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. Last Updated: 07/27/2016

Nizhny Novgorod Set For Eurobond Default




Nizhny Novgorod on Wednesday was set to become the first Russian region to default on its Eurobond, after officials said Wednesday that the region would not be paying a $4.375 million coupon maturing Thursday on its $100 million bond.


With the end of the seven-day grace period on the coupon looming at 2 a.m. Thursday Moscow time - 5 p.m. New York time Wednesday - Nizhny Novgorod had already notified creditors they would not be able to make the payment, Tayisiya Sipatova, deputy director of the regional administration's financial department, said in a telephone interview.


Missing the coupon payment should trigger cross-default provisions and make the principal on the $100 million bond immediately payable. However, Nizhny Novgorod is hoping this rule will not be applied, Sipatova said.


The region will instead focus on trying to reach a deal with creditors on restructuring the debt, she said.


"There are certain variants such as restructuring or deferring payment, there are no dead-end situations," said Sipatova.


Nizhny Novgorod Governor Ivan Sklyarov was in Moscow Wednesday holding talks with top Finance Ministry officials on the issue, she said, adding that a decision concerning the Eurobond situation was expected Thursday. She did not elaborate.


Even though Nizhny had paid previous coupons, local officials have been saying that the crisis made it extremely difficult for them to meet the obligations.


Nizhny Novgorod has so far met "understanding" on the part of its creditors and knew of no plans on anybody's part to sue over coupon non-payment, Sipatova said.


"We are all human beings and can understand each other," she said.


Creditors may well prefer to agree on restructuring terms with Nizhny rather than taking legal action to enforce the cross-default provisions.


"Legal action would not be a priority for investors, because chances of success are very small," said Elizabeth Rudman, an analyst with Moody's Investors Service rating agency.


Unlike banks or corporations, local governments usually don't have assets that can be seized, she said.


Even though it might be the logical course to sue, with the "standardized" nature of the Eurobond making legal victories highly likely, most creditors probably realize by now that any such courtroom triumphs are likely to be hollow ones, said Yekaterina Malofeyeva, an analyst with MFK Renaissance.


"We had a significant experience with people suing over agrobonds which were defaulted on, all the cases were won, but this didn't help to accelerate the redemption process much," she said.


Agrobonds are the junkiest of Russian bonds, with most regional governments having long defaulted on them.


Moody's lowered its rating for Nizhny to Caa3 last October when the region defaulted on 217 million rubles in agrobonds, and Rudman said the agency did not see a need to downgrade the rating - which already meant default - any further.


Standard & Poor's rating for Nizhny's Eurobond stood at CC on Wednesday night but would go down to D, which means default, if the coupon was not paid before the grace period elapsed, the agency said.


The Nizhny Novgorod issuer rating would also go down to D from the current SD, which stands for selective default.


Other Russian municipal Eurobond issuers, Moscow and St. Petersburg, have so far met their obligations, Moscow paying about $25 million on its 500 million Deutsche mark bond on time last week.