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Sergei Pugachev’s Baltiysky Zavod shipyard may build nuclear icebreakers, but his offer to hock the yard to repay past-due debt of another portfolio company, International Industrial Bank (IIB), has yet to thaw relations with irate creditors.

IIB failed to pay up last week on a EUR 200m bond maturity – the first such default by a Russian bank on a Eurobond since the crisis years of 1998-1999 – triggering a cross-default on another USD 200m Eurobond due 2013. Pugachev simultaneously announced a workout of RUB 32bn (USD 1.03bn) IIB owed to the Russian central bank and asked bond investors to waive the default and temporarily defer interest payments.

The government support implicit in its rescheduling of IIB’s debt gives the bank’s proposal significant momentum. Nevertheless, the Russian financier’s decision not to consult with foreign investors prior to his default-cum-proposal could backfire by fomenting opposition, said three sources familiar with the situation.

IIB issued default notices on both bonds last week, but only launched a consent solicitation to holders of the 2010s, seeking to waive the default and defer a EUR 18m interest payment until after the consent solicitation becomes effective.

The bank also asked holders of the 2010s to extend maturity for one year in exchange for a significantly bulked up security package. Several holders argued that the guarantees on offer fall short of the mark and responded with a request that Pugachev put up some of his coal assets as collateral too, said one bondholder.

By excluding owners of the longer-dated 2013 altogether, IIB also mobilized a bloc of the investors to fight their corner, said the three sources. “Both issues – the 2010s and 2013s – are in default, and normal market practice is to restructure all of the debt under such a scenario,” said one of the sources.

Legality aside, the 2013 noteholders are not in an enviable position, acknowledged a second holder of the shorter-dated bonds. “The impression is that they are watching the train leave and trying to get on the last carriage,” he said.

IIB does not see an economic rationale for approaching the holders of the 2013s, because it believes its liquidity issues are short-term and the 2013s do not need to be rescheduled, a banker close to the situation said last week

The consent solicitation launched for IIB’s EUR 200m 2010 notes early last week provides those holders with a joint guarantee from nine British Virgin Islands-registered companies through which Pugachev controls Baltiysky Zavod and another plant called Severnaya Verf. Proceeds from a share sale of both factories, which IIB says is already being negotiated, will be used to pay back the overdue issue within 20 days of completion. In return, IIB wants a notional extra year in which to repay the bond, originally due on 6 July.

That arrangement would effectively render the EUR 200m 2013 bonds subordinated debt, argued the source familiar with the situation, who went on to question whether the bank would survive until 2013 without an all-encompassing restructuring agreement. Holders of the 2013 notes have valid legal grounds for accelerating the issue, he added.

Central argument

Both bonds are dwarfed by IIB’s obligations to Russia’s central bank, however, and an acceleration notice would put 2013 holders up against the CBR, said the banking source. “I do not think that is the best option for them,” he said, adding that IIB intends to remain current on the issue by making the interest payment on its 11% 2013s due in August.

Early last week, the CBR agreed a debt rescheduling with IIB to extend the bank’s debt until January 2011. According to the first bondholder, who claimed to have seen the CBR repayment schedule, IIB will have to repay RUB 2.5bn on a monthly basis, with the remainder to be repaid at maturity.

Whatever the more militant holders of the bank’s longer-dated Eurobond decide to do next, they will have to do it quickly. The early instruction deadline for the 2010 consent solicitation comes around on Wednesday (14 July) and a bondholder meeting is scheduled for 21 July. If 2013 holders cannot round up the 25% bloc they need by 21 July, and 2010 holders pass the extraordinary resolution, IIB can argue that the event of default has been resolved, said the second bondholder and the first source familiar with the situation.

Theoretically bondholders could also challenge IIB on the grounds that it has been in breach of CBR-mandated liquidity requirements, but the bank contends it will remedy those shortly. And while local press reports widely stated that 99% of IIB’s loans are overdue, that reflects a technical classification applied by the CBR to all of the bank’s loans following its failure to repay RUB 9.6bn of CBR funding on 16 June and an additional RUB 2bn due on 23 June.

Solicitation agent Credit Suisse declined to comment on the restructuring process.

Playing it coal

The holders of the 2010s may be in a better situation than investors in the 2013, but not all of them are happy. Some have asked IIB for an additional security package in the form of a 20% share in Pugachev’s coal assets following the CBR’s claims last week that it holds a pledge over the Baltiysky shipyards as collateral for IIB’s debt.

Credit Suisse and IIB both dismissed the CBR’s claims as inaccurate during calls with foreign creditors last week, said the first bondholder.

The latest counter-proposal from bondholders suggests that an additional guarantee on coal assets should come into force only if the expected shipyard sales fail to materialise by December 2010, the bondholder continued. At the same time 2013 holders are working to accelerate, a group of 2010 holders is rallying support to get the necessary one-third bloc to stand in the way of the consent solicitation if their demands are not met, he said.


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