08/27/1998 17:00:05 Investors may sabotage Russia debt restructuring
By Catherine Evans
LONDON, Aug 27 (Reuters) - Disgruntled foreign investors may
attempt to sabotage Russia's forced restructuring of short-term
rouble debt by refusing to exchange GKO and OFZ bonds for new
paper, investment bankers said on Thursday.
They said the restructuring paid investors so little for
defaulted domestic debt that many would rather hold onto their
bonds in the hope that they will be included in any future
negotiated restructuring of Russian debt.
"This isn't an agreement, it's a diktat, so one doesn't know
to what extent people will give (Russia) the two-fingered salute
and say we're not accepting this, we'll stick with our GKOs,"
said a proprietary trader at a major European bank in London.
"All manner of things could happen...The restructuring could
be renegotiated, perhaps."
He estimated losses on the $20 billion of GKOs and OFZs held
by foreign investors at more than $13 billion.
"In fact, that's probably a generous estimate of what the
recovery rate will be," the trader said.
Other emerging markets debt traders were even more negative
on the restructuring.
"You have to value this at zero -- total losses are equal to
outstanding GKOs, which is $43 billion equivalent according to
our figures," said a trader at another European bank.
"You've got a rouble asset that's non-tradable, and you get
five percent cash upfront in your Reg. S account in Moscow that
will be untradable as well. Effectively you can say the loss is
total," he went on.
Russia intends to force investors holding GKOs and OFZs
maturing before the end of 1999 to exchange their debt at par
for new rouble bonds with maturities of three, four and five
The new three-year rouble paper will pay an annual coupon of
30 percent, while the four-year paper will pay 30 percent for
the first three years and 25 percent in year four.
The five-year paper will pay the same rate, stepping down to
20 percent in year five.
Investors swapping their debt into the new rouble bonds will
receive five percent of the nominal value of their old debt in
Russia has also offered investors an option to exchange GKOs
and OFZs into eight-year dollar bonds paying a coupon of just
five percent. Investors who choose the dollar paper will only
receive 20 percent of the nominal value of their rouble debt.
Only the three-year rouble bonds will be tradable, and then
on a limited basis.
"This exchange is worth a few cents in the dollar, no more,
to foreign investors. That being the case, I think a few will
hold onto their GKOs in the hope that will create the legal
momentum needed to claim that the Min Fin bonds are in default,"
said a senior economist at a U.S. bank in London.
Credit Suisse First Boston said in a statement released on
August 19 that its lawyers believed defaulting on the GKOs --
which technically Russia has done -- would trigger a
cross-default on $9.0 billion of Min Fins, fixed-rate dollar
bonds issued by Russia in lieu of frozen dollar accounts held at
the old Soviet foreign trade bank.
Russia has denied that it is the case.
Investors believe that triggering a Min Fin default will
force Russia to negotiate with its bondholders, the economist
said. They hope any agreed settlement would have to include
But the economist said he did not believe investors would be
able to force a default on the Min Fins.
"I think they've structured (the GKO restructuring) to avoid
a Min Fin default. Under Russian law, if you get payment it's
not a default and I think they can count this as payment," he
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