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. Last Updated: 07/27/2016

NEWS ANALYSIS: Default Looms for Bank Eurobonds




Uneximbank's impending default on its $250 million Eurobonds has foreign financial markets worried that Uneximbank may be the first in a series of defaults on the more than $1 billion of outstanding Russian corporate Eurobonds.


Uneximbank's bondholders will meet Wednesday in London to discuss the bank's upcoming default. A notice of information convening the meeting was issued Jan. 28, four days before Uneximbank missed a $12 million coupon payment on its $250 million Eurobond issue.


A grace period of two weeks applies on Eurobonds, after which creditors can file suit to force the bank into bankruptcy. When a Eurobond issuer fails to service its obligations the entirety of the principal comes due immediately.


The impending default will mean that Uneximbank will have defaulted on every single one of its foreign obligations, finalizing its status as a financial pariah, analysts said.


Uneximbank refused to confirm or deny rumors about default.


"It's premature to talk about it f there's a whole week left," Tatyana Ongotoeva, a press officer with Uneximbank, said Monday in a phone interview.


But investors have all the reason in the world to suspect that other Russian companies f especially banks f will follow the trail blazed by Uneximbank.


"The problem is that Russian banks act under a veil of uncertainty," says Richard Hainsworth, a Moscow representative of Thomson BankWatch.


Uneximbank, Alfa Bank, Rossiisky Kredit and SBS-Agro all issued Eurobonds during the frenzied borrowing binge of 1997, cashing in on world debt and equity markets' irrational and exuberant appetite for all things Russian.


The four banks issued a total of $875 million worth of Eurobonds, all of them set to mature in the second half of 2000. Only Alfa Bank is seen as a relatively sure bet to go on meeting coupon payments on its $175 million Eurobond, analysts said.


"Alfa-Bank has always tried to come out with an image of transparency," says Hainsworth. "Based on this strategy, payments on Eurobonds will be a priority for them."


Rossiisky Kredit is deemed a major risk, but analysts were unable to provide definite opinions due to a lack of solid information.


"They ought to pay $10.25 million and that's not small change," said Margot Jacobs at United Financial Group.


"Their chances are still decent due to their large regional network," she added.


Contrary to common Western practice, Russian banks often derive the bulk of their income from commissions rather than through interest payments. Banks with numerous regional outlets are therefore often in better shape than over-centralized banks.


SBS-Agro's prospects are also murky but for a different reason. The bank's fate is entirely out of its own hands; only state intervention can save it.


Russian corporations that issued Eurobonds are a better bet because these firms have either an effective revenue base or a healthy backer, or both.


Mosenergo, Irkutskenergo, Tatneft and the Moscow telephone network, MGTS, have a total of about $670 million of Eurobonds outstanding.


MGTS paid its coupon in full last fall and looks to be relatively safe, as does Mosenergo, which also has the deep pockets of the Moscow city government to fall back on at need.


Both Irkutskenergo and Tatneft are also moving in the right direction, analysts said.


"Irkutskenergo raised tariffs following the ruble slump while other energos have been forced to keep their tariffs unchanged," says Natalia Baranova, a power analyst with CentreInvest.


Tatneft is in the process of restructuring its other debts and is expected to pay its coupon this year.


"They are seeking to roll over their short-term liabilities and Eurobonds mature only in the year 2002," says Stephen Dashevsky, oil and gas analyst with Aton. "They will pay the coupon."