• ACI Russia

08/26/1998 07:23:45 Russia debt swap leaves many questions unanswered

By Apu Sikri NEW YORK, Aug 25 (Reuters) - The Russian

government's package for restructuring its domestic debt left

many key questions unanswered, including whether the bonds

would be converted from face value and exactly what exchange

rate would be used, bankers said on Tuesday.

Moscow announced a restructuring package for close to 40

billion in rouble-denominated domestic debt late Tuesday.

Analysts in the United States said no clarifications of the

terms were immediately available.

The details are critical for investors to figure out what

the exact returns on the notes would be. Analysts said their

rough estimates put the recovery at about 30 cents on the

dollar. But the actual amount could vary widely depending on

details that have yet to be explained.

Russia announced late Tuesday that all Russian Treasury

bills and notes maturing before December 1999 will be turned

into rouble-denominated bonds with maturities ranging from

three years to five years.

The bonds will pay 30 percent for the first three years, 25

percent in the fourth year and 20 percent in the fifth year.

Investors converting into rouble bonds will receive five

percent of the nominal value of their holdings in cash.

Investors who receive dollar bonds will be able to convert

only 20 percent of the rouble value of their debt into dollars.

The nominal value of the rouble debt will be calculated from

the paper's average price in roubles on August 14, 198, when

the government announced a debt moratorium.

GKOs were trading at 51 percent of face value on Aug. 14,

according to traders.

Following are some of the key questions that investors and

analysts said were not adequately addressed.

* What would be the conversion ratio between the old bonds

and the new securities. Would it be 95 percent of face value of

the old bonds or 95 percent of a nominal value with a discount

built in? * What is the exchange rate to be used. The

government said the currency conversion would be based on the

mean official exchange rate between August 17 and August 26.

Would this be the average rate of the closing on the Moscow

Interbank Currency Exchange (MICEX)? * What exactly is the

20 percent limit on the conversion to the dollar bonds? Does

it mean investors will be able to recover only 20 percent of

the nominal face value of GKOs and OFZs as of August 14, 1998

and would simply write off the other 80 percent? Or does it

mean investors can convert only 20 percent of their holdings

into dollars and the other 80 percent into rouble-denominated

bonds? Investors pointed out that if they can only get 20

percent of the nominal value of the GKOs as of Aug. 14, then

the recovery on the bonds works out to about five to six cents

on the dollar, which essentially rules out option to convert

into dollars.

* There are questions about the limited tradability of the

new rouble-denominated bonds in the secondary market. Does that

mean there will be no secondary market until maturity or will

the Ministry of Finance allow limited trading in these

instruments? "The concerns about the rouble instruments are

varied," said Daniel McGovern, managing director at Merill

Lynch International. Moreover, "the limited tradeability is a

big negative for investors," said Paul Dickson, sovereign

analyst at Lehman Brothers Inc.

-- (Apu Sikri; 212 859-1562; apu.sikri@reuters.com ))

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