The Rescue Club

Konstantin Dzhimbinov, Partner / RB partners

Times are tough for the Russian corporate bond market. The international financial crisis has strengthened negative tendencies, while the inability of companies to meet their debt obligations has caused a wave of corporate defaults. In just the last 10 months, there have been about 150 corporate bond defaults, whereas in the previous 6-7 years they didn’t even amount to ten. Adding to this bleak picture is the fact that analysts do not expect improvement in the short-term.

In response to the wave of corporate defaults, RB partners, a Russian-British firm specializing in investment banking advisory services, has teamed up with international law firm Baker & McKenzie to create the Moscow Bondholders’ Club. The Club’s aim is to shift the Russian debt market from a dead end towards constructive dialogue between issuers and bondholders, using civilized international practice. A new approach was needed to combat a series of problems including the absence of a collective position among bondholders, the insecurity of bonded debt, the presence of other kinds of creditors and encumbrance of an issuer’s property, and on occasion the unfair actions of an issuer, complicated by the lack of necessary information on the financial and operational status of the issuer and the guarantor of bonds.

The Club has met on five occasions in the form of round-table discussions. These meetings included a diverse list of participants, over twenty major Russian and international financial institutions, representing bondholders and other creditors. Past participants included UBS, Merrill Lynch, UniCredit Bank, Alfa Bank, UFG Asset Management and Blagosostoyanie Pension Fund among others. During these meetings, over ten issuers were discussed. The meetings have yielded a range of signed agreements and there is already work going on involving a few issuers, in which not only bondholders are taking part, but creditor banks as well.

The Club’s focus is on participants working together to collectively determine an appropriate course of action. The standard models or plans of interaction first call for the assembling of the pool of creditors of a given issuer. Once the preliminary information assessment is complete, differing proposals are considered, ranging from those proposals deemed “friendly” to those termed “hostile.”

Typically, if the pool considers a “friendly” proposal, such a proposal will include a Standstill Agreement between the creditor pool and the issuer. Having signed the Standstill Agreement, the debtor has to provide information and perform certain actions while refraining from others; creditors, in turn, have to hold back from bringing claims, and withhold from initiating bankruptcy proceedings. The executed Standstill Agreement will then be followed by additional due diligence of the issuer and/or guarantor’s position. This due diligence is used to develop a preliminary restructuring plan.

In those cases where the issuer may not want to interact with creditors or it may be impossible to restructure, the Club proposes a “hostile” scenario, which includes bringing suits for injunctive relief or a bankruptcy of an issuer/guarantor and assets tracing procedures.

The required expertise offers a combination of classic due diligence and forensic investigation procedures, which bring to light asset stripping, other illegal actions of an issuer or a possible resistance to investigation procedures on the part of the issuer and the guarantors. Basically, the investigation’s attention is focused on the issuer’s cash flows, the most material assets, major transactions, transactions involving affiliates, and ‘dubious’ management decisions for the last year. Current bankruptcy legislation gives broad grounds for declaring many “transactions aimed at asset stripping” invalid. If such transactions are declared invalid, the result should be a return of funds taken away. In that connection, an understanding of bankruptcy procedures and of their own rights becomes more significant for the creditors.