11 Jan 2023 17:37

MinFin backs mandatory Eurobonds substitution with reservations, Econ Ministry cautious

MOSCOW. Jan 11 (Interfax) - The Russian Finance Ministry backs proposals by VTB chief Andrei Kostin to make it compulsory for Russian borrowers to issue local bonds to replace outstanding Eurobond issues.

However the ministry thinks there should be exceptions to this rule - in special cases, debtors should be able to obtain permission from the government's investment commission not to carry out such an exchange.

In addition, the exchange should be mandatory for Eurobonds with more than 18 months to maturity, since it could take several months to prepare for such a transaction, while for shorter bonds it may be pointless.

The Russian Economic Development Ministry takes a more cautious stance. It thinks that it is possible to oblige those borrowers who have not yet decided in what form they should honor their commitments to bond holders to issue local bonds instead of Eurobonds. In addition, it is necessary to assess the impact of such a measure on the business model of borrowers, including as a factor affecting their financial stability.

MinFin: Make it compulsory, with exceptions

A source familiar with a draft report for the president prepared by the Finance Ministry told Interfax that the ministry proposed to support VTB's proposals to oblige Russian companies with Eurobonds outstanding to ensure that all holders of Eurobonds can exchange them for "substitute" bonds. Given that a number of Russian companies have already voluntarily placed substitute bonds, making this a mandatory measure would encourage hesitant issuers to issue such debt securities and would help speed up the inflow of liquidity to the Russian market, the ministry believes.

The MinFin considers it necessary to stipulate that the obligation to replace Eurobonds will apply to debt securities "with maturity of more than 1.5 years." If there is less time left until Eurobonds mature then it might not be effective to issue substitute bonds as preparations for this could take months.

In addition, it is proposed that companies might be able to ask the government commission for foreign investment for permission not to replace Eurobonds with local bonds "in special cases."

Econ Ministry: Weigh the risks

According to Interfax's sources, the Economic Development Ministry conceptually supports the proposal to oblige companies to replace Eurobonds with local bonds, but believes that this measure requires risk assessment.

The ministry thinks a regulatory act on the obliging issuers to exchange Eurobonds for local bonds can be adopted only with respect to those issuers who have not yet decided on the form inn which they will honor their payment obligations to bondholders. This opinion can be found in the ministry's review of a draft report prepared by the Finance Ministry, one of Interfax's sources said.

The source said the ministry's letter stressed that the draft report does not clarify the reasons for the need to legislate for the obligation of debtors to honor commitments to Eurobond holders solely by issuing substitute bonds. The ministry believes that in order to adopt such regulation, it is necessary to assess its subsequent impact on the business model of debtors, including as a factor affecting their financial stability.

The ministry lists a number of risks of related to the mandatory substitution of Eurobonds by local bonds. In particular, it is necessary to assess the amount of Eurobond debt of each issuer, including a breakdown of debt by holder, in order to determine their residency. If this is not done, there is a risk that control over issuance documentation for Eurobonds passes to holders from unfriendly countries and that default may be declared, the ministry believes. There is also a risk of arbitrage when buying Eurobonds at a discount from non-residents and presenting them for replacement in a zone of Russian jurisdiction.

The ministry also draws attention to the disadvantages of local bonds already in circulation - the low liquidity of most issues and uncertainty over the extent of yield to maturity due to exchange rate differences, which negatively affects the rights of investors.