While the CIS nations have recently provided a multitude of sizeable restructuring cases, the region’s dominant force, Russia, has stood up reasonably well to lengthy economic decline, economic sanctions and the collapse of oil and gas prices. There are now signs however, that its complex troubles are pushing certain companies towards a restructuring or insolvency position.
Russian, Ukrainian and CIS restructurings can be especially challenging, not least because of the complex corporate and capital structures that these companies often employ, using multiple offshore vehicles (usually in jurisdictions like Cyprus, the Netherlands and the BVI). Information gathering can therefore be incredibly difficult and there may be major issues around corporate governance and the reliability or usefulness of the accounts provided.
CIS companies often have capital structures that have multiple and indistinguishable layers. The balance sheet usually includes a combination of a multitude of bilateral loans, alongside a syndicated facility as well as bonds, but there will be very little inter-linkage between them (i.e. ordinarily no intercreditor agreement).
In a restructuring scenario, local banks, international banks (if they exist) and bondholders will generally view the world very differently – international lending into Russia and the CIS is far from prevalent and liquidity in the secondary market is low. It then becomes extremely challenging to form a consensus between the debtor and its range of creditors, particularly because some of the local banks have what can be termed a “bilateral” mentality as they have no prior experience of collective action or intra-creditor collaboration. Furthermore, whereas internationals banks may be prepared to swap debt for equity, local banks may well be prohibited from owning equity stakes. In addition, a local bank’s local currency cost of funds will almost always be higher than the US dollar or euro costs of an international bank (which gives rise to discussions about applicable post restructuring interest rates). Each of these issues add to the complexity of reaching an agreement that is acceptable to all.
In Russia, the picture may be a little clearer because there is a greater prevalence of big global players that have accessed international funding and are used to dealing with the demands of international lenders. Corporate and capital structures are certainly more transparent and identifiable.
But with sanctions, the collapse of oil and gas prices, and the Russian rouble hitting an all-time low against the US dollar in January, Russian companies are increasingly likely to restructure their debt. The Russian state-owned banks have so far been very successful in plugging the gap created by the absence of easily accessible international funding. However, in the near to medium term, time will tell whether this local effort will be sufficient or whether we will see an increasing number of Russian restructurings.