eurobonds might be allowed to place local bonds to replace these Eurobonds throughout all of next year under legal changes drafted by the Economic Development Ministry that are now going through the interagency approval process, two sources familiar with the bill told Interfax.

The Russian president signed a law in July that allows Russian companies to issue "replacement" bonds for Eurobonds. It is intended to solve the problem of payments on these bonds that Russian companies and banks faced due to the imposition of unprecedented sanctions against Russia after the start of the military operation in Ukraine, and make it possible to get payments to Russian investors unable to receive payments due to foreign depositories refusing to transfer funds to Russia's National Settlement Depository (NSD).

The current version of the law allows Russian borrowers to place "replacement" bonds under a simplified procedure, without registering a new prospectus, until December 31, 2022. The "replacement" bonds are paid for with Eurobonds or cash earmarked for the purchase of Eurobonds. The law stipulates that the amount and timing of payments on the new bonds, as well as the duration and face value of the Russian bonds must correspond to the terms of the Eurobonds they are replacing.

The amendments proposed by the Economic Development Ministry would extend these provisions of the law until December 31, 2023.

In addition, the provisions that restrict the ability to declare cross defaults will be extended by six months to July 1, 2023, Interfax sources said. Under the law, the right of creditors to demand early debt payments from the borrower under a credit agreement, including one concluded through a bond placement, is not considered to have been triggered if the borrower paid their debt obligations on time or could not pay them (or paid in the improper way) due to "circumstances of a nonfinancial nature" that the borrower could not prevent.

Russian companies have already tested out the option to replace Eurobonds with local bonds. Gazprom has provided the most detailed information about such bond placements so far. The gas giant replaced part of a dollar-denominated Eurobond issue maturing in 2027 with $304.4 million in local bonds, as well as part of an issue denominated in British pounds maturing in 2024 with local bonds totaling GBP293.6 million. Eurobonds held through Russian depositories were accepted for exchange.

At the beginning of October, Lukoil announced that it was taking requests to replace Eurobonds from five dollar-denominated issues, and Metalloinvest also began taking requests for "replacement" bonds.

Developer PIK placed an issue of local bonds totaling $395 million in August with a yield, duration and face value that coincided with the parameters of its Eurobond issue maturing in 2026. The company's management later confirmed that these were "replacement" bonds for Eurobonds held through the NSD.

Also in August, Sovcombank announced the issue of "replacement" subordinated bonds totaling $600 million with duration of 8.5 years. The bank said that various types of outstanding Eurobonds, including perpetual ones, could be exchanged for these new bonds. However, the bank did not disclose the results of the exchange, and did not clarify whether these new local bonds could be considered "replacement" bonds if their parameters, such as duration, do not correspond to those of the Eurobonds tendered for exchange.