Investors were called for a conversation – Newspaper Kommersant No. 21 (7466) dated 02/06/2023

The holding company of Sovcombank invited holders of foreign currency bonds to a dialogue. We are talking about a price of about 40% of the face value, which corresponds to market levels of the cost of Russian bonds in foreign infrastructure. Under the current conditions, the bank cannot redeem these securities, as operations on them are strictly limited due to sanctions.

Sovcombank’s majority shareholder, Sovco Capital Partners, invited holders of four Eurobond issues to discuss the redemption of bonds. This applies to “any investors” holding securities as of February 24 and the date of this offer, the report said. Bondholders have a month to notify their desire to discuss a potential acquisition.

We are talking about two issues of perpetual bonds issued by SPV by Sovcom Capital DAC and two issues maturing in 2030 and 2025 (prematurely “redeemed” at NSD, in this case, Sovcombank transferred funds to NSD, but they could not reach the addressee due to for blocking the interdepository bridge with foreign depositories).

As the first deputy chairman of the board of Sovcombank Sergey Khotimsky explained to Kommersant, more than $700 million remains in circulation on these issues. “We are talking about a price of about 40% of the face value, which corresponds to market price levels for Russian bonds in foreign infrastructure,” he explained. It is not surprising that investors on the other side received such negative revaluations due to the sanctions imposed by their countries. At the same time, those Russians who preferred offshore infrastructure to national institutions for holding assets also suffered.” These securities are stored in Euroclear, payments on them are planned in rubles. The bank is unable to redeem these securities. “At this stage, the shareholder will simply invest his own funds in these rights,” notes Mr. Khotimsky.

Problems with Eurobonds arose after the start of the NWO and the subsequent Western sanctions. In March 2022, the National Settlement Depository (NSD) announced that transactions on its Euroclear account were restricted in compliance with EU sanctions. In June, NSD itself came under EU sanctions. The situation is also complicated by the fact that the issuer, having a sub-sanctioned status, cannot conduct operations on them: pay a coupon, etc.

In this case, the bank is trying to offer a compromise solution, and the fact that the application comes from the bank’s shareholder, and not from him or his subsidiary, means that the transaction will not affect the bank’s capital, experts say.

As Alexander Afonin, Head of Bond Market Analysis at Sinara Investment Bank, notes, so far this is only an invitation to investors for dialogue. “Investors will evaluate the possibility of accepting this proposal based on the conditions announced, but it is clear that the bank is trying not to leave its creditors and offer them a compromise and, if possible, mutually beneficial solution,” he continues. “Last year, we saw a similar gesture from LUKOIL. Some investors accepted this offer, while others took advantage of the option of exchanging for replacement bonds.” In August-November 2022, Sovcombank exchanged several issues for a “quasi-substitute” one. Then 27.3% of the total volume was placed (see Kommersant dated November 29, 2022).

According to Alexei Bulgakov, Head of Fixed Income Research at Renaissance Capital, the offer provides an exit route for those Russian and friendly investors whose papers are locked up in Euroclear. “Of course, the bank will benefit from redeeming its Eurobonds at a price below par, but investors are now deprived of the opportunity to receive coupons and conduct transactions with these instruments due to the sanctions imposed on the bank,” says Alexander Afonin. “Therefore, for Eurobond holders, any offer from the bank will a chance not to write off your investments to zero, but to get a return, albeit not in full.

If investors agree to buy back Eurobonds, the parent company will be able to redeem them at NSD. The inclusion in the list of the issue “redeemed” at NSD, according to Alexei Bulgakov, means that the buyer is ready to discuss the purchase under the “assignment of claim rights” scheme, which was used in the second half of 2022 by a number of issuers when issuing replacement bonds.

Olga Sherunkova