“The source of servicing Eurobonds has remained abroad” – Kommersant

Why STLC and its subsidiaries still do not pay on issued Eurobonds, what is their difference from the securities of other Russian issuers, what options for resolving the issue does the company offer, said the first deputy general director of STLC in an interview with Kommersant Mikhail Kadochnikov.

— Currently, there are six issues of Eurobonds in circulation with a nominal volume of $3.25 billion, issued by GTLK Europe and GTLK Europe Capital DAC. But investors perceive these papers as issued by STLC (through subsidiaries), that is, as the same Eurobonds as other Russian issuers. What is the difference between your Eurobonds and Eurobonds of other issuers?

— Indeed, the subsidiaries of the European companies of the STLC group issued six issues of Eurobonds with a total nominal value of more than $3 billion. The funds raised as a result of the placement were directed exclusively to the acquisition of assets and the implementation of transport projects abroad. GTLK Europe’s own assets provided sufficient cash flow to service and repay the Eurobond debt. It was an absolutely real, autonomous and profitable business until the imposition of sanctions against the companies of the STLC group last year (in April 2022 from the EU and the UK, in August 2022 from the USA.— “b”).

This is the fundamental difference between our case and the rest. In most cases, Russian companies set up notional wallets abroad to issue Eurobonds and raise funds to finance their business in Russia. Accordingly, their asset and cash flow were formed within the country. Therefore, it was easy for them to reorganize – the source for paying off their obligations remained in Russia, the sanctions did not affect this.

Eurobonds of GTLK Europe and GTLK Europe Capital DAC were issued and distributed among investors on the foreign debt capital market, subsequently the papers appeared on the secondary market. The issuance documentation of GTLK Europe and GTLK Europe Capital clearly states that the funds received as a result of the placement will be invested in transport assets abroad, the risks and specifics of settlements and payments are detailed, which brokers should have notified Russian investors about, but, obviously, this is not done.

— According to Interfax, which referred to your presentation, the total share of holders of these Eurobonds through NSD and subordinate depositories was estimated at 42%, about $1.4 billion. Has it changed by now?

– From the point of view of the structure, there are no qualitative changes. In terms of share, it has grown by about $200 million over the past year, I believe through OTC transactions, now it is over $1.6 billion and continues to increase. And this raises questions, since the movement of our securities in the European infrastructure is impossible due to sanctions. We raised this topic several times during our consultations with the Russian financial market regulator in order to avoid a debt doubling in case of potential replacement.

— And how is ownership distributed among Russian investors?

— As of the end of 2022, through NSD and subordinate depositories, individuals accounted for 25% of placed Eurobonds, banks — 19%, depository companies — 15%, corporate investors — 11%, investment companies — 11%, insurance companies — 10%, management companies – 8%, non-residents – 1%.

— But if a part of your Eurobonds is accounted for in Russian depositories, in particular NSD, why didn’t you pay coupons on these securities?

— Firstly, our issuance scheme involves the payment of coupons and the redemption of bonds through a paying agent. Other methods of settlement with investors are a gross violation of the issue documentation.

Secondly, after Decree No. 430 was issued, issuers were advised to make payments to Russian investors by substituting or splitting payment streams. GTLK Europe had a stable, stand-alone financial model that did not provide for the maintenance of payments at the expense of the parent company. The source of Eurobond servicing has remained abroad, and today there are enough funds on GTLK Europe accounts to service Eurobonds, but they are blocked. In case of replacement or if another payment scheme for Eurobonds is chosen, the parent company will form a liability against which there is no asset in the Russian perimeter. This could lead to significant negative consequences and imbalance in the financial model of the state-owned company, which will affect the interests of local creditors and holders of local bonds, as well as our partners and clients. I hope our investors realize that the GTLK Europe Eurobonds received from them during the replacement will not solve the indicated problem.

We have developed several scenarios for creating an additional source of servicing and paying off new debt in Russia and are currently working on them with the authorities. We believe that, taking into account the systemic importance of JSC STLC for the Russian economy, the decision on the source should be made in a consolidated manner, taking into account the positions of our shareholders – the Ministry of Transport and the Ministry of Finance.

— Why was the decision on the issue of current payments on Eurobonds so delayed? Were there discussions with the financial authorities of the Russian Federation and foreign countries, when and with whom? How have they ended so far?

— Since last year, we have been actively working in the foreign perimeter and are making every effort to unlock accounts, obtain the necessary licenses and start paying our investors. Last year, we received all licenses from the Central Bank of Ireland for the payment of coupons on our bonds, and applied for an OFAC license. We are waiting for a decision. Of course, our appeal alone may not be enough, and we would need the active position of investors who could create additional pressure on foreign regulators.

In the Russian perimeter, STLC closely cooperates with the Bank of Russia and relevant departments. We are actively participating in the process of adjusting Decree No. 430, have formed and sent proposals that, in our opinion, will allow us to resolve the situation in the interests of all parties, both creditors and investors in local and international assets.

– What are these proposals?

— The essence of the first proposal is to prevent the expansion of the perimeter of Eurobonds accounted for in the Russian infrastructure. The second is the formation of a source of service and debt repayment. We count on the support of the regulator and departments of our proposals and consider it expedient to consider our case, taking into account its uniqueness, within the framework of the government commission for the control of foreign investment. Head of the Central Bank Elvira Nabiullina mentioned such a possibility in February 2023. This will ensure the interests of all market participants.

— Who is acting as financial and legal advisor on this issue at the present time? Is there consultation with Russian Eurobond holders?

— Due to certain restrictions, I cannot disclose counterparties. But one of the main criteria when choosing a legal consultant was the presence of a positive experience in preparing the replacement of Eurobonds, including the adjustment of issue documentation and holding investor voting rounds, for Russian companies. The selection of a financial consultant was carried out according to similar parameters. At the same time, taking into account the expected changes to Decree No. 430, we made a joint decision to postpone the start of work until new introductory ones appear.

As for investors, we regularly provide them with feedback to the extent allowed, without violating the law on insider information, we inform our holders about planned steps through the hotline, in the profile Telegram channel and through official correspondence.

— What proposals were presented on the procedure for the exchange of papers in the Russian infrastructure in order to preserve the perimeter of investors? Do you plan to issue similar bonds in foreign currency or rubles, and why are you not considering the option of issuing replacement bonds?

— We are actively working on the issuance of replacement bonds, taking into account the planned changes to Decree No. 430, which are expected to set deadlines for resolving the current situation.

– What options were offered to the authorities and the regulator to determine the formation of an additional source of service and repayment of a new debt? Does this concern budgetary sources or the funds of STLC itself? Including from the sale of foreign projects or from the placement of new debt securities in Russian jurisdiction?

— We are considering several options, both with state support and without it. At the same time, each scenario involves the adoption of a number of decisions that go beyond the authority of the company’s management.

– According to your estimates, what are the terms for resolving these issues, adopting relevant regulatory documents, issuing new securities, starting payments, and the like? Is it realistic to make it to the end of the year?

— During 2023, we will come to a final decision that takes into account the interests of all parties. As a state-owned company, we will certainly comply with all the requirements of the legislation of the Russian Federation.

Interviewed by Ksenia Kulikova