1 Mar 2023 16:14

Russian companies may have until end of 2023 to provide investors with 'substitute' bonds with possible exceptions - sources

MOSCOW. March 1 (Interfax) - Russian legal entities with outstanding Eurobonds in circulation could have until the end of this year to provide 'substitute" bonds to the holders of bonds whose rights to them are recorded by Russian depositories.

Sources familiar with the situation told Interfax that this was envisaged by a draft presidential decree on the matter. At the same time, borrowers may be exempt from this requirement by decision of a government commission, and Eurobonds maturing before June 1, 2024 will not be subject to the substitution requirement.

Russian issuers themselves can currently choose how to get payments on Eurobonds to investors whose rights to bonds are recorded by Russian depositories. They can do this either by arranging separate payments to holders in the Russian and foreign infrastructure, or by transferring new local bonds to investors in place of Eurobonds. Both of these options are envisaged by a presidential decree of July 5 last year, and in both cases, investors whose rights are recorded in Russia receive their payments in rubles at the Central Bank rate on the date of payment.

According to the draft decree, which is currently being approved by ministries, the July decree will be amended to stipulate that Russian legal entities with obligations related to Eurobonds must, by January 1, 2024, ensure obligations to holders whose rights are recorded by Russian depositories are honored by transferring outstanding bonds to such investors, Interfax's sources said.

They said the draft envisaged that borrowers may be exempted from the obligation to substitute Eurobonds with local bonds by decision of the government commission for foreign investment. Also, the substitution obligation will not apply to Eurobonds maturing before June 1, 2024 inclusive. Legal entities whose Eurobonds are subject to maturity exceptions, as well as those who receive permission from the government commission not to replace Eurobonds, will be able to continue making split payments, the procedure for making which is determined by the Central Bank's board of directors.

Sources told Interfax earlier that VTB CEO Andrei Kostin at the beginning of December made a proposal to Russian President Vladimir Putin to oblige Russian legal entities to issue "substitute" local bonds instead of Eurobonds in circulation. He said that in current conditions, investors had been deprived of the opportunity to freely dispose of Eurobonds, and Russian issuers were in no hurry to offer them a fully-fledged instrument instead, limiting themselves to the split payment mechanism, which does not solve the problem structurally. The president asked the government and Central Bank to consider and submit coordinated proposals on the subject raised by Kostin, one of the sources said.

The Finance Ministry and Central Bank gave their general backing to the idea of making it mandatory to issue substitute bonds. Substituting local bonds for the outstanding Eurobonds of Russian borrowers should become mandatory, but with possible exceptions approved by a government commission, Central Bank Governor Elvira Nabiullina told a briefing on February 10. "Right now this is indeed a recommendation. But on the issue of substituting bonds, we aim to ensure that the rights of Russian bondholders are protected unconditionally, and so we consider it necessary to progress from recommendations to rules, and that, as a rule, it should be obligatory to issue substitute bonds," Nabiullina said. She said that at the same time, borrowers should still have s possible exception to this rule by decision of a government commission.

The mandatory substitution of Eurobonds with local bonds will restore the rights of Russian investors, who will be able to obtain a full-fledged financial instrument, director of the Russian Finance Ministry's Financial Policy Department Ivan Chebeskov said on February 8. "We support this proposal [to oblige issuers to issue substitute bonds], we believe this must be made mandatory," Chebeskov told reporters at the time. He said on Tuesday that the Finance Ministry and Central Bank were working on the draft of the relevant decree.