beyondbrics

By Yulianna Vilkos and Alesia Sidliarevich of Debtwire

Bank of Moscow sponsors a long-running television quiz show called ‘What? Where? When?’ – and its bondholders are asking all those questions and more after Russia’s central bank recommended a 395bn rouble ($14bn) rescue package for the bank on July 1.

Although the outline terms of the bailout – prompted by alleged “fraudulent lending activities” – are straightforward enough, the implications for Bank of Moscow creditors are far from clear, say fixed-income analysts in Moscow.

The bank, which has around $2.4bn of Eurobonds outstanding, is set to receive a 295bn rouble, 10-year loan from Russia’s central bank via the Deposit Insurance Agency (DIA), plus 100bn roubles of capital from state-owned VTB by end-2012.

Despite BoM’s problems, VTB, which acquired a 46.5 per cent stake in the bank in February, will stick to its plan to consolidate a 75 per cent stake in the bank. While the bailout is being implemented, BoM will be under external administration, though the administrators are part of the VTB group.

But that leaves several important questions unanswered regarding Russia’s largest ever bank rescue, the analysts said.

Does the need for emergency funding or the appointment of administrators constitute an event of default under Bank of Moscow’s bond indentures, for example? And how will VTB value BoM’s shares when it takes majority control of the ailing lender?

The documentation governing four BoM Eurobonds has a so-called ‘financial rehabilitation’ clause stipulating that an event of default is triggered once the process starts. This would theoretically allow bondholders to ask for their money back.

But things might not be that simple. The clause refers to rehabilitation carried out under Russia’s insolvency law, one analyst pointed out, but the bank is being bailed out under special anti-crisis legislation, a point that VTB is likely to highlight when it meets its own bondholders later this month, the analyst added.

VTB will buy the additional stake in Bank of Moscow before the 295bn rouble DIA loan is disbursed with its bargain-basement interest rate of 0.51 per cent.

This raises another question, however, because when a Russian bank is placed under temporary rehabilitation, any future state-assisted recapitalisation is carried out under the assumption that the bank’s existing share capital is valued at zero.

Nor do the technical considerations end there.

VTB says alleged fraud by previous management means Bank of Moscow will have to make so many provisions against non-performing loans (NPLs) that it would no longer be in compliance with the Russian central bank’s “prudential ratios”.

That would ordinarily trigger an event of default, too – but there is nothing ordinary about Bank of Moscow’s situation.

A capital adequacy breach would only be evident based on BoM’s first reporting period after its consolidation with VTB, and could in theory be avoided if the bank takes the bailout loan first and agrees with Russia’s central bank to provision for bad loans later, two analysts said.

The scale of the emergency state funding matches the scale of the problem. According to local media reports, Bank of Moscow has around 368bn roubles of problematic loans, many allegedly extended to companies affiliated with the bank’s former head, Alexei Borodin.

So perhaps it’s fitting that contestants on ‘What? Where? When?’ – pitted against a panel of experts – are sometimes asked to guess what’s inside a mysterious black box.

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