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. Last Updated: 07/27/2016

Creditors Cast Doubt On Russia Debt Deal




Russia's hopes of forging a quick deal with the London Club of creditors on rolling over debt payments it skipped this month could be in jeopardy after a group of investors said it is considering legal action, analysts warned Tuesday.


A group of 10 nonbank holders of interest arrears notes, or IANs, claiming to hold 15 percent of the Soviet-era debt is up in arms over Russia's failure to make the $855 million payment on June 2. The group is large enough to block the London Club from agreeing to roll over the payment.


"We are still considering the possibility of legal action, but we are waiting to hear the decision of the London Club steering committee on whether it will recommend a rollover," said Marc Helie, the head of the group, which is called the Russian London Club Portfolio Managers.


"If they do go for the rollover, we would be very interested in hearing the reasons why," he said.


The steering committee is due to make its recommendations to the club within 15 business days of Russia's nonpayment. The group of creditors then has to vote on whether it will bow to Russia's pleas to postpone payment for another six months - a move that would require the approval of 98 percent of the creditors. If the committee declares default, creditors could call for accelerating repayment, which would require a go-ahead from only 25 percent of the investors.


Analysts said the amount of debt held by the Russian London Club Portfolio Managers means it has the leverage to make its voice heard.


"With 15 percent of the vote, the nonbank group could block any agreement on restructuring," said Philip Poole, an emerging markets analyst with ING Barings in London. "But the question is what would be gained by such a move."


Even though the odds of successfully suing are stacked slightly more in favor of foreign investors than the unfortunate holders of now-defunct Russian treasury bills, analysts still said the chances of gaining a return thorough legal action were slim.


"[Russia's] Vneshekonombank is the agent responsible for making payments and even if they were to win in court, freezing the bank's assets would be pointless," said Mark Cunningham, a fixed income analyst at Merrill Lynch.


"Vneshekonombank doesn't have any assets abroad and if it did it will have hidden them well," he said.


But with IANs subject to British law - instead of Russian law which held sway over T-bills - Helie said he was confident that the courts would rule for creditors. "I believe the courts will interpret the case in our favor," he said, adding he thought there was sufficient proof of Vneshekonombank's dependence on the government to allow a court ruling that would allow seizure of Russian state assets.


But analysts played down the group's threats as mere saber-rattling designed to maintain pressure on the Russian government to come up with better restructuring terms.


As much as a third of the London Club debt has passed into the hands of hedge fund mangers and mutual funds through trading in IANs on the secondary market. Helie said this group is still without representation on the club's steering committee, which has been traditionally dominated by major banks. He fears commercial banks may be more lenient on the debt because of their long term interests in Russia.


The group's attempt to gain representation on the steering committee ran aground just two weeks ago.


According to an economist at Chase Manhattan, Michael Marrese, the group's threats of legal action are an attempt to raise their profile enough to gain representation on the committee.


Helie said more financial institutions have recently shown interest in joining the group. So far just three institutions have admitted belonging to the association: Grammercy Advisors, the New York-based investment management firm that Helie heads, Appaloosa and Morgan Stanley Asset Management.