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. Last Updated: 07/27/2016

State Will Not Sweeten MinFin Offer




Russia cannot afford to sweeten its offer to restructure $1.3 billion in technically defaulted Soviet-era MinFin bonds by adding the cash payment requested by investors, the Finance Ministry said Thursday.


The ministry, which said it is on track to produce a final offer by its self-imposed Sunday deadline, said it aimed to treat investors equally and a cash payment would set a precedent for payouts on all Soviet-era debt, which Russia segregates from Russian Federation debt, such as Eurobonds.


"The Finance Ministry of the Russian Federation is not able to meet creditors' demands for payment of 10 to 15 percent cash in a restructure," it said in a statement.


It said the precedent would require payments of $3.2 billion to Soviet debt holders at 10 percent of nominal payout: "Such expenditures at present are beyond the means of the state," the statement said.


Foreign creditors have generally said Russia intends to treat them equally poorly. They have so far not chosen to take Russia to bankruptcy court - in view of the major legal hurdles, their own precedent of taking deals that are offered and Russian poverty.


A restructure of GKO treasury-bill debt was widely called confiscatory, though the ministry intends to reopen that offer, and foreigners have said there have been no active negotiations on terms for the MinFin bond exchange.


"This is just another example of a unilateral restructuring without the good faith of negotiations," said one London-based bond holder, who argued Russia was unfairly consigning the MinFins to the ghetto of less senior Soviet-era debt.


"They can wave their arms and say they want to treat it as Soviet debt now, but they expressly provided otherwise in the terms and conditions of the bonds."


The ministry said it intended at the time of the swap to pay interest accumulated in six months time from the original due date to Nov. 14, but did not specify the form of the payment.


The ministry published in August a preliminary offer that foreigners said was worth around 20 to 40 cents on the dollar to swap bonds one-to-one for either new eight-year MinFin bonds or four-year OFZ ruble bonds and said it had asked investors for comments.


It said Thursday it was ready to make changes to the choice of debt available to investors and the exchange rate to be used for those who swap from dollar to ruble debt.


It would cut the tenor of MinFin bonds for which investors could trade and change tax rules for the new paper. It did not give details of the final proposal, though Kommersant newspaper said it envisaged swapping the $1.3 billion of MinFins for $650 million of new dollar-denominated paper and the remainder in ruble debt.


Ruble paper would be valued based on the average ruble-dollar rate for the first week of November, instead of the May 14 rate, and the ministry intended to arrange for coupon payments of new paper to be paid out tax-free.


Kommersant outlined the same terms for the bonds as in the August offer, except that OFZ bonds would yield 15 percent in the first two years and 10 percent in the last two and would pay a quarterly coupon rather than a semi-annual one.